Petromec Inc v Petroleo Brasileiro SA Petrobras & Ors

Contractual total-loss and termination provisions must be construed according to their distinct mechanisms. Where a total-loss clause requires payment within 90 days and contains no declaration procedure, the payment becomes definitively due at the end of that period. Future contractual instalments are therefore discounted to that due date, rather than to the date of the loss. Hire remains payable during the intervening period, together with any applicable overdue interest. An interpretation which treats the regimes as identical, or produces overlapping discounting and default-interest consequences, should be rejected.

The dispute arose from complex sale, bareboat charter and financing arrangements concerning a semi-submersible production platform. Petromec was the upgrading contractor and an assignee of relevant payment rights. After the platform sank following an explosion, the contracts required a substantial Loss Payment.

On a preliminary issue, Tomlinson J held that future payments were to be discounted to 18 June 2001, 90 days after the platform became a total loss, rather than to 20 March 2001, the date of the loss. The first and second defendants appealed. The central issue was the proper construction of the contractual Loss Payment and total-loss provisions.

1. Appeal dismissed. The declaration made by Tomlinson J, including the Loss Payment of US$334,557,499.34, was upheld.
2. The total-loss regime in Clause 11 was materially different from the termination regime in Clause 13. Clause 13 required Petro-Deep to elect and declare the Termination Payment immediately due. Clause 11 provided no equivalent declaration mechanism. Following a total loss, the Loss Payment and other indebtedness became definitively due at the end of the 90-day period, although Brasoil could pay earlier.
3. The contractual definition of Loss Payment required future instalments to be discounted to the date on which payment was due. Properly construed in the context of Clause 11, that date was the end of the 90-day period, not the date on which the vessel became a total loss.
4. Clause 12.5 confirmed that hire continued to accrue after the total loss until all sums due under Clause 11.1 had been received. Clause 17 provided for overdue interest on sums unpaid on their due date. This construction gave coherent effect to the contractual scheme.
5. The court rejected the proposed implication of a declaration under Clause 11. The clause operated effectively without one. The competing construction would require hire instalments falling due during the 90-day period to be discounted as already outstanding and would also expose them to overdue interest, producing an incoherent result. Sedley LJ agreed with Brooke LJ’s reasoning in full, and Jacob LJ agreed.

1. Court of Appeal (Civil Division): Unanimously dismissed the appeal by the first and second defendants.
2. High Court, Commercial Court: On 28 February 2003, Tomlinson J determined the preliminary contractual issue and declared the correct Loss Payment to be US$334,557,499.34.