Petromec Inc & Ors v Petroleo Brasileiro SA Petrobras & Ors

Commercial contracts are construed in their full transactional context. Where legitimate doubt exists, the court may favour the meaning which best reflects the overall transaction’s sense and purpose.

An incomplete memorandum contemplating future agreements cannot ordinarily become binding merely because later contracts are executed. An express obligation within a concluded contract to negotiate defined costs in good faith is not necessarily unenforceable under English law, although its scope must be construed strictly. A contractual entitlement to reasonable extra cost does not include profit where the language, evidential requirements and wider arrangements show that only expenditure and associated overheads were intended.

Following the loss of an offshore production platform, disputes arose under a complex group of purchase, charter, security and upgrading agreements. SANA, Petro-Deep and Petromec claimed interests in excess insurance proceeds and related interest. Petrobras and Brasoil disputed those claims.

Further appeals concerned the legal effect of a preliminary memorandum, liability for delay and a performance bond, the meaning of compensation for an altered upgrading project, payments made directly to subcontractors, indemnity deeds, and an obligation to negotiate costs in good faith.

The appeals were from two judgments of Moore-Bick J in the Commercial Court, including [2004] EWHC 127 (Comm) and [2004] EWHC 1180 (Comm). The central questions were how the interlocking agreements should be construed and whether the parties had enforceable rights beyond their express contractual allocation of costs and risks.

1. Disposition. The appeals concerning the insurance arrangements were allowed only in respect of SANA’s and Petromec’s claims to interest earned in June and July 2001. They were otherwise dismissed. The further appeals concerning the upgrading arrangements were dismissed.

2. Per Mance LJ, the contractual waterfall applied to the loss payment and the further insurance sums deemed to have entered the security account. The security arrangements had to be read with the primary purchase and charter agreements. Their natural meaning gave effect to the transaction’s overall aim: after full payment, Brasoil, as intended owner, was entitled to excess insurance proceeds. Courts construe agreements in context and may resolve legitimate doubt by adopting the meaning which best reflects the overall transaction.

3. Brasoil’s equitable ownership of the Tortin debt was sufficient for contractual netting. The netting discharged that debt and the corresponding final-payment obligations; it did not transfer the debt to Petro-Deep or SANA. Currency fluctuations did not disturb the intended correspondence between the dollar and lire payment obligations.

4. SANA was refused permission to advance a new interest claim on appeal. The proposed case was complex, had not been identified before the trial judge and might have required factual investigation. Ordinarily, a successful party should not face on appeal a materially new case which could have been advanced at trial.

5. SANA and Petromec nevertheless had rights against all sums which should have stood in the security account. Because sufficient insurance proceeds should have been credited to it, they were entitled to the relevant basic-hire payments and the interest attributable to their principal sums.

6. Per Longmore LJ, the memorandum of agreement was too uncertain and incomplete to create binding obligations. It contemplated later interlocking contracts and left essential matters unresolved. The subsequent transaction documents superseded its contemplated allocation of responsibility.

7. The Supervision Agreement imposed no direct liability on Petromec to Brasoil for delay. Its compensation provisions covered reasonable extra cost, including appropriate overheads and financing costs, but not profit. Payments made directly to subcontractors under the Deed of Payment and Indemnity were interest-bearing loans. The later indemnity deeds did not enlarge Petromec’s rights to profit or reopen final variation agreements.

8. The global settlement discussions fell outside the narrowly expressed obligation to negotiate defined extra costs in good faith. It was therefore unnecessary to decide enforceability. Longmore LJ nevertheless considered that an express, narrowly defined good-faith negotiation clause within a concluded agreement was not necessarily deprived of legal substance by Walford v Miles [1992] 2 AC 128.

• Court of Appeal (Civil Division): By [2005] EWCA Civ 891, allowed SANA’s and Petromec’s appeals only as to interest earned in June and July 2001 and dismissed all other appeals.
• Commercial Court: Moore-Bick J determined the parties’ insurance and contractual claims in judgments including [2004] EWHC 127 (Comm) and [2004] EWHC 1180 (Comm). The Court of Appeal disturbed his conclusions only on the limited interest claims.