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

A contractual entitlement to reasonable extra costs of construction work requires proof that the claimed costs arise from work within the contractual compensation mechanism. A contractor may calculate the total recoverable additional cost without a separate notional costing of an intermediate, unbuilt specification. It must nevertheless give adequate particulars of the work performed, the authority for it, its reasonable cost, and any necessary causal link between the work and indirect costs.

Contractual provisions requiring evidence of expenditure do not remove the need to establish that expenditure was additional and recoverable. Case management directions should define the structure and detail required in a Scott Schedule, while avoiding oppressive demands for further particulars.

Petromec agreed to procure upgrading works to an oil-production platform for Petrobras. The original South Marlim specification was replaced by a Roncador specification, with further changes made while the works progressed. Clause 12 of a Supervision Agreement provided for compensation for reasonable extra costs.

Cooke J made declarations concerning the construction of clauses 12.1 to 12.3 and the particulars required to prove Petromec’s claim: [2007] EWHC 1589 (Comm). Petromec appealed, contending that it could claim the difference between its eventual reasonable Roncador costs and estimated South Marlim costs without identifying the detailed work and instructions giving rise to the costs.

The central issues were the proper relationship between clauses 12.1 and 12.2, and the degree of pleading and Scott Schedule particularity required for the claim.

1. Disposition. The appeal was allowed only in part. The court upheld, subject to a minor gloss, the declarations in paragraphs (a) and (b) of Cooke J’s order. It set aside paragraph (c), which had determined a construction issue relevant only to a possible future claim for discretionary interest.
2. Construction of clause 12. Clause 12.1 concerned the agreed substitution of the clause 11 Roncador specification for the original South Marlim specification. It was not, in substance, a unilateral change order under clause 10. Clause 12.2 concerned later alterations or changes instructed by Petrobras. Clause 12.1 therefore permitted recovery of the difference between the reasonable cost of the original specification and the reasonable cost of the clause 11 Roncador specification. Clause 12.2(ii) permitted recovery of reasonable extra costs caused by later instructed changes.
3. Combined calculation. Although the contractual sources of entitlement differed, Petromec did not have to undertake a pointless separate costing of the unexecuted clause 11 Roncador works. It could formulate a claim by deducting the properly particularised reasonable South Marlim cost from the properly particularised reasonable cost of the eventually instructed Roncador works. That formulation did not dispense with proof of recoverable additional cost.
4. Particularity and causation. Petromec had to identify, with sufficient itemised detail, the work content, the authority under which it was done, and its asserted reasonable cost. Work had to be shown either to have been required by the clause 11 specification or to have resulted from a clause 10 instruction. Where an instruction could not be produced, Petromec had to particularise why it was nevertheless obliged to carry out the work. Indirect costs also required an adequately pleaded causal nexus where it was not obvious.
5. Case management. The case-managing judge should prescribe the headings and structure of any Scott Schedule. The court should not impose an artificial pleading straightjacket, but adequate particulars were necessary for fairness and for the issues to be tried. Clause 12.3 did not mean that evidence of actual expenditure alone established entitlement. The clauses were principally directed to payments while works were in progress, whereas the completed-project dispute required proof to the court of reasonable additional costs.

• Court of Appeal (Civil Division): Allowed the appeal in part. It dismissed the challenge to paragraphs (a) and (b) of the order, subject to omitting references to clause 12.3 evidence, and set aside paragraph (c).
• Queen’s Bench Division (Commercial Court): Cooke J made declarations on the construction of clauses 12.1 to 12.3 of the Supervision Agreement and the particulars required for the claim: [2007] EWHC 1589 (Comm).