Petromec Inc v Petroleo Brasileiro S.A. Petrobras & Ors

In a complex contractual transaction, security arrangements must be construed consistently with the primary contracts where their purpose is to secure and distribute sums due under those contracts. A waterfall mechanism does not create rights or confer benefits that the primary agreements do not provide. Insurance proceeds received through the waterfall remain subject to contractual obligations to account for excess sums. Materials and equipment incorporated into a vessel pass by accession where the contractual arrangements show no intention to reserve title. Under Brazilian law, a proprietary interest alone does not give a third party a right to enforce property insurance; recovery requires an agency, representation or third-party-benefit relationship recognised by that law.

The claimant and defendants were parties to inter-related agreements concerning the sale, charter, upgrading and financing of an oil production platform. After the vessel became a total loss, Petrobras paid part of the insurance proceeds to the security agent and provided an undertaking for the balance. The principal disputes concerned entitlement to the remaining proceeds, Petromec’s alleged ownership of equipment on board, the operation of the contractual waterfall, the effect of the Tortin Debt netting arrangements, and claims concerning insurance-related expenses and the security agent’s indemnity.

The judgment records earlier preliminary decisions on the amount of the Loss Payment, including [2003] EWHC 179 (Comm), upheld by the Court of Appeal in [2004] EWCA Civ 156.

1. Petromec’s insurance claim. Petromec retained no title to equipment placed on board the vessel. Under the transaction documents, title to structural materials passed to SANA by accession on incorporation, and the same applied to equipment absent evidence of a contrary intention. Petromec’s claim therefore failed for want of an insurable interest.
2. Alternatively, under Brazilian law a proprietary interest alone did not confer a right to recover under the policy. Recovery by a third party required a recognised relationship of legal representation, agency, business management or an express contract for the third party’s benefit. None existed in Petromec’s case.
3. Contractual distribution. The Security Agency Agreement was a secondary security arrangement and had to be construed in the context of the Purchase Agreement, the Bareboat Charter and the Upgrade Agreement. The waterfall governed distribution through the security account, but did not create benefits absent from the primary contracts.
4. Brasoil’s election to net the Final Payment against the Tortin Debt was effective. Legal title to the debt was unnecessary because Brasoil had acquired an equitable assignment. A clear and unequivocal communication was sufficient, and the notice remained effective although sent to SANA rather than Petro-Deep. The netting discharged Brasoil’s and Petro-Deep’s corresponding obligations and transferred the benefit of the debt to SANA.
5. Any balance reaching SANA through the waterfall after satisfaction of secured obligations remained subject to the obligation to account to Brasoil under the contractual provisions transferring SANA’s interest in the vessel and insurance proceeds. Brasoil was entitled to the whole remaining balance, subject to other secured claims. The sum paid into court for the balance of the Loss Payment was to be distributed under clause 4.1 of the Security Agency Agreement.
6. Claims by SANA and Petromec for the security agent’s retained expenses were not established because causation and loss were unsupported. SANA’s claim for reimbursement under clause 8.15 failed insofar as it concerned expenses already incurred; any recoverable later expenses had to result from action taken under the agreement and be properly recoverable by the security agent.