Petroleo Brasileiro SA (Petrobras) v Petromec Inc

A contractual variation in a technical specification must be read with the specification as a whole. A sentence reconfirming the required performance remains effective unless clearly displaced. A later description of equipment may allocate the cost of supplying particular items without transferring the contractor’s design and construction obligations, including ancillary works and deck space. A proposal that an arrangement “may be used”, subject to study and approval, is not a binding commitment to adopt it. The original contractual requirements therefore remain in force until an approved variation is made. For a hypothetical cost comparison, the court must use the specification at the agreed relevant date and cannot add a later design merely because it might have been adopted.

Petrobras and Petromec entered into a Supervision Agreement concerning the extra cost of upgrading an offshore production platform for the Roncador field, measured against the cost of a hypothetical South Marlim upgrade under the “Original Specification”. Clause 12.1 required payment of the reasonable extra cost of the Roncador work.

Field J, in the Commercial Court, decided the compressor and riser issues largely in Petromec’s favour in [2011] EWHC 2997 (Comm). Petrobras appealed. The appeal concerned the construction and effect of deviations relating to compressor equipment and riser attachment, together with consequential deck-space and cooling issues.

Rix LJ gave the leading judgment. Moore-Bick LJ agreed with his conclusions and Lewison LJ agreed with both judgments. The appeal was allowed.

1. Compressors. The general specification required a platform capable of the stated production and compression capacity. The first sentence of the compressor deviation expressly reconfirmed those requirements and retained its natural force. The second sentence was a limited qualification concerning the equipment Petromec had to supply. It did not relieve Petromec of responsibility for designing and constructing a platform capable of meeting the specification, including ancillary equipment and any necessary deck extension. The compressor issue was therefore decided in Petrobras’s favour.
2. Risers. The wording that the central caisson “may be used”, coupled with a further study and later discussion and finalisation, amounted only to agreement in principle. It gave Petromec an opportunity to develop a proposal but did not contractually commit Petrobras to accept the central-caisson design or wet attachment of the remaining risers. The original requirement for a design permitting dry attachment to the pontoons remained. A spider deck was outside the Original Specification as at 19 December 1996. The court recorded a concession that it was probably the practical outcome, but made no formal finding on that probability and left comparative cost calculations open.
3. Consequential issues. The answer to issue 2 was set aside because the lower court had made no alternative findings after deciding the compressor and riser issues differently. Issue 4 was substituted with the agreed finding that the South Marlim upgrade required two new semi-submersible seawater lift pumps, each with a capacity of 1,550 m³/h, and nine new discharge coolers.

• Court of Appeal (Civil Division): allowed Petrobras’s appeal and varied the answers and orders on the compressor, riser, deck-space and cooling issues.
• Queen’s Bench Division, Commercial Court: Field J determined the issues in the judgment from which this appeal arose, reported at [2011] EWHC 2997 (Comm) .
• Earlier Commercial Court proceedings: a previous judgment by Moore-Bick J, reported at [2004] EWHC 127 (Comm) , had held that the Memorandum of Agreement was not binding.