England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
COMMERCIAL COURT
Mr Justice Tomlinson

		Royal Courts of Justice Strand, London, WC2A 2LL
		17th February 2004

Lord Justice Brooke :

1. This is an appeal by the first and second defendants against a judgment of Tomlinson J in the Commercial Court on 28^th February 2003 on a preliminary issue in this action when he declared that the correct amount of the Loss Payment required pursuant to Clause 11 of the Bareboat Charter and Purchase Agreement dated 20 June 1997 between Petro-Deep Inc ("Petro-Deep") and the second defendants and of the Bareboat Sub-Charter Agreement dated 20 June 1997 between the second defendants and the first defendants was US$334,557,499.34. In essence the judge accepted the submissions of the present respondents on the matters in issue between the parties, which are now the subject of this appeal.
2. The factual background to this dispute is clearly set out in the judgment. The third defendants Societa Armamento Navi Appoggio SpA ("SANA") were the owners of a large semi-submersible production platform called "Spirit of Columbus". In June 1997 they encountered financial difficulties. A complex set of sale and charter contracts and associated financial arrangements were then put in place whereby the platform was sold, resold and then finally chartered. The ultimate sub-bareboat charterer was the first defendant company Petroleo Brasileiro S.A Petrobras ("Petrobras"), the state oil company of Brazil.
3. Under these arrangements SANA sold the platform to Petro-Deep on terms whereby Petro-Deep were to pay the purchase price of the platform over a 12-year period. Petro-Deep in turn concluded a "Bareboat Charter Purchase Agreement" with the second defendants Braspetro Oil Services Company ("Brasoil"). This contract, whereby title in the platform would pass to Brasoil on payment of all the sums due under this head Bareboat Charter, also had a 12-year term. Brasoil in turn concluded a "Bareboat Sub-Charter" Agreement with Petrobras which had a similar 12-year term.
4. The platform was to be upgraded before it was put into operation by Petrobras. This was to be done pursuant to a contract concluded between Petro-Deep and the claimants Petromec Inc ("Petromec"). The cost of the upgrade was reflected in the quarterly hire due from the two bareboat charterers.
5. SANA, Petro-Deep and Brasoil assigned their entitlement to receive payment pursuant to these various arrangements to a "Security Agent". The Security Agent, now Den Norske Bank ASA, the fourth defendants, then acted as trustee on behalf of various interested parties, including SANA and Petromec, whose interests derived from their role as seller and upgrading contractor respectively. This accounted for the appearance of Petromec as claimants in this action despite the fact that they were not a party to the agreement which gave rise to the dispute the judge had to resolve.
6. On 15th March 2001 there was an explosion on board the platform. It sank five days later.
7. Each of the sale or charter contracts made provision for a "Loss Payment" to be made by the purchaser or the charterer, as the case might be, in the event that the platform became a total loss (as defined in the relevant contract). The Loss Payment included an amount in respect of future payments which would have fallen due under the contracts had they been performed according to their tenor over their intended 12-year duration. These payments were to be discounted pursuant to an agreed formula. The parties' dispute related to the date to which the future payments should be discounted. Because of a movement in LIBOR between the rival dates this makes a difference of about US$2.5million on a payment which it is agreed was in any event in excess of US$330million. If the rates had moved in the opposite direction it would have been in each of the protagonists' interests to adopt a position diametrically opposed to that which they respectively adopted in argument before the judge.
8. There were other disputes between the parties which related to the manner in which matters were resolved consequent upon the total loss of the platform, but in the first instance the court was invited to resolve a short point of construction concerning the date to which the discounting should be made. The point which the judge had to decide on the trial of a preliminary issue was whether the discounting should be to 20^th March 2001 (the date on which the platform became a total loss) or 18^th June 2001 (90 days after 20^th March) which was the date by which the Loss Payment had to be paid.
9. For the purpose of the preliminary issue the judge was invited to consider only the position between Petro-Deep and Brasoil pursuant to the Bareboat Charter and Purchase Agreement dated 20^th June 1997. The parties, agreed, however, that in the light of his determination of the position under that contract he should also make a declaration in relation to the position as between Brasoil and Petrobras where the relevant provisions were identical.
10. At the hearing before the judge Petromec and SANA made common cause, as did Petrobras and Brasoil. Den Norske Bank ASA were present at the hearing, although not represented by counsel, and they made no submissions to the judge. Nor were they represented on the appeal to this court.
11. Like the judge, I must set out the bare minimum of the contractual provisions necessary to render this judgment intelligible. The relevant provisions of the Bareboat Charter and Purchase Agreement dated 20^th June 1997 between Petro-Deep and Brasoil included the following:

"1. DEFINITIONS

"Final Payment" means the sum payable to Petro-Deep, in order to effect transfer of title to the Vessel to Brasoil, equal to that amount of the Outstanding Indebtedness under the ABC Loan which Brasoil acquires from ABC pursuant to the Debt Purchase Agreement.

"Loss Payment" means a sum payable to Petro-Deep by Brasoil as liquidated damages in the case of any event described in Clause 11.1 hereof, in the amount equal to the aggregate of (i) all the outstanding instalments of Fixed Hire falling due under this Agreement and not paid, discounted to the date the payment is declared due, for amounts that fall due after such date, at the lower of nine per cent (9%) per annum and LIBOR plus three per cent (LIBOR + 3%) compounded annually, and (ii) all the Subsidy not yet paid, discounted to the date the payment is declared due, for amounts of Subsidy that fall after such date, at the then prevailing ABI Rate compounded annually, and (iii) all Over-due Interest that remains unpaid on all payments that fell due prior to the date payment is declared due.

"Other Indebtedness" means the aggregate sums of moneys owing by Brasoil to Petro-Deep hereunder and outstanding at any relevant time other than (i) Fixed Hires, (ii) Supplemental Hires, (iii) Loss Payment and (iv) Termination Payment.

"Termination Payment" means an amount equal to the Loss Payment payable by Brasoil to Petro-Deep as liquidated damages upon declaration by Petro-Deep pursuant to Clause 13 hereof in the event of the happening of any Termination Event.

"Total Loss" means an actual, constructive, compromised or arranged total loss of the Vessel; or Compulsory Acquisition; or capture, seizure, detention, confiscation or requisition for hire of the Vessel by any government or any person acting or purporting to act on behalf of any government or by pirates, whether such capture, seizure, detention, confiscation or requisition is lawful or wrongful, unless the Vessel is released from such capture, seizure, arrest, detention, confiscation or requisition within 90 days of after the occurrence of thereof.

3. AGREEMENT TO LET AND HIRE BY BAREBOAT CHARTERING

3.1 Bareboat Chartering of Vessel

Subject to the terms and conditions hereinafter set forth, (i) Petro-Deep hereby agrees to charter the Vessel to Brasoil and Brasoil hereby agrees to charter the Vessel from Petro-Deep on a bareboat basis for the Charter Period, and (ii) Petro-Deep agrees, upon the expiry of the Charter Period by effluxion of time or earlier termination, to transfer or procure the transfer of title to and ownership of the Vessel to Brasoil and Brasoil agrees to accept such transfer.

7. RISKS AND INSURANCES ON VESSEL AND BELONGINGS

7.1 Risks of Vessel and Belongings

The Vessel and Belongings shall, throughout the Post-Delivery period, be in every respect the risk of Brasoil…..

7.2 The Insurance

Brasoil shall, not later than the Pre-Delivery Date, either take out and effect or procure that Petrobras takes out and effects the following insurances at Brasoil's or Petrobras' expense on and in respect of the Vessel and shall throughout the Post-Delivery Period maintain the said insurances effective with such Insurer or insurers as are acceptable to SANA, at Brasoil's or Petrobras's own expense;

1. Hull and Machinery Insurance shall be taken out and maintained to be effective in the joint names of SANA, Petro-Deep, Brasoil and Petrobras as co-assured with the Insurer against such fire and usual marine risks…….

7.3 Conditions of Insurance

The terms and conditions of all insurances referred to in (1) and (2) of Clause 7.2 hereof and all rules and articles of the P&I Club shall be subject to the prior approval of SANA (such approval not to be unreasonably withheld or delayed). Furthermore, every hull and Machinery insurance and War Risk insurance shall, throughout the Post-Delivery Period, be maintained to be effective in such amounts as shall at least be equivalent to the full commercial value of the Vessel, but in any event in such amounts as shall be not less than one hundred ten per cent (110%) of the applicable Loss Payment in the relevant policy period.

11. TOTAL LOSS

11.1 Loss Payment

Notwithstanding anything to the contrary contained in this Agreement, if the Vessel shall become a Total Loss or if for any reason Brasoil shall be permanently deprived of her use prior to the end of the Charter Period, Brasoil shall pay or procure the payment to Petro-Deep (out of the proceeds of an insurance claim or claims and/or from Requisition Compensation and/or by payment by Brasoil direct) of the Loss Payment and all Other Indebtedness within 90 days of the occurrence of such Total Loss or permanent deprivation.

11.2 Payment of Over-due Interest

Notwithstanding and in addition to the payment of the Loss Payment and all Other Indebtedness, Brasoil shall pay to Petro-Deep the Over-due Interest on the Loss Payment from the date such payment is declared due and all Other Indebtedness until the receipt by Petro-Deep thereof in full.

12. PAYMENT OF CHARTER HIRES

12.1 Charter Hires

12.5 For the avoidance of doubt, Brasoil shall continue to pay hire under this Agreement notwithstanding that the Vessel shall have become a Total Loss or subject to Compulsory Acquisition provided always that no further instalments of hire shall become due and payable after the date on which all sums due under Clause 11.1 shall have been received in full by Petro-Deep, and the Charter Period shall terminate on that date.

12.6 For the avoidance of doubt, Brasoil shall continue to pay hire under this Agreement notwithstanding termination of the chartering of the Vessel pursuant to Clauses 13 or 15 provided always that no further instalments of hire shall become due and payable after the date on which all sums due under Clauses 13 and 15 shall have been received in full by Petro-Deep, and the Charter Period shall terminate on that date.

13. TERMINATION EVENT

13.1 Termination Event

A Termination Event shall mean any or each of the following events, states of affairs, conditions and acts (whether any such event, state of affairs, condition or act shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) (it is expressly agreed and confirmed that Clause 11 hereof shall apply to, and Clause 13 shall not apply to, the case in which any event or act which falls within the scope of a Total Loss and where a Termination Event occurs or exists)…[A list of 22 termination events then follows]

13.2 Special Powers

1. Upon the occurrence of a Termination Event and at any time thereafter so long as the same shall be continuing, Petro-Deep may, at its option, exercise all or any one or more of the following powers at any time and as Petro-Deep may think fit:

(a) To declare by notice given to Brasoil the Termination Payment and all Other Indebtedness to be immediately due and payable whereupon the same shall become immediately due and payable and Brasoil shall pay the same together with any Over-due Interest thereon for the period from the date the Termination Payment is declared due until the full payment thereof;

(b) To take any action at law or in equity to collect the Termination Payment and all Other Indebtedness then due and thereafter to become due and the Over-due Interest thereon or to enforce performance and observance of any obligation, agreement or covenant of Brasoil under this Agreement; and

(c) To receive all of the insurance proceeds and recoveries which Petro-Deep may use for payment of repair or liability.

2. Upon the occurrence of a Termination Event and at any time thereafter so long as the same shall be continuing, Petro-Deep may declare, by notice given to Brasoil, that this Agreement (other than the powers described in Clause 13.2(1)) is terminated and may exercise all or any one of the powers described in Clause 13.2(1) hereof.

13.3 Settlement of Claim

(1) Payment of Termination Payment

After Brasoil receives Petro-Deep's notice of declaration of the Termination Payment and Other Indebtedness being due, Brasoil shall pay within sixty (60) days the Termination Payment and Other Indebtedness together with all Over-due Interest thereon from the date the Termination Payment is declared due until the full payment of such Termination Payment and Other Indebtedness ….

14. PURCHASE AND TRANSFER OF TITLE

14.1 Purchase

In consideration of the full payment of (i) all Charter Hires hereunder or, if the Vessel becomes a Total Loss or there is earlier termination of the Charter Period, the Loss Payment or the Termination Payment respectively, (ii) all Other Indebtedness and (iii) all accrued Over-due Interest, Petro-Deep shall or shall procure that SANA shall transfer the legal title to and ownership of the Vessel to Brasoil or its nominee pursuant to the terms of this Clause by means of delivery of a bill of sale executed and notarised at Brasoil's expense; provided that Brasoil has paid the Final Payment to Petro-Deep and has performed all of its other obligations under this Agreement.

17. OVER-DUE INTEREST

In the event of any failure by Brasoil to pay on the due date for payment thereof, or in the case of any sum payable on demand, the date of demand therefor, any hire or other amount payable by it under this Charter (including, without limitation, any amounts payable under Clauses 11.1 or 13.3 or 15 (but not including amounts not paid due to the exercise by Brasoil of its entitlement to defer or suspend payments pursuant to Clauses 20.4 and 20.5 in which case no interest will be payable under the provisions of this Clause 17)), Brasoil shall pay to Petro-Deep on demand interest on such hire or other amount from the date of such failure to the date of actual payment (both before and after any relevant judgment or winding up of Brasoil) at the rate determined by Petro-Deep and certified by it to Brasoil either (i) in respect of such payment in Dollars hereunder to be the greater of 9% and that rate which is the aggregate of:

(1) two per cent (2%); and

(2) the London Inter-Bank Offered for Dollar deposits of not more than one month's duration (as selected by Petro-Deep in the light of the likely duration of the default in question)……….and interest payable by Brasoil pursuant to this provision shall be compounded annually, shall accrue from day to day, shall be calculated or the actual number of days elapsed in a three hundred and sixty (360) day year and shall be payable on demand."

12. Part of the difficulty that has arisen in this case can be attributed to the fact that on occasion the draftsman has sought to equate the procedures following a total loss (Clause 11) with the procedures following a termination event (Clause 13). In the latter case things are quite straightforward. Once Petro-Deep elects to treat one of the 22 occurrences listed in Clause 13.1 as a termination event, it will issue a declaration to Brasoil identifying "the Termination Payment and All Other Indebtedness to be immediately due and payable". It is understandable that if payment is not made forthwith, Petro-Deep is entitled to recover "overdue interest" from the date the termination payment is declared due until full payment of the termination payment and other indebtedness is made. In the context of the Clause 13 scenario it is also understandable that the termination payment is expressed to be an amount payable as liquidated damages. If payment of subsequent hire charges is made pursuant to Clause 12.6, these can be readily set off when the precise amount of the termination payment is computed, if paid later than the date of the declaration.
13. Clause 11, however, is concerned with a quite different scenario. The vessel is a total loss, or for some other reason Brasoil is permanently deprived of her use for the whole of the rest of the charter period, and there is no question of a need for any declaration, to be issued or not at Petro-Deep's election, before the "Loss Payment and All Other Indebtedness" becomes payable. Instead, Clause 11(1) provides that these sums become payable within 90 days of the triggering event (in other words, they are legally due on the last day of that period at the very latest), and it is not surprising that this sub-clause envisages that this payment might be made by Brasoil out of the proceeds of an insurance claim and/or compensation for the requisition of the vessel. For obvious reasons, it is highly unlikely that these sources of payment would be available to Brasoil at the very start of the 90 days, and understandable that the parties agreed that Brasoil should be allowed 90 days within which to pay.
14. Clause 17 provides for the payment of over-due interest if the loss payment is not paid on its "due date", which must mean, on the proper interpretation of Clause 11(1), the end of the 90 day period. It is difficult to understand the purpose of Clause 11(2), because the Clause 11 procedure does not provide for any declaration that the loss payment is due, and it may be that the draftsman mistakenly thought that some declaration or other triggered off the Clause 11 procedure when of course it does not. The fact that the Clause 11 arrangements were infelicitously drafted is also evident from the description of the "Loss Payment" in Clause 1 as "liquidated damages" when it was common ground that this description was inept. Mr Hancock QC, who appeared for the appellants, made a valiant effort to persuade us that the making of some kind of declaration was implicit in Clause 11(1), but I remained unconvinced: the procedure makes no provision for such a declaration, and does not require one in order to make it work effectively.
15. The confusion about the difference between the Clause 11 and Clause 13 regimes was carried over into Declaration III which formed part of Annex A to the Participation Deed and Security Assignment. This deed was executed on the same occasion as the bareboat charters. Sloppy drafting is again evident on the first page of that declaration where there is a mistaken cross-reference in item (x). The purpose of this Annex is to enable a clearcut statement of the amounts due under a loss payment or a termination payment to be prepared. If, for instance, the loss event is the requisition of the vessel by a government, then the definition of Total Loss in Clause 1 provides that if the vessel is released from requisition within 90 days there will not be a total loss after all. If it is not so released, the loss payment is due at the end of the 90 days, and it is hardly surprising to find that Table A in Declaration III provides for overdue interest on any unpaid hire payments which fall due during the 90 days. It is not at all easy to see why the parties should ever have agreed to overdue interest being payable on the "loss payment" of the vessel (see the definition of "Total Loss" in Clause 1) when payment of the loss payment was not definitively due for a further 90 days and might not be due at all if the vessel was released from the constraint in question within that period. (Incidentally, there is further evidence of sloppy drafting in this definition of "Total Loss", where the words "such … arrest" appear in the fifth line without any prior reference to an arrest).
16. Mr Hancock's submissions were firmly rooted in his contention that the "termination payment" and "loss payment" provisions were identical, and that in each case the right to the single capital sum accrued at the time that the relevant event occurred. As I have shown, this is simply not the case under Clause 11. The right to the single capital sum is definitively crystallised at the end of the 90 day period following the total loss, even though Brasoil may, at its option, pay this sum earlier. During the 90 days Brasoil is obliged to continue to pay the hire charges notwithstanding that the vessel is a total loss (Clause 12.5). This obligation comes to an end as soon as it pays all the sums due under Clause 11.1, which will of course include overdue interest on any unpaid hire charges accruing due during the 90 days, as Table A to Declaration III (which continues the inept reference to a declaration of loss) demonstrates.
17. Mr Hancock suggested that his clients' interpretation was supported by various commercial and purposive considerations. Whether the parties agreed that the final capital payment should replace the income stream under the charter agreement on Day 1 (as it does if a declaration is made under Clause 13) or at the end of Day 90 (when it is conclusively evident that the total loss has occurred and when payment of the loss payment is definitively due) does not appear to me to make any difference in commercial terms provided that liability for the income stream, together with overdue interest on unpaid hire payments, remains in being until the capital payment becomes definitively due, incorporating as it does the appropriate agreed calculation for the accelerated receipt of income payments due after that date. In this electronic age I am entirely unpersuaded by the consideration that the LIBOR rate on the day when payment is due will only become known in London five hours before payment is actually due in New York.
18. In his careful judgment the judge pointed out one aspect of the agreement which would make no sense at all, commercial or otherwise, if the agreement was interpreted in the manner suggested by Mr Hancock. If he was right, the effect of discounting back to the date of total loss would in virtually every case involve discounting the fixed hire payments falling due in the 90 days between the date of the total loss and the date prescribed for payment on the basis that (i) they were outstanding; (ii) they were (almost by definition) not paid as at the date when payment was declared due, on this hypothesis the date of loss, and (iii) they therefore had to be discounted. However, since on this hypothesis the instalment would not have been paid on what according to Mr Hancock was now the due date (namely the date of loss), the discounted instalment would also pursuant to Clause 17 carry overdue interest at the default rate of interest which was fixed at at least 9%.
19. I see no reason to lengthen this judgment by repeating any of the further reasons the judge gave for rejecting Mr Hancock's submissions. It is sufficient to say that I agree with the judge. It is also unnecessary to lengthen this judgment by expressly citing any of the well-known cases which Mr Gee QC, who appeared for SANA, cited to us in support of his proposition that where there are obvious drafting errors in an agreement it is the duty of the court to do its best to identify the parties' true intention. I am quite satisfied for the reasons expressed in this judgment that the appellants' submissions are not well founded and that this appeal should be dismissed.

Lord Justice Sedley:

20. I agree with the entirety of Lord Justice Brooke's reasoning and therefore with his and Mr Justice Tomlinson's conclusion. I take the liberty of adding a word about the construction of contracts like this one.
21. We were told in the course of argument that a number of the most prestigious firms of solicitors in the City of London had had a hand in drafting this charterparty. That perhaps begins to explain why its parts do not fit together. It also explains why the court's assumed task of identifying the parties' true intentions has been, as so often, a search for a mare's nest. What we have had to do, in effect, is scrap an element that makes no sense because of the way it is drafted.
22. It has been said that poets ought to be involved in the writing of constitutions. Is it too much to suggest that editors ought to be involved in the drafting of contracts? No doubt the function would be practically uninsurable and so would have to be carried out without legal liability, but a careful professional eye cast over this document when the parties' lawyers had had their say and departed would probably have picked up the anomalies and discontinuities which have led to this costly litigation. It might even have earned the lawyers some additional fees for sorting out the date to which future payments should be discounted.

Lord Justice Jacob:

23. I agree with the judgment of Lord Justice Brooke.