Petromec Inc. v Petroleo Brasileiro S.A. Petrobras and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Moore-Bick,Lord Justice Moore-Bick,MRS JUSTICE GLOSTER, DBE,Mrs Justice Gloster, DBE :,MRS JUSTICE GLOSTER,MRS. JUSTICE GLOSTER,THE HONOURABLE MR JUSTICE COOKE |
| Judgment Date | 06 July 2007 |
| Neutral Citation | [2007] EWHC 3462 (Comm),[2007] EWHC 1589 (Comm),[2004] EWHC 1180 (Comm),[2005] EWHC 2430 (Comm),[2006] EWHC 1443 (Comm),[2003] EWHC 179 (Comm),[2004] EWHC 127 (Comm),[2006] EWHC 3518 (Comm) |
| Docket Number | Case No: 2002 Folio 4,Folio No. 4 of 2002,Case No: 2002 FOLIO 4,Case No: 2002 FOLIO NO 4,Case No: 2002 Folio 308 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 06 July 2007 |
[2004] EWHC 1180 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Moore-bick
Case No: 2002 Folio 308
Ms Sue Prevezer Q.C. (instructed by Curtis Davis Garrard) for the claimant and the fifth defendant
Mr. Christopher Hancock Q.C. and Mr. Malcolm Jarvis (instructed by Linklaters) for the first and second defendants
Mr. David Scorey (instructed by Watson Farley & Williams) for the third defendant
Mr. Michael Lazarus (instructed by S. J. Berwin) for the fourth defendant
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version may be treated as authentic.
The Hon. Mr. Justice Moore-Bick
Introduction
This action arises out of a complex group of inter-related agreements which were executed to give effect to a transaction under which a semi-submersible oil production platform, Spirit of Columbus, was to be upgraded and made available to Petroleo Brasileiro S.A. ("Petrobras"), the Brazilian state petroleum company, for service in the South Marlim oilfield off the coast of Brazil. The parties to the agreements represented a wide range of different interests. They included not only the vessel's owner, Societa Armamento Navi Appoggio S.p.A. ("SANA") and the ultimate employer of the vessel, Petrobras, but companies associated with a Brazilian offshore engineering company, Maritima Petroleo e Engenharia Ltda ("Maritima"), and also various companies and financial institutions that had provided funds, services and equipment required for the original construction of the platform. Maritima was ultimately controlled by Mr. German Efromovich who had been responsible for bringing the parties together and who intended to manage the upgrading work.
SANA was incorporated in Italy in the early 1980s to own and operate vessels in the offshore petroleum industry. In the late 1980s it entered into a contract with Sestri Cantieri Navale S.p.A. ("SCN") for the construction of an oil production platform using finance derived from subsidies made available to shipowners by the Italian government, credit facilities made available by SCN and design and project management services provided by a company called Oil Fields Development Ltd ("OFD") which also supplied some equipment for the vessel.
Midland and Scottish Resources Plc ("MSR") was incorporated in England towards the end of the 1970s with a view to carrying on business as an offshore drilling contractor. It subsequently acquired the right to provide equipment and services for the development of the Emerald field in the North Sea. In 1990 MSR acquired Tortin Investments Ltd ("Tortin") which then owned OFD and a company called Midland & Scottish (Italy) Ltd which was the parent company of SANA. By that means MSR became the ultimate parent company of SANA and obtained the benefit of the contract for the construction of the vessel.
In order to fund the services it had contracted to make available to SANA OFD obtained a loan from its parent company, Tortin, which in turn obtained a loan from Arab Banking Corporation B.S.C. ("ABC"). The indebtedness of Tortin to ABC, which later became known as the 'Tortin Debt', was secured by, among other things, a guarantee of repayment by SANA and a first preferred mortgage on the vessel.
In the event the recoverable reserves in the Emerald field proved to be smaller than had originally been expected. The two subsidiaries of MSR involved in the project entered into a creditors voluntary arrangement early in 1994, leaving MSR with four secured loans and four unsecured loans. The only significant asset available to MSR from which it could meet its liabilities was its shareholding in Tortin through which it controlled SANA's interest in the vessel.
The vessel completed its sea trials in 1994 and was marketed for use in various offshore locations. Petrobras was interested in using it in the South Marlim oilfield and by November 1996 Mr. Efromovich had been able to negotiate terms with Petrobras which provided the basis for a transaction that would make the vessel available to it for service in Brazil while at the same time satisfying the interests of all those who had provided finance for its construction. Those terms were embodied in a Memorandum of Agreement between Maritima and Petrobras dated 26 th November 1996 which formed the basis for the subsequent negotiations. Those negotiations eventually led to the execution of the group of inter-related contracts, each dated 20 th June 1997, which gave effect to the transaction in its final form.
The general nature of the transaction
Although the agreements by which it was implemented are numerous and complex, the basic nature of the transaction can be described in fairly simple terms as follows:
(a) SANA as owner entered into a contract for the sale of the vessel to Petro-Deep Inc., ("Petro-Deep") a company formed by Mr. Efromovich for the sole purpose of entering into this transaction. Under that contract the vessel was to be delivered to Petro-Deep as soon as possible, but the price was to be paid in quarterly instalments over a period of 12 years with title passing to Petro-Deep at the end of that period on receipt of payment in full. This agreement was referred to in the transaction documents as the Head Purchase Agreement, but I shall refer to it simply as the Purchase Agreement.
(b) Petro-Deep entered into an agreement known as the Bareboat Charter and Purchase Agreement ("the Bareboat Charter") with Braspetro Oil Services Company ("Brasoil"), a subsidiary of Petrobras, under which the vessel was chartered to Brasoil for a period of 12 years with title passing to Brasoil at the end of that period providing all amounts due from it had been paid. Petro-Deep also undertook to upgrade the vessel in accordance with an agreed specification to render it suitable for employment in the South Marlim oil field.
(c) Brasoil entered into a sub-charter with Petrobras ("the Bareboat Sub-charter") for the employment of the vessel for a period of 12 years, but without any corresponding provision for the upgrading of the vessel or for the transfer of title.
(d) In order to carry out its obligation to upgrade the vessel Petro-Deep entered into an agreement ("the Upgrade Agreement") with Petromec Inc., ("Petromec"), another company formed by Mr. Efromovich solely for the purpose of this transaction, for the necessary work. Payment for the work was to be made quarterly over a period of 12 years out of the hire payable under the Bareboat Charter. Petromec in turn entered into contracts with a Canadian shipyard, Davie Industries Inc., and with suppliers of equipment and services to carry out the upgrading work.
These four agreements together form what may be regarded as the primary contractual documents in the sense that between them they establish the basic framework of the transaction.
The precise structure of the transaction was dictated to a considerable extent by the need to satisfy the diverse requirements of a large number of interested parties, but the scheme as a whole was founded on the premise that the financial obligations to which it gave rise would be funded in one way or another out of the sub-charter hire. The hire payable by Petrobras to Brasoil enabled Brasoil to meet its obligations to Petro-Deep and enabled Petro-Deep in turn to meet two quite separate obligations: its obligation to pay the instalments of the price to SANA under the Purchase Agreement and its obligation to make periodic payments to Petromec in respect of the works to be carried out under the Upgrade Agreement. The instalments of the purchase price payable to SANA provided the source of funds from which the various loans made to finance the construction of the vessel and other indebtedness of MSR and its associated companies (apart from certain debts that Mr. Efromovich agreed to purchase himself) were to be repaid. The payments received by Petromec would finance the upgrading work and were expected to provide Mr. Efromovich or the Maritima group with a reasonable profit on the transaction as a whole. It was no doubt partly for that reason that Mr. Efromovich negotiated the sub-charter hire with Petrobras by reference to prevailing market conditions. The MSR debt that Mr. Efromovich agreed to buy represented a charge on the profits of the transaction as far as he was concerned.
In order to provide the degree of security required by the various parties to the transaction Brasoil, Petro-Deep and SANA entered into an agreement with other interested parties known as the Participation Deed and Security Assignment ("the Participation Deed") by which they assigned their rights to receive payments under the Bareboat Sub-charter, the Bareboat Charter and the Purchase Agreement respectively to a bank appointed to act as Security Agent for distribution in accordance with an agreed set of priorities. The provisions prescribing the manner in which funds were to be distributed were set out in a Security Agency Agreement in which they were aptly described as a 'waterfall', with funds flowing further down as each successive beneficiary received what was currently due to it. Beneficiaries of the waterfall included Petromec, which by that means was assured of receiving the funds it needed to carry out the upgrade work, and also ABC and SCN, which were to receive through that mechanism repayment of the loans they had originally made to finance the vessel's construction. The parties also agreed that payment by Petrobras to the Security Agent of hire due...
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