| Date | 5 September 2007 |
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| Judgment | Petromec Inc -v- Petroleo Brasileiro S.A. QBD 6 July 2007 |
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| The Issue | Whether a contractor can claim additional cost arising out of changed work scope on the basis of a global total costs claim, being the difference between actual costs and anticipated costs. |
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| Implication |
A global or total cost evaluation of claims will generally be disapproved by the courts as it fails to meet the basic requirements of proof of entitlement and causation. |
printOn 20 March 2001, after an explosion and fire involving tragic loss of life, the Petrobras 36 capsized and sank in the deep water of Brazil’s Campos Basin. Petrobras 36 was one of the world’s largest offshore oil production platforms and had been working in the Roncador field, an oil field discovered in late 1996. The financial consequences of that event led to lengthy litigation and an insurance payout of almost US$ 0.5 billion to the owners and operators of the vessel. In 1997, the Petrobras 36 had originally been intended for use on Brazil’s South Marlim field but it soon became apparent that she would be more useful in the Roncador field. Rather than reformulate the contractual documentation between the operator and the contractor, which by then was in an advanced state of preparation, the parties had executed the agreement on the understanding that they would start the different and more expensive upgrade necessary for the Roncador field and the contractual position would be corrected in due course by an amendment to the contract. This was subsequently agreed and backdated to the date of the commencement of the engineering and construction works. Ten years later Petromec, the contractor, and Petroleo Brasileiro, the owner under the construction agreement, are still arguing over the proper costs of the engineering and construction of the rig which since 2001 has been lying on the seabed. In 2004, the High Court gave its decision in relation to a series of preliminary issues between the parties concerning the construction of the rig. The Judge decided that Petromec, the contractor, was entitled under clause 12 of the amended contract agreement to recover the additional costs incurred by reason of the change in specification of the oil rig from that required from the South Marlim field to that required for the Roncador field, including the costs of financing, administration and general overheads but not additional profit. The parties remained in dispute however, as to the manner in which those additional costs should be computed. Clause 12.1 of the agreement stipulated that Petroleo would pay to Petromec an amount equal to the reasonable extra cost of upgrading the vessel in accordance with the amended specification over and above the cost that might reasonably have been incurred in accordance with the original specification. Petromec advanced its case by looking at the total cost incurred in constructing the rig to the Roncador specification, less the cost that it said it would have incurred in producing the rig to the original South Marlim specification. Sitting in the Commercial Court in London, the Hon. Mr Justice Cooke commented that this method proceeded on the basis that the total difference between the final cost actually incurred in respect of the varied Roncador specification and the projected cost of building to the South Marlim specification was attributed solely to the changes in specification as opposed to any other factor such as over pricing, failure in implementing design, poor workmanship or rectification of other errors attributing to the contractors or subcontractors. In other words, Petromec was seeking to avoid setting out in detail of all the distinct variations and changes and costing each of those separately. Petroleo contended that the proper construction of the agreement required the adoption of a ‘variation order’ method which involved the identification of the required changes in specification and the analysis of the cost incurred by reason of those individual changes. If an individual change in specification could not be identified and the cost of the additional work attributed to each change, there would be no entitlement to compensation. Having carefully examined the contract agreement, the Judge concluded that Petromec’s interpretation could not be accepted. In his judgement, in order to succeed it was necessary for Petromec to identify the work, and the cost attributable to that work, required to affect changes from the former specification to the new specification. The reasonableness of the work and of the costs also had to be shown. Mr Justice Cooke was aware of the inevitable difficulties in identifying additional costs caused by way late procurement, disruption or acceleration work. Petromec argued that these were areas of cost which tended to ‘fall through the cracks’ when the court insisted on a high degree of particularity in causation. Whilst this point attracted some sympathy from the judge, it did not in his opinion obviate the need for Petromec to prove each element of additional cost; “There can be no shortcut which this court can approve”. Mr Justice Cooke also commented that it would make no difference whether consideration was being given to multiple breaches or to multiple variations. The overall principle remained the same. There was a need to show the consequences of complying with the instructions in terms of work done and cost reasonably incurred. The causal nexus was important and had to be spelled out in an intelligible form. The claim could not be ascertained in the manner proposed by Petromec; that was not what the contract envisaged, nor what the law allowed, nor what the rules of court required for it to put and establish its case.
CJ-0735
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