England and Wales High Court (Commercial Court) Decisions
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URL: http://www.bailii.org/ew/cases/EWHC/Comm/2006/3358.html
Cite as: [2006] EWHC 3358 (Comm)
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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| Kellogg Brown & Root Inc |
Claimant |
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| - and - |
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| (1) Concordia Maritime AG |
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| (3) Stena Bulk AB |
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| (4) Concordia Maritime AB |
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| (5) Northern Marine Management USA LLC (formerly Universe Tankships (Delaware LLC) |
Defendants |
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Mr Nicholas Hamblen QC and Mr Sean O'Sullivan (instructed by Stephenson Harwood) for the Defendants
Hearing dates:
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Crown Copyright ©
- This case arises out of the purchase by Kellogg Brown & Root Inc ("KBR") and Halliburton Produtos Limitada of two 25 year old Stena VLCCs (Very Large Capacity Carriers) for the purpose of converting the tankers into Floating Production Storage and Offtake ("FPSO") vessels. The VLCCs which were eventually purchased were the Stena Continent and the Stena Concordia. Each vessel was purchased under a separate memorandum of agreement. The claim in respect of the Stena Concordia has been compromised. The seller of the Stena Continent is not a party to these proceedings.
- KBR's claims against Concordia Maritime AG ("D1") are (for the most part) brought pursuant to a Guarantee provided by D1 on 26 January 2001 ("the Guarantee"). KBR claims D1 is liable for the cost of all steel replacement in excess of an initial 150 tonnes under the Guarantee.
- The primary issue is what quantity of renewal steel was in fact required to meet the relevant Petrobras Specification requirements. KBR contends that it was required to renew substantially in excess of 150 tonnes, including significant bottom plate steel replacement of c.1630 tonnes, in order to meet the applicable Petrobras Specification. D1 says that much of this replacement steel can be explained by KBR's misunderstanding/mis-application of the Petrobras Specifications.
- In terms of bottom plate, there is a central issue over the meaning of the words "to – original plate thickness", which KBR contends means the original thickness of the vessel's bottom plate when built in 1975 (i.e. 35mm in the parallel midbody). D1 says that "t o" is a reference to the thickness actually required for the start of the vessel's new life as an FPSO, i.e. the reassessed thickness, which D1 says was calculated as 27mm, although KBR says that the reassessed/adopted thickness as approved by ABS and Petrobras was 30mm.
- KBR contends that it is entitled to recover the cost of the full amount of steel actually replaced in the tanks bottoms, on the basis that all of this was required even using criteria which were less onerous than required by the Petrobras Specifications (namely the Present Thickness criteria and then the TQ1028 criteria). D1 says that if "to" had been understood to refer to the reassessed thickness of 27mm, only about 16.8 tonnes of renewal steel would have been required. KBR contends that it was only after Petrobras agreed to relax its criteria that the extent of the steel renewals decreased.
- If, contrary to D1's primary case, ""to" is a reference to the original, or "as built", thickness of the bottom plate, D1 says that:
- In any event, D1 takes issue with:
- KBR also advances an additional claim against D1 based on an alleged implied term contained in an agreement it says was reached in a meeting at Heathrow on 12 October 2001, to the effect that KBR would or might seek a "concession" from Petrobras and would or might reinspect the bottom plate in the light of that concession. It was implicit (KBR says) in that approach that D1 would be liable for the costs incurred in substitution for the plate replacement which KBR alleges would otherwise have been required, and for which KBR alleges D1 would have been liable under the Guarantee.
- The mis-statement and collateral warranty claims are based upon certain statements allegedly made by D3-D5 or individuals employed by them during the negotiations leading up to the agreement of the MOA in 1999-2000, concerning the quality and suitability of the Concordia Class vessels (which included the Stena Continent and the Stena Concordia), for conversion to FPSOs.
- KBR's case is that D3-D5 owed a special duty of care to KBR, which they breached by making these alleged statements, because they were made negligently. Alternatively, KBR says that some of these alleged statements amounted to, or perhaps gave rise to, collateral warranties which were broken in view of what, KBR says, was the true condition of the Continent.
- It is convenient at this point to set out the relevant Contract Documents and Petrobras Specifications.
- The MOA between KBR and the seller was agreed on 19 April 2000. It was on amended Norwegian Sale Form terms. The most relevant terms of the MOA are:
- The MOA was subsequently varied by the parties by two addenda. Addendum No. 1 (signed 15 December 2000/11 January 2001) concerned the cleaning of the vessel before delivery and provided KBR with some additional options in relation to the dates for receiving Notice to Proceed and delivery of the vessel.
- Addendum No.2 (dated 25 January 2001) clarified the identity of the buyer of the vessel and the replacement of the Stena Conductor with the Stena Continent. It also confirmed the terms of the guarantee to be provided by D1:
- On 26 January 2001, D1 entered into the Guarantee in favour of KBR as follows:
- Clause 4 of Appendix 1 to the MOA referred to certain Petrobras Specifications, including the following:
- For completeness, I refer to an earlier revision of Petrobras Specification 202 (rev.E issued on 26 August 1998) and especially section 9 thereof:
- The Joint Chronology of Events helpfully prepared by the parties is at Appendix A. I refer to the Joint Chronology which forms part of this judgment.
- The definitions of technical terms and procedures helpfully agreed between the experts are set out at Appendix B. I refer to the definitions in Appendix B which form part of this judgment.
- Mr Ian Linder
- Mr Vince Worsnop
- Mr Roger Samways
- Mr Paul Phillips
- Mr Mark Kilcran
- Mr Per Palludan
- Mr Ulf Ryder
- Mr Ake Rohlen
- Mr Per Labom
- Mr Robert Blane
- I had some reservations about Mr Blane's evidence. In my view the contemporary documents provide the best guide to the matters he dealt with in evidence.
- Mr David Jones
- I had some reservations about Mr Jones' evidence. In my view the contemporary documents provide the best guide to the matters he dealt with in evidence.
- Mr Beadnall is a partner in Stephenson Harwood, solicitors for the defendants. He gave evidence in relation to the meeting on 12 October 2001 at the Hilton Hotel, Heathrow Airport.
- Mr Biles was called by the claimant. He is a Master Mariner and Naval Architect. He has a current Class 1 (Master Mariner) Certificate of Competence, an Honours Degree in Naval Architecture and a Masters Degree in Business Management. He is a Registered Chartered Engineer with the Royal Institution of Naval Architects and a Registered European Engineer with the Institute of Marine Engineers. He had relevant experience of conversions from VLCC to FPSO in the case of the Sahara/Fluminese and the Lu San/Frade.
- Mr Corlett was called by the defendants. Mr Corlett is a professional Naval Architect and Marine Consultant. In the early 1980s he was employed by Single Buoy Moorings as a Senior Naval Architect and was responsible for tanker conversion engineering for various FPSO Projects and Studies which SBM were carrying out at the time. He became a Marine Consultant in 1983 and retained an interest and involvement in FPSO and FSO engineering, carrying out consultancy work on FPSOs and related Projects for various clients.
- Mr Corlett has never acted as a Steelwork Inspector on a conversion from a VLCC to a FPSO, although he was involved in the determination of the extent of steelwork repairs during his time at SBM.
- I accept the claimant's submission that Mr Biles has considerably more expertise (and more recent expertise) in the practical field of steel renewals than Mr Corlett. I refer to Mr Biles' evidence as to his experience in respect of other vessels of negotiating with Class and determining the size and number of inserts. In my opinion Mr Biles' evidence on the issues relating to the ABS Inserts criteria is generally to be preferred to the evidence of Mr Corlett.
- I had some reservations about Mr Corlett's evidence to the extent set out below. Further, in his report Mr Corlett did not always distinguish between issues which were sensitive to expert evidence and issues which were matters for the Court (taking into account appropriate expert evidence). Although the same point should in fairness be made in relation to some of Mr Biles' evidence, the point was more pronounced in Mr Corlett's case. Further, I was on occasion left with the impression that Mr Corlett did not always comply with CPR 35PD.2 (6) ("where there is a range of opinions on the matters dealt with in the report –
- The claimant's case is as follows. At all times, D3 and D4 were acting on behalf of themselves and the Stena Group (or 'Stena Sphere' as they refer to themselves in their published literature) more generally. D3 and D4 were at all material times acting on behalf of themselves and the ultimate sellers. In the case of the employees of D3, they were acting on behalf of D3 and as agent for, amongst others, D4. D3 and D4 were pursuing a policy that had been agreed, directed and implemented between themselves to promote the sale of the whole class of Concordia VLCCs for conversion to FPSOs. D4 was the ultimate owner of CM Continent Limited, the owner of the Continent.
- The defendants' case is as follows. The individual employees' role in the negotiations was as agents for the individual shipowning companies. None of D3-D5 assumed personal responsibility for the representations being made; nor did KBR rely on such assumption of personal responsibility; nor, if it did, did it do so reasonably, and in any event there was no sufficient assumption of responsibility to create a special relationship with any of D3-D5.
- It is agreed that a summary of the relevant legal principles is found in Clerk & Lindsell on Tort (19th Edition, 2006) paras. 8-84 to 8-91. Paras. 8-96, 8-99, 8-101-104, 8-106-107 are also of relevance. The above include the following passages:
- As explained in footnote 4 and the cases there referred to, animo contrahendi means:
- A helpful recent summary of the relevant legal principles regarding the recognition of pre-contractual promises or assurances as collateral warranties is to be found in the obiter judgment of Lightman J. in Inntrepreneur v East Crown [2000] 2 Lloyd's Rep.611. His summary is at [10]:
- My analysis and conclusions in relation to the mis-statement claim and the collateral warranty claim are as follows.
- The claimant's case is as follows. In Section 9.2 "to – original plate thickness" refers to the as-built thickness of the vessel i.e. its first or 'original' thickness. D1 has sought to construct a link between Section 9.1 and 9.2 where none exists. The reason that D1 has sought to construct such a link is to support what is, in effect, an attempt to re-write the language of Section 9.2 so that "to – original plate thickness" is re-defined to refer to the "reassessed" or "nominal" thickness. There are no links of the type suggested by D1. Sections 9.1 and 9.2 deal with separate issues. Section 9.1 is concerned with the effects of general corrosion. This relates to the strength of the individual structural member. That explains why the reassessed figure derived from the strength assessment is relevant to that exercise. Section 9.2 is concerned only with the criteria to be applied to determine when pits in the bottom plating must be weld repaired or cut out and replaced with new steel. It is concerned with the risk of pollution. The criteria in Sections 9.1 and 9.2 are separate. They relate to different problems and have separate criteria applied to them. In both cases, however, on KBR's construction, the primary concern of Petrobras can be seen to be to specify conservative criteria which minimise the risk of Petrobras having to undertake maintenance and repairs to the hull during the 20 year service life of the vessel, which would adversely affect the operation of the FPSO.
- D1's case is as follows. Original plate thickness means the applicable reference thickness – i.e. the approved scantling thickness. In the context of a conversion in which there is to be an approved reassessment, it means the reassessed thickness. This is in accordance with normal industry practice and the universal practice of Class. To construe it as meaning as built thickness would mean introducing a different reference thickness for bottom pitting repairs than for other steel repairs, and moreover the use of an unapproved thickness. Neither expert had ever encountered a steel repair specification or a steel repair job where this approach had been followed. Furthermore the use of as built thickness as a reference thickness leads to consequences which are technically illogical and which flout technical commonsense. It would also lead to the replacement of bottom plating in circumstances where effectively no steel renewals were required by Class or were otherwise technically necessary, a wholly unreasonable and uncommercial result.
- The relevant legal principles are as follows.
- In my judgment "to - original plate thickness" means "as built" thickness. I consider that this construction is consistent with the relevant explanations of and meanings of the Technical Terms and Procedures set out in Appendix B. It is consistent with the ordinary meaning of the word "original" (see 4 above). It is consistent with the careful and separate definitions of the various thicknesses referred to in Section 9.1 and 9.2. If for example it was intended that 'to' should have the same meaning as 'tn', there would have been no need to provide a separate definition of 'to'. It is consistent with the context of a generic specification (see 8 above). It is consistent with the conservative approach adopted by Petrobras in certain other respects (see 9 above). It was understandable in commercial terms that Petrobras would take a conservative approach to pits in the bottom of a vessel (see 10 and 12 above). This construction is consistent with the fact that the Projects were intended to be fast track projects, with blasting etc followed by inspection followed by painting or renewal (see 11 above).
- I add the following footnote. It should be remembered that in the carefully drafted email of 27 September 2001 the defendants (and in particular D1) alleged "that the specification appended to our contract is simply incorrect in defining to as original rather than nominal thickness" (emphasis added). Thus on 27 September 2001 it was being alleged that a mistake had been made, and not that KBR had misconstrued the meaning of Section 9.2.
- The claimant's case is as follows. A relaxation was obtained on site in Singapore to use a slightly more relaxed set of criteria for the bottom pitting inspections after blasting in mid-August 2001 - the Present Thickness criteria. As set out in Mr. Blane's "check" calculation of 23 August 2001, the use of the Present Thickness criteria was less onerous and therefore beneficial to the defendants. The Present Thickness criteria were a practical application of the Section 9.2 criteria, employed to take account of the fact that there had been some limited general corrosion on the Continent. The May TQ did not raise any query in relation to the reference thickness to be used for the bottom pitting inspections under Section 9.2. The May TQ was limited to (a) asking Petrobras for a relaxation of the pit diameter criteria (i.e. the 200mm limit referred to in Section 9.2.1 and 9.2.2(a)), which KBR requested to be relaxed to 300mm, and the correction of the minor typographical errors that were evident in the wording of Section 9.2. These points had been picked up by Mr. Jones when he first read Section 9.2 in February 2000. Petrobras' answer was to reject the request for a relaxation in relation to the pit diameter criteria and to correct the minor typographical errors. The May TQ did not have the effect of substituting a new reference thickness for the as-built thickness in Section 9.2. Even if, contrary to the claimant's case, it could be said to have had such an effect, it was superseded by the agreement to the Present Thickness criteria.
- D1's case is as follows. The May TQ superseded Section 9.2. It represented a complete redraft of Section 9.2 and rendered irrelevant the formulae used therein and the consequential abbreviations and definitions used such as "to" and "original plate thickness". The reference thickness in the May TQ is "T" or "bottom plating thickness", as it is in the ABS guidance from which the May TQ was taken. It is common ground between the experts that "T" in the ABS guidance refers to the current approved scantling thickness, which in this case would be the approved reassessed thickness. If so, it must have the same meaning in the May TQ. There is no proper basis as a matter of construction for giving it some special and different meaning – a fortiori in circumstances where there is no need to refer back to Section 9.2. The agreement to apply the Present Thickness criteria was not the subject of a TQ and did not change the specification requirements. They remained as set out in the May TQ.
- TQ 007 (also called the May TQ) was submitted to Petrobras requesting clarification of parts of Section 9.2 on 23 April 2001. TQ 007 was returned by Petrobras on 9 May 2001. The answers to the Technical Query should be read in the light of the particular queries raised.
- I accept Mr Worsnop's evidence to the following effect. Prior to commencing the close-up inspections on P43, he reviewed the applicable Petrobras specifications, and in particular, Section 9.2 in relation to bottom pitting criteria. He noted that the Petrobras criteria provided that the maximum pit diameter was 200mm. This was stricter than the ABS criteria, which permitted a maximum pit diameter of 300mm. He therefore asked the Petrobras site team whether the Petrobras specification could be brought in line with the ABS criteria in this regard, and drafted a local Technical Query and enclosed sheets. The mechanism available for putting this query to Petrobras was via a TQ from JSPL to KBR, albeit drafted by Mr Worsnop. Petrobras rejected KBR's request and continued to require that the maximum nominal diameter of any pit did not exceed 200mm. Petrobras effectively restated the Section 9.2 criteria as being applicable.
- The May TQ corrected the typographical errors that had been noted in Section 9.2 and identified in the email from Mr Rohlen of 15 February 2000. TQ 007 did not change the reference thickness. TQ 007 did not seek to raise any query about the definition of "original plate thickness" and did not substitute the reassessed thickness as a new reference thickness for pitting inspections.
- Further it should be noted that at the stage TQ 007 was issued, the bottom of the vessel had not been blasted (bottom shell blasting commenced on 15 August and the first bottom plate inspection did not end until 26/27 September).
- For the reasons set out above Issue 16 does not arise. The Present Thickness criteria were (I find) the criteria discussed and agreed with Petrobras and ABS before the bottom pitting inspections commenced and were the criteria actually applied by KBR, Petrobras and ABS during the first inspection in August/September 2001 that led to the renewals in DD1 and DD2. I accept Mr Samways' evidence as to the circumstances in which the use of the Present Thickness criteria was discussed and agreed. The conduct of the parties was inconsistent with TQ 007 superseding Section 9.2. I reach this conclusion having reviewed all the relevant evidence.
- The claimant's case is as follows. There was no obligation on KBR to mitigate the seller's/guarantor's liability. It cannot be negligent to implement what the contract requires. Nor can it be "unfair" or "unreasonable" to implement the very obligation that the seller/guarantor have agreed will be for their account. There is no principle of law that required KBR to seek a relaxation to the Specification which would have the effect of increasing the amount of welding to be undertaken (on D1's case, at KBR's cost) in order to reduce the seller's/guarantor's liability. Even if there is such a duty, there was no breach on the facts of the present case, nor was KBR's conduct "unfair" or "unreasonable". Petrobras would not have accepted a revision to their criteria earlier than they actually did.
- D1's case is as follows. KBR's failure to agree criteria with Petrobras akin to TQ 1028 before they actually did so was unreasonable and/or negligent and was a consequence of (1) KBR's failure to put forward a steel replacement procedure in a proper and timely fashion as they ought to have done and had stated that they would do; and/or (2) KBR's failure to seek clarification of the reference thickness under Section 9.2 despite this being both unclear and, if it meant as built thickness, technically illogical and unreasonable; and/or (3) KBR's failure to ensure that an approved reassessment was obtained in a timely fashion, and on any view well in advance of steel inspections and/or (4) KBR's failure to use the determined but the yet to be approved reassessed thicknesses for such inspections. KBR cannot recover in respect of renewals carried out as a consequence of its own unreasonableness and/or negligence because the indemnity only extends to renewals which were properly and reasonably required and/or because it does not indemnify KBR against the consequences of its own negligence and/or because in such circumstances the renewals would not be "required" and/or as a matter of causation.
- In my judgment it was not unreasonable and/or unfair and/or negligent of KBR to fail to agree criteria with Petrobras similar to TQ 1028 before they actually did so. Even if KBR was under some form of duty to seek to agree criteria with Petrobras similar to TQ 1028, I do not consider that KBR acted unreasonably or unfairly or negligently. Further, I do not consider that Petrobras would have agreed criteria similar to TQ 1028 before they actually did so.
- I refer to the chronology of relevant events as set out in the Chronology of Events.
- I accept the evidence of Mr Kilcran as follows –
- Having carefully considered all the evidence in my opinion on a balance of probabilities Petrobras reluctantly agreed to TQ 1028 in November because Petrobras was subject to pressures (from sources other than the parties), to make faster progress in relation to extracting oil generally, and the Project in particular.
- The claimant's case is as follows. There is no principle of law that would require KBR to cancel the dry dock(s), incur cancellation charges (for its account), incur welding charges (which on D1's case were for KBR's account), take the commercial risks of the future availability of the dry docking facilities and the potential impact on the overall schedule in order to relieve the seller/guarantor of a contractual liability that they had voluntarily assumed.
- D1's case is as follows. Even before the Heathrow meeting, it was known that ABS agreed to the re-assessed thickness being used as the reference thickness and, following the discussions with ABS at the meeting, it was apparent that they essentially agreed with the approach which had been proposed. It was anticipated that Petrobras would or would substantially follow ABS' lead and KBR's own view was that significant steel renewals could thereby be avoided. There was at that time still no agreement between KBR to JSPL for steel renewals to the bottom plate to go ahead at DD1. In all the circumstances, it was unreasonable and/or negligent for KBR to go ahead with significant steel renewals at DD1.
- In my judgment KBR is entitled to recover from D1 in respect of the plate replaced at DD1 based on the first inspection to the extent set out below. In my opinion KBR did not act unreasonably and/or unfairly and/or negligently in failing to defer carrying out any renewals at DD1, until the plate had been re-inspected.
- On 13 November 2001 TQ 1028 was formally approved by Petrobras, subject to ABS issuing a statement regarding In Service Inspection criteria consistent with the pitting criteria set out within the TQ. DD1 commenced on 17 October 2001. Steel was renewed against the Present Thickness criteria.
- I refer to the history of the relevant events as set out in the contemporary documents, including (without limitation) the chronology set out above. When regard is had to all the relevant circumstances (including the various contractual relationships to which KBR was party), I do not consider that KBR acted unreasonably and/or unfairly and/or negligently in failing to defer carrying out any renewals at DD1 until the plate had been re-inspected.
- I refer to the position between KBR and JSPL as reflected in:
- In all the relevant circumstances (including, in particular but without limitation, the position between KBR and JSPL and Petrobras) KBR had no sensible commercial alternative but to proceed with renewals at DD1 based on the first inspection.
- I refer to and accept Mr Phillips' account and analysis in his witness statement. I also refer to and accept the reasons given by Mr Phillips in evidence as to why KBR had no sensible commercial alternative but to proceed with renewals at DD1 based on the first inspection.
- I accept the claimant's submissions as follows. The significant increase in the quantity of steel that had to be renewed as a result of the extent of the pitting in the bottom of the Continent, placed the claimant in an extremely difficult position in relation to both JSPL and Petrobras. It gave rise to a number of significant commercial pressures referred to by Mr Phillips. In order to undertake the steel renewal during the planned Dry Dock, significant preparatory work was required. By mid-September 2001 it was apparent that the bottom plate renewals would have to be undertaken during more than one Dry Dock (as opposed to the original plan to undertake bottom plate renewals in the first Dry Dock – see Mr Witton's email to Mr Jones of 13 August 2001). In order to undertake a dry dock, steel had to be sourced and fabricated. The quantities of steel involved would not have been readily available from local stockholders. Thus a procurement period in advance of fabrication and dry docking was required. Fabrication of bottom plate replacement had started before 26 September. By that date some 1,443 tonnes of steel plate for bottom renewal were subject to purchase orders or were in stock and would be available before 29 September. A further 1,200 tonnes of 30 mm plate was to be ordered by JSPL for availability by DD2 in December 2001. Further, on 26 September "JSPL highlighted that KBR response to VOR 15 [which became VO 16], "DD extension must be made before 28 September 01 to secure dock allocation." JSPL was in an extremely strong commercial position as against KBR. KBR was under intense pressure from Petrobras to maintain the schedule. KBR was caught between Petrobras and JSPL at a time when plate had already been ordered and fabrication had commenced, with no realistic commercial alternative but to proceed with plate renewals at DD1. There was no viable alternative for any person other than JSPL to complete the work. The terms agreed were the best deal that KBR management believed they could obtain given all the circumstances at the time. Delaying the steel work renewals was not an option. KBR was subject to a fast-track contract on which the Project depended. Delaying the work was not an option. KBR had to manage the relevant commercial risks. KBR held back for over a month in an attempt to agree better terms with JSPL. JSPL reduced their demand from $5,400 per tonne down to $4, 900 per tonne. KBR had a tight schedule and had to move forward. KBR took and made what they considered to be the best decisions based on the information available at the time.
- The claimant's case is as set out above in relation to issues 21 and 22.
- D1's case is as follows. KBR is not entitled to recover in respect of plate replaced based on the first inspection for the reason that, by the time of DD2, TQ1028 had been agreed and it follows that the only steel renewal that was at that stage "required" was that called for under TQ 1028. In any event, it was unreasonable and/or negligent for KBR to go ahead with the replacement of plate on the basis of the first inspection in circumstances where TQ1028 had been agreed and it was apparent that it would make a huge difference to the quantity of renewals required.
- TQ 1028 was formally approved by Petrobras on 13 November, subject to ABS issuing a statement regarding In Service Inspection criteria consistent with the pitting criteria set out within the TQ. DD2 began on 24 November.
- In my judgment KBR is entitled to recover from D1 in respect of the plate replaced at DD2 based on the first inspection to the extent set out below. I reject D1's submission to the effect that KBR is only entitled to recover in respect of that proportion of the plate replaced at DD2 which would have been condemned if TQ 1028 had been applied. I refer to and repeat the analysis set out above in relation to issues 21 and 22.
- I refer to the history of the relevant events as set out in the contemporary documents including (without limitation) the chronology set out above and the Chronology of Events.
- When regard is had to all the relevant circumstances (including the various contractual relationships to which KBR was party) I do not consider that KBR is only entitled to recover in respect of that proportion of the plate replaced at DD2, which would have been condemned if TQ 1028 had been applied.
- I refer to the position between KBR and JSPL as reflected in:
- The dilemma that KBR faced was described in an email from Mr Witton to Mr Press on 19 November 2001 in the following terms:
- A happy client
- A happy Subcontractor
- No future disagreements during blast inspection before painting (a big plus)
- Negate disagreements on grinding preparation before coating
- Schedule, through less disruption
- Client will be easier on coating acceptance
- Negate any claims from JSL
- Mr Phillips' view of the position was set out in his email to Mr MacKintosh of 22 November as follows:
- Anticipated / notified 'claim' via JSPL for 'deletion' of DD2 – US$3,626,395.71 (term b – Attachment A – To be claimed against xstg V.O No 16).
- DD2 cost of replacing 880 Tonne – US$4,372,000.00 (880 Tonne @ $4900/Tonne + Pit repairs – Item a Attachment A)
- Potential 'saving' as negotiated – circa U.S $745,604.29.
- Revised quantity of replacement plate – est against new criteria – circa 286 Tonne.
- Mats/fab to date 1,018,710.00
- Dry Docking 140,700.00 (Based on 21 days @ U.S $6,700/day)
- Pitting repairs 510,000.00 (Based on significantly increased No: pits to repair due to original plate remaining in-situ.)
- Seam repairs 80,000.00
- Replacement Stl 1,401,400.00 (Revised quantity to replace – 286 Tonne @ U.S $4,900.00)
- Total 3,150,810.00
- In all the relevant circumstances (including, in particular, but without limitation, the position between KBR and JSPL and Petrobras) KBR, in my opinion, acted reasonably in proceeding with DD2 based on the first inspection.
- I refer to and accept Mr Phillips' account and analysis in his witness statement. I also refer to and accept the account and reasons given by Mr Phillips in evidence. In particular (but without limitation) I accept Mr Phillips' evidence to the following effect. As at 30 October steel had already been fabricated for a Dry Docking to take place at about the end of November. "The results of the implementation of TQ 1028 were not known, and the threat, because that is what it was, from JSPL, was that, "Should you not go ahead with [DD2], the proposed time scale, i.e. 24 November start date, then we cannot guarantee you another available Dry Docking scope as and when it may have been required." The decision to go ahead with DD2 was made by KBR senior management based on the information they had available at the time and a limited number of difficult options. They took into consideration all of those options.
- I accept the claimant's submissions as follows. Work on the Project could not be put on hold pending a decision by Petrobras as to whether or not to agree to a relaxation and, if so on what terms. Following the agreement of ABS to the revised criteria on 19 October, TQ 1027 took a little time to produce. It involved discussions with Petrobras and was finalised and submitted on 1 November. The time taken was reasonable. A summary by Mr Jones of the meeting on 31 October stated "From my discussion later that day with our inspector in Angra he confirmed seeing a very impressive 7 page document prepared by KBR justifying their request to Petrobras." In the event Petrobras rejected TQ 1027. JSPL had by 19 November already completed the preparation of 880 tonnes of steel plate for DD2, as stated in Mr Witton's email of 19 November. JSPL's threats prior to DD2 were of substance, given JSPL's past behaviour. JSPL stated that the date (24 November) for DD2 was the only Dry Docking slot available to KBR, and if KBR chose not to use it, then in addition to presenting KBR with a claim for JSPL's cancellation costs, JSPL could not guarantee that another Dry Dock slot would become available as and when required, due to the state of business at the shipyard. KBR was subject to similar commercial pressures to those that applied in relation to DD1. Similar hard choices had to be made and similar risks and uncertainties managed (although by this stage TQ 1028 had very recently been approved). The commercial realities favoured continuing with DD 2 and it was not negligent of KBR to go ahead with it. As Mr Phillips put it: "… We had a project to deliver a vessel within a certain timescale. We needed to proceed with the works. We could not afford any schedule slippage. The potential was … for significant slippage. The potential … was for a significant claim …, and the potential was … for further risk due to the unknown factors that … were [mentioned] by Jurong, future Dry Docking space may not be available as and when you need it. That … was a major risk item that had to be managed."
- The claimant's case is as follows. The first sentence of clause 4.1 of the MOA sets the overall limit of the claimant's liability for steel renewals. It provides that the extent of the claimant's liability for steel to be renewed in the conversion yards is limited to "the cost to the Buyer of one hundred and fifty (150) tonnes". The second sentence of clause 4.1 imposes a liability on the seller (and therefore on D1) for the cost of steel renewals in excess of that cap. The liability of D1 is "Any steel renewals, in addition to the 150 tonnes, to meet the Petrobras specification requirements…". There is no precise figure that could be identified as the quantity of steel that was the absolute minimum that was required to meet the specification requirements. The extent of the renewals will depend on numerous factors and, in relation to the identification and replacement of steel for replacement, will depend on the judgment of different surveyors. This is illustrated by the present case where the surveyors and other inspectors involved in the identification and mark up of steel for renewal due to bottom pitting included KBR (Mr. Samways), Stena (Mr. Blane), Petrobras (Mr. Machado), JSPL (in determining their cutting plans) and the ABS surveyors (Mr. Ang, Mr. Han and Mr. Chong). In addition, Mr. Samways and Mr. Worsnop were involved in direct discussions with JSPL and ABS. As both experts agreed, that is not a precise science – it is a practical exercise, involving judgment made on the ground. Clause 4.1 of the MOA is a commercial document relating to steel renewal in a shipyard on a fast-track conversion to an FPSO and must be construed in that light. It covers steel renewed to meet the relevant Petrobras Specifications applying normal industry/shipyard practice and, in so far as the steel was required by Class, providing that it is a reasonable application of the requirements of ABS as understood at the time. Further, clause 4.1 is concerned with the actual quantity of steel renewed – it creates a liability in the seller (and thus D1) for the actual quantity of steel renewed at the rate actually charged by the shipyard. It is not limited in the way D1 suggests, namely to a figure equivalent to a theoretical minimum figure resulting from a desk top exercise undertaken many years after the event by experts who were not present at the time.
- D1's case in relation to the inserts criteria is that the quantity of renewal steel which the claimant can prove was required in order to meet the Petrobras Specification is the quantity which is the minimum requirement of class – i.e. that required on a practical application of the ABS criteria.
- In my judgment, in order to recover under the Guarantee for steel renewals resulting from the application of the ABS Inserts criteria at each of DD1, DD2 and DD3, KBR has to prove on a balance of probabilities that the amalgamation of inserts was a reasonable application of the ABS Inserts criteria and/or other requirements of ABS as understood at the time, having regard in particular (but without limitation) to normal industry practice. I do not consider that the "reasonable application" test is likely to produce a result that in practice differs materially from the result of the first test (KBR has to prove that the amalgamation of inserts was the minimum that was required in order to comply with the ABS Inserts criteria and/or other requirements of ABS).
- I accept the claimant's submission that Mr Biles has considerably more expertise (and more recent expertise) in the practical field of steel renewals than Mr Corlett. I refer to Mr Biles' evidence as to his experience in respect of other vessels of negotiating with Class and determining the size and number of inserts. In my opinion Mr Biles' evidence on the issues relating to the ABS Inserts criteria is generally to be preferred to the evidence of Mr Corlett.
- Further I accept the claimant's submission that the relevant exercise is a practical exercise involving judgment made on the ground, and that care should be taken before placing reliance on a theoretical desktop exercise undertaken many years after the event by experts who were not present at the time.
- I accept Mr Samways' account of the relevant events as set out in his witness statement. I refer to the full account there set out.
- Mr Worsnop sent copies of the fair sketches to JSPL QA Department during August/September 2001. JSPL used these to produce their "Bottom Shell Renewal and pit repair by welding" documents for each of the tank areas. These were initially issued by JSPL at the RevA "Issued for approval by KBR & ABS". These showed that JSPL had in many instances amalgamated the mapped defects into larger areas of proposed steel renewal. When KBR received the first of these documents from Jurong, Mr Samways reviewed it and then went to discuss Jurong's approach with Mr Ganesan, Jurong's QA manager for the P43 vessel. He stated that multiple inserts would not be acceptable to ABS, as such inserts would not comply with ABS' rules in relation to the maximum number of inserts permitted in a strake or the proximity of welds, and nor was such an approach in accordance with good engineering practice. He also noted that the fair sketches showed circular inserts and explained that Jurong did not fit circular inserts. The Jurong IFA documents were reviewed by Mr Samways, Petrobras and ABS. Once each party approved a document, it was returned to Jurong to incorporate any comments and for issue at the "Approved for Construction" revision.
- I accept the claimant's submission that the contemporary documents show that Mr Worsnop was endeavouring to keep Mr Jones up to date with information, as it became available. Mr Jones knew as at 20 September 2001 that KBR was requesting ABS to comment on steel substitutions in relation to the bottom renewal (see Mr Jones' email to Mr Carlsson (the President of Concordia Maritime AB) dated 20 September 2001).
- On 20 September 2001 Mr Carlsson sent an email to ABS, asking ABS to investigate the extent of the steel renewals on the Concordia and the Continent and the criteria that were being applied. This direct approach to ABS was not revealed to KBR. I would be surprised if such a direct approach to ABS (without informing KBR) accorded with good industry practice. On 21 September ABS issued instructions to their field surveyors for use as the criteria for pitting repair of both bottom plate and internal structural members. KBR was not informed by ABS of this guidance until 10 October.
- The first bottom plate inspection ended on 26/27 September.
- On 27 September Mr Rohlen (Vice President of Stena Bulk, who was in charge of selling the Concordia Class tankers for conversion and negotiations with KBR from February 2000) sent the email to KBR which had been carefully drafted by a number of persons on behalf of the defendants. The email said:
- On 1 October Mr Worsnop participated in a telephone conference call arranged and attended by Mr Press and the FPSO team in Rio. Mr Press distributed an action list to the FPSO team dated 1 October. Mr Worsnop was asked to prepare for a further telephone conference scheduled for 3 October to discuss the potential to reduce the replacement steel quantity, KBR's exposure to additional cost and the current status of the new steel order etc. Mr Worsnop was of the opinion that the exercise of attempting to reduce the replacement steel quantity, and still be in compliance with ABS requirements and the Petrobras Specification, was futile. This was because when it became apparent that significant amounts of steel renewal were required to meet the Petrobras Specification and ABS requirements, he and others had revisited the Petrobras Specification together with the inspection report several times, to ensure that KBR was renewing the minimum quantity. Nevertheless he complied with Mr Press' request and arranged for a further discussion as to the minimum steel renewals with the ABS Offshore Manager, on the following day.
- Mr Worsnop was seeking confirmation from ABS that the steel replacement which KBR proposed was the minimum steel replacement required by ABS in order to achieve class requirements. At this stage ABS were not asked to comment on the Inspection criteria giving rise to individual areas of plate replacement for bottom pitting repairs as shown on the first sketches. What was required from ABS was confirmation of their criteria regarding the allowable number and proximity of inserts. Mr Worsnop initially spoke with Mr Han, the ABS surveyor attending on site, and informed him that KBR intended to request that ABS review the proposed steel replacement and confirm that it was the minimum steel renewals required to meet Class requirements. This conversation took place on about 1 October. Following this conversation Mr Worsnop telephoned Mr Ang, the ABS Offshore Manager for Singapore, to arrange a meeting regarding ABS' review of Jurong's proposed bottom plating renewals. The meeting took place on site on 2 October. The meeting was attended by Mr Ang, Mr Sewell (the KBR Construction Manager for the P 48/Concordia conversion in Brazil), Mr Samways and Mr Worsnop. Mr Worsnop produced a record of the discussions during this and subsequent meetings, to which I refer.
- I accept the claimant's submission that KBR was engaged in a genuine attempt to understand and determine the extent of the steel renewals that would be required by ABS across the Projects, and that Mr Sewell's attendance was further confirmation of this.
- On 3 October KBR faxed Mr Ang six examples of typical plate inserts to confirm that KBR's interpretation of the application of the guidelines was correct. KBR asked if Mr Ang would review the proposed bottom plate renewals to ensure that the proposed renewals were not excessive and/or that these renewals were the minimum requirements to repair the defective areas. Mr Ang agreed that ABS would do this and advised KBR to contact Mr Chong, who would be the ABS surveyor responsible for carrying out this task.
- On 4 October there was a further meeting, this time with Mr Chong of ABS attended by Mr Worsnop, Mr Sewell, Mr Witton and Mr Samways. Mr Chong confirmed that he understood the nature of KBR's request, i.e. to confirm that the proposed steel renewals were the minimum plate renewals required to satisfy ABS guidelines or to show areas where they could be reduced. He said that he would respond by 9 October. Mr Chong had been made aware that KBR representatives were departing for London on 10 October to have meetings in relation to bottom plate with the defendants. KBR provided Mr Chong with four sets of the fair sketches for all the tanks which had been marked up to show the proposed repairs edged in pink.
- On 6 October Mr Chong told Mr Worsnop that he would be forwarding a copy of the drawings to ABS Houston. Mr Worsnop pointed out in his witness statement that there had been no mention of ABS Houston becoming involved in the process, and KBR saw no need why they should become involved. Further, KBR had some reservations because it was KBR's understanding that Mr Jones had been a long time employee of ABS and had been based in America.
- On 9 October Mr Chong attended the site with a letter in which ABS stated that the proposed repairs were acceptable to ABS, but which did not state whether the proposed steel renewals were the minimum as per KBR's request. The letter said:
- There followed a number of discussions including phone calls with Mr Ang and Mr Tan, but ABS were not prepared to commit to stating in writing that the renewals were the minimum renewals. In his witness statement Mr Worsnop said that at the time he felt that ABS Singapore had been told by ABS Houston to avoid making any comments regarding the quantity of bottom plating steel required, as ABS did not want to get involved in the arguments that KBR were then having with the defendants.
- On 10 October Mr Witton of KBR sent a fax to ABS in relation to bottom steel replacement – "we take your acceptance of the proposed bottom plate steel renewal, as ABS' confirmation that this represents the minimum steel quantity required to meet the Project and the Class requirements."
- There was no response by ABS to this letter. Nor did ABS identify at any time before completion of DD2, any areas of steel that could be saved or were outwith ABS' requirements. At no time did ABS suggest that the ABS Inserts criteria had been incorrectly interpreted or applied by KBR/JSPL.
- In my opinion KBR acted reasonably in approaching ABS as set out above. It may be that a classification society will not ordinarily provide confirmation that proposed bottom plate steel renewal represents the minimum steel quantity required to meet the Project and Class requirements. But I find that the probability is that the defendants' approach to ABS (without informing KBR of the same) had some effect on ABS' response. KBR fairly acknowledge in their closing submissions that the defendants did not intend that the result of their direct discussions with ABS in Houston from 20 September onwards, should be a decision by ABS to reply as they did. It is possible that had there been a joint approach by all interested parties to ABS, ABS' response might have been different.
- Mr Biles undertook the exercise of applying the ABS Inserts criteria to the areas of steel renewals as identified by Mr Samways and Mr Blane. For his first and second exercises he applied the criteria of a maximum of two inserts per strake width turned sideways. These criteria are less onerous than the earlier criteria of a maximum of three inserts in a half strake length that, according to the evidence of Mr Worsnop, were applied in relation to the amalgamation of steel for DD1 and DD2. Mr Biles pointed out that if the criteria to be applied to the work undertaken in DD1 and DD2 included the more onerous "three inserts in a half strake length", this would increase the areas to be amalgamated and therefore increase the tonnage. Mr Biles should have set out in relation to his third exercise the precise nature of his instructions. In his third exercise Mr Biles revisited the exercise in relation to the tanks that were included in the first two dry docks, to reflect the application of the more onerous criteria. In the time available he had not been able to perform any detailed calculations to recalculate the tonnage on this basis, but from an inspection of the diagrams he said that the tonnage would increase compared with the first two exercises. From a review of the ABS Insert sketches he believed that it was reasonable to conclude that the amalgamation of inserts carried out by KBR/JSPL, as shown by the pink line on the ABS Inserts Sketches (for those tanks included in the first two dry docks), was largely consistent with the ABS Inserts criteria, based upon a maximum of three inserts in a half plate length. In carrying out this third exercise, Mr Biles identified those areas where KBR/JSPL appear to have taken areas of plate that would normally be saved using a strict application of the ABS Inserts criteria. He also identified those areas which would ordinarily be taken (even though as a matter of fact they were not) using a strict application of the first ABS Inserts criteria. It is important to note that the final figure (1,720 tonnes based on three in one/two plate length) is based on the as built thickness and is therefore higher than the actual claim figure (which includes three tanks that were replaced during DD2 with 30mm plate). Thus the 1,720 tonnes figure was included for comparison purposes only.
- I consider that there is force in the claimant's submission that Mr Biles' third exercise provides some further evidence that KBR's/JSPL's interpretation of the criteria was reasonable and in accordance with the ABS Inserts criteria applicable during DD1 and DD2.
- It was pointed out to Mr Corlett that his figure of 997.3 tonnes was based on the use of 35mm plate throughout, whereas the as-fitted thicknesses on DD2 were lower in some areas. On that basis, he has now calculated a figure of 1, 010.9 tonnes for all three dry dockings. On that same basis, Mr Biles' 1,255 figure comes down to about 1,208 tonnes.
- In undertaking their respective analyses, the experts identified the following issues in relation to the application of certain aspects of the ABS criteria, in particular:
- I generally prefer Mr Biles' evidence in relation to these issues.
- In considering the claimant's primary case that it is entitled to recover the full amount claimed in relation to DD1 and DD2 some allowance should in my opinion be made for the consideration that it was in JSPL's interests to make the inserts as large as possible (although this factor should not be overstated). I reject any suggestion (if it is made) that the sketches submitted by KBR to ABS were deliberately misleading.
- In the event ABS did not confirm that the proposed bottom plate steel renewal represented the minimum steel quantity required to meet the Project and the Class requirements.
- It is important to remember that the application of the ABS Inserts criteria was a practical matter. The object would always be to achieve the minimum plate replacement in the context of what the surveyor was prepared to allow. The role of the owners' representative would be to influence that decision on a practical basis.
- Mr Biles accepted in cross-examination that his second exercise was "an application of the ABS criteria, if I was doing it with an ABS surveyor." Applying the ABS criteria, as he considered an ABS surveyor would do, Mr Biles arrived at a figure of 1255 (which has to be adjusted to 1208). But it must be remembered that he applied criteria less onerous than the criteria of a maximum of three inserts in a half strake length that were applied in relation to the amalgamation of steel for DD1 and DD2.
- I take into account the various matters that emerged in cross-examination of the experts.
- I take into account in answering issue 37 my answer in relation to issue 38.
- The answer to issues 37 (which takes into account the answer in relation to issue 38) involves a difficult and complex balancing exercise of the various facts, matters, opinion and considerations identified above. Having carefully reviewed the various facts, matters, opinions and considerations identified above and the evidence as a whole, my answer to issue 37 is 1200 tonnes.
- The claimant's case is as follows. D1 is liable for the actual weight of the steel replaced calculated at the rate per tonne actually charged by JSPL. Mr. Corlett's suggestion that the reassessed thickness had to be 27mm under the terms of the Specification results from his misunderstanding of what the Petrobras Specification required, including what is required to be done with Section 9.1. Projemar, KBR, Petrobras and ABS properly understood and applied the Specification. In simple terms, the Specification is aimed at making the maximum use of the available strength in the existing hull structure. As such, Projemar correctly derived as its final design basis from the existing thickness of the hull. This gave a gross thickness of 30mm which was then proposed to Petrobras and ABS as the reassessed thickness. That figure was approved by Petrobras and ABS. Once approved, the 30mm reassessed thickness was used as the basis for the final design by Projemar (to be verified by Finite Element Modelling), as the input figure in Section 9.1 (to determine when individual structural elements needed to be replaced due to general corrosion) and as the reference thickness for ABS' future in service inspections. Further, there is no evidence that Petrobras would have accepted a reassessed thickness of 27mm. Plate could only sensibly be replaced at the thicknesses actually used. D1's contentions to the contrary ignore the commercial realities of the position in which KBR was placed.
- D1's case is as follows. 27 mm ought to have been used because that was the minimum acceptable scantling thickness determined by the strength assessment referred to in s.9.1 and on the true construction of the specification that was the thickness which was required to be used. Alternatively, any steel renewal costs resulting from KBR's decision to use a greater thickness were not "required" and/or were not "due to" corrosion and are accordingly irrecoverable.
- Issues 38 – Analysis and conclusions
- I repeat my conclusions in relation to issue 17. In my judgment it was not unreasonable and/or unfair and/or negligent of KBR to fail to agree criteria with Petrobras similar to TQ 1028 before they actually did so. Even if KBR was under some form of duty to seek to agree criteria with Petrobras similar to TQ 1028, I do not consider that KBR acted unreasonably or unfairly or negligently. Further, I do not consider that Petrobras would have agreed criteria similar to TQ 1028 before they actually did so.
- The following is agreed between the experts. If the determination for steelwork replacements for bottom pitting was to be made on the basis of the minimum required scantlings, then the results of the reassessment were necessary, prior to any inspection for pitting.
- If the determination for steelwork replacement for bottom plating was to be based on the original (as built) scantlings (as I have held), then the results of the reassessment would not be necessary prior to any inspection for pitting.
- Where renewals are necessary, once the minimum required scantling results from the reassessment are known and approved, it is normal practice to use the reassessed scantlings for hull plating (which includes the appropriate corrosion margins) for replacement. However, there is no overriding technical reason why thicker plates should not be used.
- For DD1 c.800 tonnes of 35mm plate was procured, of which c.658 tonnes were installed during DD1. The balance of the tonnage in DD1 was plates of other thicknesses (e.g. in the taper regions). KBR says that some (c.42 tonnes) of this 35mm plate procured in advance of DD1 was used in DD3. The defendants agree that c.42 tonnes of 35mm plate was used at DD3, but say that there is no evidence which explains why this happened.
- For DD2, c.764 tonnes were installed of which c.542 were 30mm plate, some (but not all) of which was used to replace what had previously been 35mm plate. Of the total installed tonnage of 764 tonnes, therefore, a significant quantity was replaced at less than as-built thickness.
- It is necessary when considering these issues to pay careful regard to the contemporary documents.
- On 19 September 2001 ABS sent a fax to KBR stating that ABS would only accept renewals with plates that were the same thickness as the original scantlings, and not the reassessed scantlings. Mr Moloney had raised the matter in a fax dated 17 September. ABS' requirement (which KBR had to comply with) was that "when the scantlings are physically renewed, the renewed plate thickness is to be that of the original scantlings, not the reassessed scantlings."
- On 24 September 2001 KBR re-confirmed verbal instructions to JSPL as follows:
- On 25 September a fax from ABS to KBR approved mid-ship section and typical transverse sections (based on adopted thickness of 30mm for bottom plate). I refer to the Table of the mid-ship section scantling reassessment.
- Minute 3.2 of Weekly Progress Meeting number 35 between KBR and JSPL recorded "Activities planned for this coming period 26 September – 2 October 01 … Bottom Plate replacement – fabrication, started."
- On 5 October 2001 ABS responded to CSQ/050 to confirm that structural reassessment for FPSO criteria would form the basis for renewal requirements for class purposes and that ABS would accept renewal with reassessed plate thickness (which in context meant 30mm). I find that KBR had pursued the matter reasonably and timeously with ABS. ABS' Response was in these terms-
- DD1 commenced on 17 October. Steel was renewed against Present Thickness criteria.
- On 13 November TQ 1028 was formally approved by Petrobras, subject to ABS issuing a statement regarding In Service Inspection criteria consistent with the pitting criteria set out within the TQ.
- On 23 November KBR issued a further CSQ (058) requesting ABS to review TQ 1028 and confirm ABS' acceptance criteria for the inspection and identification for the repair of the Barracuda and Caratinga vessels.
- DD2 began on 24 November.
- On 7 December ABS responded to CSQ 58 as follows:
- I also refer to the documents listed in paragraphs 68 and 78 above.
- When Mr Corlett was cross-examined he accepted that he had not seen certain documents attached to ABS' response to CSQ 58. When shown Appendix D Mr Corlett said "it would appear that the calculation has been done on the basis of the adopted thickness, which is the thickness that was approved by ABS and it is being done on the basis of gross thickness … This is the way they applied it in practice. I do not dispute that that is the way they did it." Mr Corlett added "It is not the way that I would interpret the specification". I consider that Appendix D provides material support to relevant aspects of the claimant's case.
- Mr Biles' evidence based on relevant recent experience provided material support for the proposition that it is not uncommon for a considerable time to elapse before an approved reassessment is available from class and that in the meantime plate would ordinarily be replaced at the as-built thickness.
- The answer to issue 38 involves a difficult balance in all the circumstances referred to above.
- I have made allowances for these conclusions in arriving at the figure (1200 tonnes) in answer to issue 37.
- The claimant's case is as follows. There was an implicit agreement between the parties at the Heathrow meeting on 12 October 2001 that if any proposal for a relaxation to the pitting criteria set out in Section 9.2 was accepted by Petrobras, and if the claimant chose to implement those relaxed criteria thereby giving a concession to the seller under Clause 4.1 of the MOA, as this would lead to a reduction in the amount of steel plate replacement to the account of the seller and D1, then the lesser costs of re-inspecting against the relaxed criteria and of increased numbers of pit weld repairs in lieu of plate replacement would be encompassed by Clause 4.1 of the MOA, and therefore to the account of the seller (and D1). The total amount recoverable under this head of claim is said to be US$1,126,468.
- D1's case is as follows. There was no implied term as alleged and there is no evidence to support the implication of any such term. The strict legal requirements for the implication of terms are not satisfied. Even if they were, the additional costs would not be recoverable under the Guarantee unless there was a written variation of the Guarantee, which there was not (nor is any such variation alleged). Further, if the terms of the contract between KBR and the seller were varied as alleged, then D1 would be discharged from any liability under the Guarantee.
- I agree with D1's submission that the strict legal requirements for the implication of terms are not satisfied - see Chitty on Contracts volume 1 paragraph 13-001 and following. The alleged implied term is not necessary, in the business sense, to give efficacy to the contract. It is not an obvious inference from the agreement. Clause 4.1 of the MOA contained a carefully structured bargain between KBR and the seller. It would have been open to the parties to vary that agreement by amending clause 4.1, but they did not do so.
- This issue is answered above.
- The claimant's case is as follows. Clause 4.1 of the MOA provides that any renewal steel required, in addition to the 150 tonnes, to meet the Petrobras Specification requirements:
- D1's case is as follows. The quantity falling within the estimated quantity included as part of the lump sum conversion contract (which it says is the first 1,000 tonnes) can only be charged to it at US$2,880/ tonne. This was the actual "cost" to KBR of this renewal steel; if some or all of it had not been required, KBR would have received a credit at that rate. For any steel in excess of the estimated quantities, D1 can only be charged at the contractual rate for increases to the estimated quantities of US$3,054/tonne and not at the rolled up rate which KBR agreed with JSPL. The rolled up rate of US$4900/tonne in fact included fixed costs which cannot properly be claimed under the Guarantee, but deliberately dressed up as a rate per tonne for the purposes of seeking to do so.
- I refer to the Vessel Conversion Original Subcontract number F008 dated 22 January 2001 between KBR and JSPL and the Annexes to that Contract including in particular Annex A – 1 Attachment II – Weight Table and Annex D – 1 Article 3.0 Pricing for Changes. Article 3.0 Pricing for Changes provided: -
- In relation to the variation rates of bottom plate, the sub-contract included a provisional 1000 tonnes which was described on the Weight Table as relating to three distinct types of steelwork renewals (bulkhead, deck and shell) but the 1000 tonnes quantity was not broken down, so as to allocate distinct tonnages to the three specific categories. I find, having carefully considered the available materials as a whole, that on a balance of probabilities KBR reached an agreement with JSPL that of the 1000 tonnes, 300 tonnes would be attributed to bottom plate. (See in this connection the document entitled "Steelwork Evaluation" which confirms this finding).
- There was no question of a credit of $2,880. The first 150 tonnes was for KBR's account. In my judgment the next 150 tonnes (being the first 150 tonnes which D1 is liable for under the Guarantee) falls to be charged to D1 at the rate of $3054.
- The claimant claims the balance at the rate of $4, 900 (subject to a discount achieved in relation to steel renewals in DD2). In my judgment the appropriate rate per tonne for all further bottom plate recoverable under the terms of the Guarantee given by D1 falls to be charged to D1 at the contractual rate for additional steel of $3054 for the following reasons. The Guarantee provided that D1 is liable for "Any renewal steel required, in addition to the 150 tonnes, to meet Petrobras specification requirements … calculated at the weight of additional steel in excess of 150 tonnes, times the rate per tonne charged by the conversion yard to Buyer as documented and technically justified in the invoice." These words should be read together with the opening words of clause 4.1 "The extent of steel to be renewed in the conversion yard, due to structural repair or corrosion of the vessel …". In my opinion D1's liability under the Guarantee extends to liability for the costs referred to in the Unit Prices in 2.3 above ("the Unit Prices below are to be inclusive of, but not limited to construction engineering, materials supply, prefabrication, supervision, installation, blasting and protective coatings, NDT as required, making good, indirect services such as fire-watching and scaffolding.") Further, in my opinion, D1's liability was for reasonable costs incurred.
- In his email to Mr Wyse of 18 October 2001 Mr Phillips said: -
- Further, Mr Phillips' email to Mr MacKintosh of 24 February 2002 stated: -
- Cleaning (sweep blasting, mechanical cleaning, chemical)
- Inspection (UT/MPI etc)
- Production of shop drawings
- Pitting and Seam weld repairs
- Access costs (Scaffolding)
- Steelwork renewal
- Third party costs
- Material procurement cancellation charges
- In February 2002 Mr Phillips considered that the maximum rate per Tonne recoverable from D1 was US$3054. I agree with that conclusion for the reasons set out above.
- The parties have agreed a commercial compromise in relation to these items of a notional 160 tonnes at a rate of US $3,054 per tonne.
- Interest payable, if any, in relation to these items remains in dispute.
- I add the following footnote. I did not case manage the pre-trial stages of this case. It is now clear (with the benefit of hindsight) that this case would have benefited from a direction along the following lines – before instructing experts the parties should agree (as far as practicable) the materials and questions to be placed before the experts (and should if necessary refer any point of difficulty in this connection to the Court). Had such a direction been given considerable time and expense would in my view have been saved.
To determine whether the existing thickness is acceptable.
To determine the minimum required thickness i.e. the minimum thickness which would be acceptable under the classification rules.
the review of design and survey during and after construction to verify compliance with such rules, guides, standards or other criteria,
the assignment and registration of class when such compliance has been verified, and
the issuance of a renewable Classification certificate, with annual endorsements, valid for five years.”
Mr. Justice Cresswell :
INDEX
| INTRODUCTION / CLAIMS | 1 |
| CONTRACT DOCUMENTS AND PETROBRAS SPECIFICATIONS | 2 |
| CHRONOLOGY OF EVENTS | 3 |
| TECHNICAL TERMS AND PROCEDURES | 4 |
| WITNESSES | 5 |
| LIST OF ISSUES, ANALYSIS AND CONCLUSIONS | 6 |
| APPENDICES | |
| APPENDIX A CHRONOLOGY OF EVENTS | 7 |
| APPENDIX B TECHNICAL TERMS AND PROCEDURES | 8 |
INTRODUCTION / CLAIMS
The Claim under the Guarantee
i) KBR should have approached Petrobras for a clarification/correction permitting the use of criteria akin to TQ1028 before commencing the close up inspections or, at worst, before making any decisions about renewals; or
ii) once discussions had begun with D1 and ABS about the use of reassessed thickness, KBR should not have gone ahead with renewals based on the Present Thickness criteria at the 1st ("DD1") and/or 2nd drydocking ("DD2").
i) the way in which inserts identified in accordance with both the Present Thickness criteria and the TQ1028 criteria were amalgamated to result in larger areas being renewed;
ii) the use of replacement steel of as-built thickness rather than the reassessed thickness; and
iii) the unit rate which KBR agreed to pay to the Hull Conversion Sub-Contractor Jurong Shipyard ("JSPL" or "Jurong") for the renewals.
Mis-statement and Collateral Warranty Claims
CONTRACT DOCUMENTS AND PETROBRAS SPECIFICATIONS
MEMORANDUM OF AGREEMENT
"4.0 Inspections Refer to Appendix 1 – Particular Conditions of Agreement
a)*
b)* Stena Conductor. The Buyer shall have the right to inspect the Vessel's classification records and declare whether the same are accepted or not within 20 days of the signing of this Agreement. Buyer to inspect vessels records prior to physical inspection…
The Buyer shall undertake the inspections without undue delay to the Vessel. Should the Buyers cause undue delay they shall compensate the Sellers for the losses thereby incurred. The Buyers shall inspect the Vessel without opening up and without cost to the Sellers. During the inspection, the Vessel's deck and engine log books shall be made available for examination by the Buyers. If the vessel is accepted after such inspection, the sale shall become outright and definite, subject only to the terms and conditions of this Agreement, provided the Sellers receive written notice of acceptance from the Buyers within 72 hours after completion of such inspection.
Should notice of acceptance of the Vessel's classification records and of the Vessel not be received by the Sellers as aforesaid, the deposit together with interest earned shall be released immediately to the Buyers, whereafter this agreement shall be null and void.
11. Condition on delivery
The vessel with everything belonging to her shall be at Seller's risk and expense until she is delivered to the Buyers, but subject to the terms and conditions of this Agreement she shall be delivered and taken over as she was at the time of inspection, fair wear and tear excepted.
However, the Vessel shall be delivered with her class maintained without condition/recommendation*, free of average damage affecting the Vessel's class, and with her classification certificates and national certificates, as well as other certificates the Vessel had at the time of inspection, valid without condition/recommendation* by Class or the relevant authorities at the time of delivery.
"Inspection" in this Clause 11, shall mean the Buyer' inspection according to clause 4 a) or 4 b), if applicable, or the Buyers' inspection prior to the signing of this Agreement. If the Vessel is taken over without inspection, the date of this Agreement shall be the relevant date.
Notes, if any, in the surveyor's report which are accepted by the Classification Society without condition/recommendation are not to be taken into account."
In addition, the parties negotiated certain particular conditions which were agreed to form part of the MOA, including the following:
"1.0 Purchase
1.1 Buyer shall not be in a position to effect the formal purchase of the vessel, until such time that Buyer's Client has provided Buyer with Notice to Proceed…for the provision of two FPSO's for the Barracuda & Caratinga Field Development. This notification date is expected to be mid 2000…
1.2 In the event that Buyer has not been provided with the Notice to Proceed by its Client by 31st October 2000, Seller shall be entitled to withdraw from this Agreement and re-offer the subject vessel for disposal at no cost to Buyer…
2.0 Inspection and Acceptance
2.1 Acceptance of the Stena Conductor is subject to satisfactory inspection by the Buyer in accordance with Clause 4b) of the [MOA]. Furthermore it is a requirement of Buyer's Client (BCDC), that each vessel proposed for the Barracuda & Caratinga Fields Development Project is approved by them. In the event of non-approval of the Stena Conductor, Seller shall propose alternative sister vessels, that are acceptable to BCDC and Buyer…
4.0 Guarantees
4.1 The extent of steel to be renewed in the conversion yard, due to structural repair or corrosion of the vessel and/or the additional steel required for the vessel to meet the fatigue requirements contained in Petrobras specifications shall be capped at a cost to Buyer of one hundred and fifty tonnes. Any renewal steel required, in addition to the 150 tonnes, to meet Petrobras specification requirements shall be to Seller's account, calculated at the weight of additional steel in excess of 150 tonnes, times the rate per tonne charged by the conversion yard to Buyer as documented and technically justified in the invoice. No underdeck stiffening required for installation of process equipment shall be for Seller's account.
Seller shall provide a Company Guarantee, in a mutually acceptable form, as surety for the recovery of monies from the Seller in respect of additional steelwork. Such guarantee shall be valid for one year from the date of delivery of the vessel.
This clause 4.1 shall survive the termination or expiry of this Agreement.
4.2 Documents relating to the Petrobras specification requirements are as follows:
1) General Specification – FPSO – Converted Ship-ET-3010.49-1200-940-PPC-200
2) Structural Requirements for Converted Ship – ET-3010.49-1200-940-PPC-202 (Sections 3.2 Fatigue, Section 9 Plate Replacement)
3) Structural requirements for New Building FPSO unit – P43 – ET – 3010.49-1350-140-PPC-002
5.0 Precedence
The conditions contained in this Appendix I to the Memorandum of agreement shall take precedence over those terms and conditions contained within the Memorandum of Agreement SALEFORM 1993."
ADDENDA TO THE MEMORANDUM OF AGREEMENT
"(c) All references to the "Buyers" shall be construed as references to Kellogg Brown & Root Inc (rather than Brown & Root Energy Services)…
(e) All references in the MOA to "Stena Conductor" shall be deleted and replaced with references to "Stena Continent"…
(l) The guarantee to be issued as surety for the recovery of monies from the Sellers in respect of additional steelwork under clause 4.1 of Appendix 1 to the MOA is attached as Appendix 1 to this Addendum."
CONCORDIA MARITIME AG GUARANTEE
"1. In consideration of the Beneficiary agreeing to purchase the m.v "STENA CONTINENT" (the "Vessel" from CM Continent Shipping Limited (the "Company") pursuant to the memorandum of agreement dated 19 April 2000 (as amended by addendum no.1 dated 15 December 2000 and addendum no.2 dated 25 January 2001, the "MOA") we, CONCORDIA MARITIME AG (the "Guarantor") irrevocably and unconditionally guarantees the punctual payment of any and all sums payable by the Company to the beneficiary under clause 4.1 of Appendix 1 to the MOA and undertake that, if for any reason the Company shall fail to pay any such sum the Guarantor shall within three banking days (in Switzerland) after receiving a written demand by and from the Beneficiary, unconditionally pay that sum to the Beneficiary…
3. This Guarantee shall expire at midnight on 26 January 2002 after which no claim may be made against the Guarantor under this Guarantee (but without prejudice to any claim validity made against the Guarantor on or prior to 26 January 2002 and shall survive the termination or expiry of the MOA to the extent of any sums then payable by the Company to the Beneficiary under clause 4.1 of Appendix 1 thereto…"
PETROBRAS SPECIFICATIONS
A. Petrobras Specification 202 for a converted ship unit (Revision G issued on 26 January 2000):
"1. INTRODUCTION
This document presents the minimum BRASOIL requirements for the structural design conversion of an oil tanker into a Floating Production Storage and Offloading System (FPSO), to be installed at Barracuda Filed [sic] in the Campos Basin. The required life of the Unit is 20 years without docking….
The Classification Society (CS) requirements latest revision (see document LD-INDEX OF APPLICABLE STANDARDS) for FPSO shall be used for verification of old structural parts and for design of reinforcements and complementary structures. The most restrictive of the requirements in the following sections and the CS Rules shall be used.
The Unit shall be referred by CS as "As New" (zero cycle of life) regarding CS inspection requirements…
9. PLATE REPLACEMENT
9.1 Corrosion Pattern
In addition to CS and previous BRASOIL requirements, a strength assessment shall be performed for the FPSO conditions to obtain the required thickness herein called nominal thickness (tn). Plates shall be replaced when:
t<tn ... (1 - 0.75 ( rl) + m
Where:
t - structural element average thickness based on the ultrasonic gauging report;
m - BRASOIL's corrosion margin, as defined in Section 3.3 of ET-STRUCTURAL REQUIREMENTS of the New Building FPSO Unit;
tn - nominal thickness, to be obtained from the strength assessment
rl - individual plate wastage allowances in percentage, defined by CS. As a reference, see ABS' Hull Thickness Measurement 1998 (Gauging Surveys).
The ultrasound gauging shall be performed by CONTRACTOR according to a procedure to be submitted to BRASOIL and CS for approval. Both ultrasonic gauging report and reassessment study shall be submitted to BRASOIL and CS' approval.
All structural elements replacement shall be submitted to BRASOIL and CS for approval. The sequence of structural elements renewal shall take into account the building residual stress, i.e. the CONTRACTOR shall minimize these stresses as much as possible.
9.2 Bottom Pittings Repair
After bottom plating blasting and shop primer application of cargo, slop and ballast tanks, these regions shall be inspected for pittings and, if necessary, painted or renewed (if the case) using following criteria:
| 1. pd > 200mm | ⇒ plate renewing |
| 2. pd ≤ 200mm | |
| a. dbp < 75mm | ⇒ plate renewing |
| b1. dbp ≥ 75mm and cpfd > 80mm | ⇒ plate renewing |
| b2. dbp ≥ 75mm and cpfd ≤ 80mm and tr < 6mm | ⇒ plate renewing |
| b3. dbp ≥ 75mm and cpfd ≤ 80mm and tr ≥ 6mm | |
| b3.1 pd ≤ 0.15 to | ⇒ pitting painting |
| b3.2 pd > 0.15 to and pd < to/3 | ⇒ pitting welding |
| b3.3 pd ≥ to /3 | ⇒ plate renewing |
where:
pd - pitting diameter
dbp - distance between pittings
cpfd - continuous pitting filling distance
tr - residual plate thickness below pitting
to- original plate thickness
Note: Pitting repair and NDT procedure to be submitted to CS' approval."
B. Petrobras Specification 200 General Specification for a Converted Ship (Revision G issued on 26 August 1998):
"1 - INTRODUCTION…
All…materials are the same of those required for the new building FPSO and shall be supplied by the CONTRACTOR.
2- MAIN REQUIREMENTS
The Unit shall be designed to 20 years fatigue life without dry docking…
Structural criteria and requirements shall follow the new building FPSO documents and ET-3010.49-12000-940-PPC-202-STRUCTURAL REQUIREMENTS…"
C. Petrobras Specification 002 for a Newbuilding FPSO Unit (Revision H issued on 9 February 2000):
"1. Introduction…
The Classification Society (CS) requirements latest revision…for FPSO shall be used for design of structures, reinforcements and complimentary structures. The most restrictive of the requirements in the following sections and the CS Rules shall be used.
Additional relevant criteria shall be used in the design, based on designer experience, on designer knowledge of the Unit and requirements of the CS…
3.3 Corrosion Margins
The required scantling of plating thickness, longitudinal and transversal stiffeners of the hull shall take into account the BRASOIL Corrosion Margins, as a minimum requirement. These minimum margins reflect an average overall corrosion wastage for 20 years in service, assuming good maintenance schedules and an effective system of coating protection in ballast tanks…"
PETROBRAS SPECIFICATION 202 REVISION E
"9. PLATE REPLACEMENT DUE TO CS SURVEYS
In addition to CS Surveys requirements for oil tankers, the CONTRACTOR shall consider the corrosion margin provided by BRASOIL on Section 3.3 of ET-STRUCTURAL REQUIREMENTS of the New Building FPSO Unit.
The renewal thickness, which is based on the reassessment thickness, is defined as the CS Surveys required thickness plus the corrosion margin. This thickness shall be compared to the measured one. If the measured thickness is lower than the renewal one, it is characterized as "Substantial Corrosion" (according to ABS Rules for Oil Tankers), consequently the plate shall be replaced.
All plate replacement shall be submitted to BRASOIL and CS for approval. The sequence of plate replacement shall take into account the building residual stress, i.e. the CONTRACTOR shall minimize these stresses as much as possible..."
CHRONOLOGY OF EVENTS
TECHNICAL TERMS AND PROCEDURES
WITNESSES
Witnesses called by the claimant
Mr Linder is a Chartered Engineer and a member of the Royal Institution of Naval Architects. By 1999 he had become a key member of the BRES Deepwater and Floating Production Team, primarily responsible for vessel procurement and for providing advice on naval architectural aspects of all company FPSO Projects. BRES acted on behalf of KBR during the vessel procurement process, including during the negotiations with Stena. Prior to the transaction in question, Mr Linder had no experience of buying ships.
Mr Worsnop joined KBR in February 2000. Between February 2000 and January 2001 he was involved in the bid and clarification phase. During this phase he was involved with both the P43/Continent and P48/Concordia vessels. From January 2001 in the execution stage, he was primarily involved with the P43/Continent vessel. He had a number of different roles. He was the Lead Marine Engineer until mid January 2001. In the execution phase he was transferred to the Singapore conversion yard, and took on roles as Marine Engineering Manager and On-Site Deputy Manager for the Continent.
In my opinion Mr Worsnop's evidence was generally reliable.
Mr Samways is a qualified Marine Surveyor. He is self-employed as an independent specialist in visual surveying and supervision of steel repairs/renewals. His initial involvement on the P43 Project was during May 2001. It was originally envisaged that he would be engaged to carry out the survey of the P43 vessel for about a three month period. However, due to all the issues with that vessel, he remained working on the P43 Project for over two years, until July 2003.
Mr Samways said that he had never heard the term "original thickness" used in any other context than for original as-built thickness.
I was generally impressed by Mr Samways' evidence.
Mr Phillips is self-employed as a consultant. His formal qualifications include a BSc in Quantity Surveying and membership of the Institute of Cost Engineers.
Mr Phillips joined the P43 Project on 8 February 2001 as Contracts Manager and was initially mobilised to KBR's Rio de Janeiro office. He moved to Singapore on 24 March 2001. On arrival at the Jurong Shipyard facility in Singapore, his immediate task was to ascertain the current contractual position with the conversion sub-contractor, JSPL and to formulate a post-contract management philosophy and plan of control, with the KBR site management team. This involved the setting up and implementation of site level Contracts Practice and Procedure and the implementation of a sub-contracting and vendor supplies strategy.
Mr Phillips struck me as a precise and impressive witness whose evidence was generally accurate and reliable.
Mr Kilcran is a Structural Engineer with BSc (Hons) in Civil Engineering and MSc/DIC Concrete Structures. He is a member of the MIStructE Institution Structural Engineers. He has over 23 years of experience in civil and structural engineering design and construction, including 15 years' experience in off-shore engineering design and construction. From April 2001 Mr Kilcran worked as the interface co-ordinator in Rio. In June 2001 he was assigned to be the Vessel Engineer Co-ordinator (replacing the existing Vessel Engineering Co-ordinator, Mr Colin Joyce).
Mr Kilcran was a particularly impressive witness. I accept his evidence where it conflicts with the evidence of the defendants' witnesses.
Witnesses called by the defendants
Mr Palludan worked for Stena Bulk AB from 1 May 1998 to 31 January 2000 as a Contract Manager. He was involved in the negotiations leading up to the sale of the Stena Continent and Stena Concordia. Mr Palludan had no technical background and had not been involved in conversion projects before joining Stena Bulk AB.
Mr Ryder is President and CEO of Stena Bulk AB. He is a very senior and experienced person in the shipping industry. His expertise is on the commercial side, not the technical side.
Mr Ryder explained that Concordia Maritime AB is owned by the Stena Group of companies (which includes Stena Bulk AB) to the extent of about 51% or 52%. Stena Bulk AB had an Agency Agreement with CM Continent Shipping Ltd and other single purpose shipowning companies. Mr Ryder said that in relation to the sale of the Continent, Stena Bulk AB was acting as agent to the single purpose owner (CM Continent Shipping Ltd) under the Agency Agreement and pursuant to the terms of the Agreement. Stena Bulk AB received commission on the sale pursuant to the terms of the Agency Agreement. Mr Ryder produced the Agency Agreement and an addendum thereto on the 8th day of the trial. These documents confirmed what Mr Ryder had said.
Mr Ryder said that he assigned to Mr Palludan, the Contract Manager, the task of marketing the Concordia Class of vessels for sale.
In the course of his evidence Mr Ryder said that in his (extensive) experience of selling ships, the sale of ships is not conducted on the basis of contractual undertakings given in pre-contractual letters. The main terms are negotiated (price, delivery etc), and then "somebody else takes over and negotiates the terms and conditions of the (written) contract." He added "the contract here was [on the] Norwegian sales form … you go back and forth, very often with legal assistance, how to phrase, and you put extra clauses in etc and then when you have full agreement, you sign the MOA document".
Mr Rohlen was at the material time General Manager Off-shore and Tanker Projects, employed by Stena Bulk AB. He was involved in the marketing and selling of the Concordia Class vessels. His involvement in the sale of the two Concordia Class vessels to KBR started in February 2000. He took over from Mr Palludan who left Stena Bulk AB.
Mr Rohlen said that when technical information was requested by BRES, he would rely on input from Mr David Jones in Houston, as this was not Mr Rohlen's area of expertise.
From 1985 to June 1999 Mr Labom was employed as a Technical Manager by Stena Bulk AB. From July 1999 he was employed as Technical Director by Concordia Maritime AG, responsible for the new building projects and the operation of the Concordia Maritime tankers.
Mr Blane is a Technical Director with Tritec Marine Consultants, a consultancy engaged in providing marine superintendent services to the maritime industry. His remit was as steel work inspector acting on behalf of Universe Tankships, to accompany the ABS surveyor(s) and BRES representatives on joint inspections of the Continent in order to verify the level of steel repairs and/or replacements required as a result of bottom shell pitting only. He was present in Singapore from 22 August to 26 September 2001. He attended the meeting at Heathrow on 12 October. He was again present in Singapore between 7 November and 18 November. Mr Blane had not worked on any ABS class ships before. He said that he had had previous experience of one conversion to a FPSO and one to a FSO.
Mr Blane agreed that when he first arrived in Singapore he took the view that the words "original plate thickness" in the Petrobras specification meant the as-built thickness, 35mm.
On 27 September 2001 Mr Blane wrote in a report: -
"After blasting, it became evident that the condition of the bottom shell was not as expected.
When compared to the stringent pitting criteria set by Petrobras, fairly large sections of the bottom plating were found wanting, particularly with regard to pit depth and proximity to other similar pits.
Throughout the survey period, the subject of the strength analysis being undertaken in Brazil remained to the fore, although no information was presented, apart from "unofficial" notification that scantling thickness could be reduced from 35mm to 30mm. This if confirmed, would of course have a tremendous bearing upon the amount of steel renewals necessary, and hence the reason for non-divulgence?
The insert steelweight per tank is the best possible under the circumstances, to comply with the Petrobras criteria."
Mr Jones was manager of Special Projects at Universe Tankships from June 1999 until the end of June 2005. Universe Tankships is a technical management company for tanker vessels. Mr Jones was the technical person responsible for answering all questions relating to the structural characteristics of the Concordia fleet. Prior to working for Universe Mr Jones was employed by ABS in New York for 17 years.
Mr Alan Beadnall
EXPERT WITNESSES
Mr Ian Biles
Mr Brian Corlett
a) summarise the range of opinions; and
b) give reasons for his own opinion").
LIST OF ISSUES, ANALYSIS AND CONCLUSIONS
I turn to consider the agreed List of Issues
A. THE MIS-STATEMENT CLAIM
1. Who were the individuals in question representing when they made any relevant statement? In particular, were they acting:
(i) on behalf of and in the interests of D3-D5; and/or
(ii) in the case of D3, on behalf of, amongst others, D4; and/or
(iii) only as agents for Sellers (i.e. the individual companies that owned the vessels that were eventually sold).
2. In so far as representations were made and/or warranties were given by D3-D5's employees during the negotiations, on whose behalf were they given and did they involve any personal assumption of responsibility/liability on the part of D3-D5.
3. What statements were made by D3-D5 to KBR during the course of the negotiations? In particular:
(i) did D3-D5 state that the bare hull when delivered would be delivered within:
a) ABS requirements for the class +A1 FPSO, in Stena Bulk's letter to KBR dated 22 December 1999; and
b) the hull specifications stated in the Petrobras technical specifications 200, 202 and 002, including Section 9.2 of Petrobras Specification 202G, relating to bottom pittings repair, in Mr. Rohlen's email to Mr. Linder of 15 February 2000?
(ii) did D3-D5 state that extensive steel repairs/renewals would not be required either to meet Class requirements or to meet the particular requirements of the Petrobras Specifications?
(iii) did D3-D5 state that any steel renewals and repairs required to be undertaken during the conversion process would be "minimal", and, in any event, any steel renewals would be in the order of 200 tonnes and, if so, would this statement be reasonably understood to relate to the requirements of Class (for FPSO) and/or the Barracuda and Caratinga project and/or the specific requirements of the Petrobras specifications?
(iv) did D3-D5 state that the Concordia class were "excellent" candidates for conversion and "eminently suitable" for the Barracuda/Caratinga project?
(v) did D3-D5 state that there would be "no surprises" during the conversion process and that the conversion process with be smooth, with no hidden costs or scheduling surprises?
(vi) did D3-D5 state that all Concordia Class vessels were identical for the purpose of conversion to F(P)SO?
(vii) by use of the testimonial from SBM within the Stena sales brochure, did D3-D5 state that the Stena Contender:
a) was representative of the other vessels within the Concordia Class:
b) had an excellent hull design and maintenance condition; and
c) had been refurbished and converted into an FSO with only minimal steel repair and no requirement for steel replacement?
(viii) did D3-D5 state that the steel scantlings remained as built:
a) within the Stena sales brochure; and/or
b) as a result of the coating and maintenance regime that has been followed?
(ix) did D3-D5 state that:
a) they had access to detailed and complete maintenance records for the Concordia Class vessels;
b) they had access to a number of crew members and relevant technical personnel who had a long standing and intimate knowledge of the vessels;
and therefore by implication represent that:
c) they had checked these;
d) they had disclosed any factors that would be relevant to the conversion both generally and in relation to the Petrobras Specification; and
e) they did not contradict any of the other representations that D3-D5 had made in relation to the Concordia Class vessels concerning the cost time or level of repairs required for conversion?
(xi) did D3-D5 state that the vessels were coated top and bottom, with the implication being that they had been coated from new?
4. Did any of D3-D5 owe a special duty of care to KBR in respect of the alleged statements and, if so, what was the extent of that duty, having regard (to the extent relevant and among other things) to:
(i) the role of D3-D5 in the negotiations (see Issues 1 and 2 above);
(ii) KBR's allegation that the alleged statements were made to influence KBR to purchase the Vessel;
(iii) D3-D5's allegation that Noble Denton was engaged by KBR as its technical advisor to undertake independent surveys on its behalf;
(iv) KBR's allegation that the nature of the Noble Denton inspection undertaken pre MOA was limited and/or could not have revealed the extent of corrosion pitting which had been repaired with epoxy filler and recoated;
(v) KBR's allegation that D3-D5 were directly asked whether the Concordia Class vessels would comply with Section 9.2 of the Petrobras Specification 202G in relation to the issue of pitting;
(vi) D3-D5's allegation that KBR relied on its own inspection of the classification records held at ABS' office in Houston;
(vii) D3-D5's allegation that KBR was invited to inspect the Vessel's maintenance records which it chose not to inspect;
(viii) KBR's allegation that it was reasonable not to inspect the Vessel's maintenance records in light of:
a) the statements made and information provided by D3-D5;
b) the specific answers provided by D3 on 22 December 1999 and 14 February 2000 in relation to the Vessel's ability to comply with Section 9 of Petrobras Specification 202;
c) KBR's own inspection of the class records; and
d) the Noble Denton inspection of the Concordia.
(ix) KBR's allegation that the ABS class records referred to in paragraph 4 (vi) above were incomplete and/or inaccurate in that they did not reveal the extent of pitting;
(x) D5's allegation that this was a negotiation at arms length between sophisticated commercial parties, resulting in a written agreement based upon NSF terms;
(xi) any legal representation that either party received during the course of the negotiations and the conclusion of the MOA;
(xii) KBR's allegation that D3-D5 were best placed to make a judgment as to whether the Vessels were suitable for conversion to FPSO and whether the bare hulls would comply with Petrobras Specification 202G in light of the fact that D5 had managed the Vessels from new; and
(xiii) the specific terms of the MOA, including the provision of the Guarantee.
5. Were any of the alleged statements which are proved or admitted to have been made by one or other of D3-D5 factually inaccurate and/or, in so far as they are matters of opinion, opinions that no person in the position of the relevant defendant(s) could reasonably have held in light of the facts and matters that were or ought to have been known to them?
6. If so, was/were the same made negligently by all or any of D3-D5, having regard (to the extent relevant and among other things) to:
(i) the results of the ABS Safehull analyses;
(ii) the fact that the Vessels obtained Grade 1 – First Class Classification in the ABS Condition Assessment Programme for trading tankers;
(iii) the fact that the Vessels were in Class for trading tankers;
(iv) the results of Noble Denton's own inspections in Dubai drydock;
(v) D3-D5's knowledge of the actual condition of the vessels, including the extent to which corrosion pitting had taken place, the nature of the repairs undertaken and the extent to which such repairs were undertaken by or ought to have been known to the D3-D5 and /or reported to ABS;
(vi) the Vessel's maintenance records and D3-D5's alleged failure to undertake a proper, or any, review of the same;
(vii) the success or otherwise of the conversion the Stena Contender into the FSO N'kossa; and
(viii) the applicable Petrobras Specifications and ABS Class Requirements for conversion to FPSO.
7. Did KBR in fact rely upon the alleged statements and, if so, did they act reasonably in doing so, having regard (to the extent relevant and among other things) to the various matters listed in the subparagraphs to paragraph 4 above?
8. If any of D3-D5 was in breach of duty as alleged, what loss (if any) was suffered by KBR as a result, having regard (to the extent relevant and among other things) to the claimant's allegations that, if the true extent of the pitting and cracking in structural members had been made known to it, it would either:
(i) have required a reduction in the purchase price to an (unspecified) extent which it is said would have covered the damages now claimed in relation to this mis-statement case; or
(ii) purchased an alternative vessel at a different price (not specified).
B. THE COLLATERAL WARRANTY CLAIM
9. Did D3-D5 make the statements and representations set out within paragraph 3 above?
10. Do these circumstances give rise to a collateral warranty on the part of the D3-D5 in the following terms:
(i) that the Concordia Class vessels were identical for all material purposes;
(ii) that if the Vessels were purchased by KBR, then:
a) the Vessels' bare hulls (i.e. after shot blasting) would be delivered within:
(a) the ABS requirements for the class +A1 FPSO (including ABS requirements for repairs and/or renewals due to pitting in the internal structures and bottom plating); and
(b) the specific Petrobras Specifications identified in Stena Bulk's letter dated 22 December 1999; and
(c)Petrobras Specification 202 Rev G and, in particular, clause 9.2 contained therein as referred to in Mr. Rohlen's email dated 15 February 2000 to Mr. Linder; and/or
b) the condition of the Vessels was such that they would not require any, or any significant, repairs, steel renewal or steel replacement to meet the ABS requirements and Petrobras specifications identified in (i) above; and/or
c) that the extent of steel renewals which would be required for conversion to FPSO was of the order of 200 tonnes of steel.
11. Did KBR in fact rely upon any such alleged collateral warranties and, if so, did they act reasonably in doing so, having regard (to the extent relevant and among other things) to the various matters listed in the subparagraphs to paragraph 4 above?
12. Were D3-D5 in breach of any such collateral warranty in that:
(i) the Concordia Class vessels were not identical for all material purposes;
(ii) the vessel's bare hull was not delivered within:
a) the ABS requirements for the class +A1 FPSO (including ABS requirements for repairs and/or renewals due to pitting in the internal structures and bottom plating);
b) the Petrobras Specifications identified in Stena Bulk's letter dated 22 December 1999; or
c) Petrobras Specification 202 Rev G and, in particular, clause 9.2 contained therein as referred to in Mr. Rohlen's email dated 15 February 2000 to Mr. Linder;
(iii) the Vessel required extensive steel renewal and repairs in order to meet the ABS requirements and Petrobras specifications identified in paragraph (ii) above; and
(iv) the extent of steel renewals required for conversion to FPSO were far in excess of 200 tonnes of steel.
13. If so, what loss (if any) was suffered as a result by KBR?
The marketing and sale of the Concordia Class fleet was pursuant to a strategy adopted by D3 and D4 to maximise the proceeds of sale of the Concordia Class vessels which were soon to become obsolete. Pursuant to their strategy on behalf of themselves and their group, they were offering purchasers a choice of "any 2 from 7", on the basis that all Concordia Class vessels were in all material respects in the same condition and they stood to benefit directly from the sales of those vessels.
D3 and D4 voluntarily assumed a duty of care to KBR to protect KBR against economic loss. There was a close relationship between D3 and D4 and KBR, in which D3 and D4 voluntarily provided KBR with information, assurances and advice in relation to the actual condition of the hulls of the Concordia Class Vessels. D3 and D4 were in the best position to make judgments as to the actual condition of the vessels and to provide information, assurances and advice as to whether or not the actual condition of the hulls would, amongst other things, meet the requirements of ABS and the Petrobras Specifications for conversion of the hulls to FPSOs. Such information, assurances and advice were provided with the knowledge and intention that KBR would and should rely on the same. In those circumstances, D3 and D4 voluntarily assumed a duty of care to ensure that such information, assurances and advice was accurate and/or that they had reasonable grounds for believing the same to be accurate.
That duty of care is not negatived by the fact that:
i) this was a commercial transaction. It is precisely because D3 and D4 were in the best position to know and/or make judgments about the actual condition of the hulls given their intimate knowledge of the vessels, access to the crews, access to specialist personnel at their agents, D5, and access to the maintenance history of the vessels, that it was reasonable for KBR to seek and/or rely on the statements and assurances identified above;
ii) limited legal advice was obtained at the conclusion of the negotiations;
iii) the terms of the MOA and/or the terms of the Norweigan Sale Form that were incorporated into the MOA.
KBR reasonably relied on the statements and assurances. They relied on the D3 and D4 statements and assurances in selecting the Concordia Class vessels for Barracuda and Carratinga field projects in 2000, with regard to assessing schedule and risk to the Projects in using the vessels and in entering into the MOAs in April 2000. It was reasonable for KBR to do so given D3-D5's voluntary assumption of responsibility, intimate knowledge of the vessels and the unqualified nature of the statements given.
The statements and assurances were inaccurate; The relevant inaccuracies are that:
i) The vessels' bare hulls could not be and were not delivered within the requirements of Section 9.2 of Specification 202G because of the presence of tens of thousands of pits (in both the Concordia and the Continent) that would require substantial steel renewal and repair.
ii) The vessels' bare hulls could not be and were not delivered within the requirements of the ABS Process Instructions. At the time of delivery, even under the Class requirements, the bottom pits for a tanker undergoing conversion to an FPSO would be judged against the as built thickness, unless and until the reassessment was approved. This was particularly important in a fast track project where the steelwork inspections would or might go ahead before the reassessment had been finalised (and would thus be judged against the as built thickness). Even following any reassessment, given the nature and extent of the pitting, it was highly likely that, at the very least, significant weld repairs would be required.
iii) The extent of the steel repairs and renewals that were required to meet the Petrobras Specification 202G and/or ABS' requirements for the class +A1 FPSO were not minimal. The steel renewals required under Section 9.2 of Specification 202G were of the order of 2800 tonnes for the Continent. Further, even if it was reasonable for D3-D5 to assume that the reference thickness for bottom pitting inspections was the reassessed thickness, it was likely that extensive weld repairs would be required under either the ABS or Petrobras Specifications.
iv) There were tens of thousands of pits in the bottom of the Continent. These would always be a matter of concern to an owner like Petrobras and a conversion contractor. The impression given by the statements made by the defendants was that there would not be extensive pitting in the hulls.
The inaccurate statements and assurances were made negligently and/or, to the extent that they were expressions of opinion, there were no reasonable grounds for holding those opinions. In particular:
i) The defendants knew or ought to have known that there was extensive pitting in the hulls of, inter alia, the Concordia and the Continent. This was or ought to have been known to D3-D5.
ii) The defendants failed to appreciate that Section 9.2 of Specification 202G applied to as-built thickness. That is not a conclusion that D3-D5 could reasonably have reached. If that mistake had not been made, it is inevitable that the defendants would have realised that it was probable that there would be very significant steel repairs and renewals, given their actual knowledge of the presence of extensive bottom pitting in the hulls of the vessels.
iii) The defendants failed to identify the fact that they were basing their statements and assurances on critical assumptions, namely that:
a) although the vessels did or might contain extensive bottom pitting;
b) the reference thickness for the bottom pitting criteria either in the ABS Process Instructions and/or in the vessels was the reassessed thickness; and/or
c) the reassessed thickness would be sufficiently low to ensure that no or no significant repairs or steel renewals would be required; and/or
d) any pits in the bottom plating would be permitted to be painted;
with the result that, as D3 to D5 ought to have realised, the unqualified assurances and representations were misleading and inaccurate.
iv) The defendants failed to warn KBR that the statements and assurances in December 1999 and February 2000 in relation to the repair and renewal of steel due to bottom pittings, did not apply to the Continent when that vessel was proposed by the defendants as a suitable substitute vessel for the Projects.
KBR suffered loss as a result of its reliance on the inaccurate statements and assurances by D3 and D4. The loss suffered by KBR is the diminution in value between the price paid and the vessel's true value. This can properly be assessed be reference to the cost of repair. The quantum of KBR's claim is a total of US$759,936 excluding interest.
As to the collateral warranty claim, this follows on from, and is closely linked to the mis-statement claim.
D3-D5 contend that, if and in so far as any statements are proved to have been made, they were statements of opinion. Further, the alleged generalised statements akin to those made in the brochure were mere puffs or "sales talk". Any statements made in relation to potential steel renewals or compliance with the Petrobras Specification(s) were made on the basis of ABS requirements. A number of the statements alleged are unpleaded and some are unsupported by evidence.
D3-D5 did not owe any special duty of care bearing in mind in particular that: this was a major business transaction; KBR would not be expected to act on any statement made without independent inquiry; KBR was offered full access to the vessel's records; the parties' legal relationship was to be defined in and governed by a negotiated contract made with the assistance of lawyers; it would be inconsistent with the terms of that contract, the nature of and the allocation of risk involved in an NSF contract, and the specific contractual regime in relation to steel renewals agreed and set out therein.
The only case in negligence that was put at trial to Mr Jones was in relation to his opinion that the vessels could generally comply with the Petrobras Specification(s). That opinion was stated and understood to be based on the premise that the Petrobras Specification requirements were materially the same as ABS' requirements. On that basis, the opinion was both reasonable and correct, and was supported by ABS itself. On the basis of ABS' requirements, only 18 alternatively 80 tonnes of steel renewal would have been required for bottom plate. All other statements relied upon in relation to potential steel renewals and the conversion process were equally made on the basis of compliance with ABS requirements and were therefore reasonably made. There was no negligence.
KBR did not rely on the alleged statements as was made clear by Mr Linder's evidence, by the contemporaneous reasons put forward within KBR for the purchase of the Stena vessels, and by the fact that no complaint of or akin to mis-statement was raised at any time prior to the pleadings in the action.
KBR's damages claim is advanced on the misconceived basis that there was a duty to disclose to KBR the "true extent of the pitting" and that, if D3-D5 had done so, a reduction in purchase price would have been agreed or an alternative vessel purchased. There is in any event no evidence to support, let alone prove, the actions which it is alleged would have been taken.
As to the collateral warranty claim there was never any intention or understanding that any of the statements made would have contractual effect. As one would expect, and as Mr Linder expressly accepted, Stena were never prepared to agree to contractual undertakings that were not reflected in the contract itself. The contract structure, its terms and the steel guarantee are inconsistent with any collateral warranty being given in relation to steel renewals.
KBR did not rely on the alleged warranties as was made clear by Mr Linder's evidence, the contemporaneous reasons put forward within KBR for the purchase of the Stena vessels, and the fact that no complaint of or akin to breach of warranty was raised at any time prior to the Amended Particulars of Claim in the action.
Any warranty given would have been on the basis that Petrobras Specification requirements were materially the same as ABS requirements. On that basis the warranty would have been true since the vessels did generally comply with ABS requirements as only 18 alternatively 80 tonnes of bottom plate steel renewal would have been required to comply with such requirements.
The mis-statement claim and the collateral warranty claim – issues 1 to 13 – Analysis and conclusions
The relevant legal principles are common ground.
A. Negligent mis-statement
8-86 Special relationship In Hedley Byrne Lord Reid explained that the familiar Donoghue v Stevenson test for duty of care was not an adequate control where the loss resulted from negligent words rather than acts because words could be spread and thereby have a wider impact. All the Law Lords agreed that a duty in this context could only be imposed if there was a special relationship between the parties but they explained the nature of that relationship in differing terms. Lord Reid stated it would arise where:
"the party seeking the information and advice was trusting the other to exercise such a degree of care as the circumstances required, where it was reasonable for him to do that and where the other gave the information or advice when he knew or ought to have known that the inquirer was relying on him."
Lord Morris gave a more consensual emphasis, suggesting that the giver of the information must "undertake to apply his skill for the benefit of the claimant". Lord Devlin focussed on assumption of responsibility, saying:
"… the categories of special relationships, which may give rise to a duty to take care … are not limited to contractual relationships or to relationships of fiduciary duty, but also include relationships which … are 'equivalent to contract' that is, where there is an assumption of responsibility in circumstances in which, but for the absence of consideration, there would be a contract."
8-87 Assumption of responsibility In Henderson v Merrett Syndicates Ltd Lord Goff identified the governing principle of Hedley Byrne as being assumption of responsibility by the defendant along with reliance by the claimant. He said that from the speeches in Hedley Byrne:
"we can derive some understanding of the breadth of the principle underlying the case. We can see that it rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships spoke in terms of one party having assumed or undertaken a responsibility towards the other. On this point, Lord Devlin spoke in particularly clear terms … Further, Lord Morris spoke of that party being possessed of a special skill which he undertakes to apply for the assistance of another who relies upon such skill."
Lord Goff noted that the concept of assumption of responsibility:
"provides its own explanation why there is no problem in cases of this kind about liability for pure economic loss; for if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages in respect of economic loss which flows from the negligent performance of those services."
In Williams v Natural Life Health Foods Ltd, Lord Steyn said that "there was no better rationalisation for the relevant head of tort liability than assumption of responsibility [because] the backcloth against which the Hedley Byrne case was decided" was that of "the restricted conception of contract in English law, resulting from the combined effect of the principles of consideration and privity of contract" which meant that "the law of tort, as the general law, has to fulfil an essential gap-filling role". The facts that support an assumption of responsibility and tort liability in English law would often support contractual liability in other European law systems…
8-88 Objective test of assumption of responsibility In Hedley Byrne Lord Devlin referred to the necessary assumption of responsibility as not being imposed by the law but undertaken voluntarily. However, in Henderson Lord Goff said that "an objective test will be applied when asking the question whether responsibility should be held to have been assumed by the defendant to the claimant". Lord Steyn amplified the point in Williams v Natural Life Foods Ltd saying:
"The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in his dealings with the claimant. Obviously, the impact of what the defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification, the primary focus must be on exchanges … which cross the line between the defendant and the [claimant]."
In Electric Private Equity Partners v KPMG Peat Marwick, the Court of Appeal applying Lord Steyn's dictum, reversed the decision of Carnwath J. to strike out an action against the defendants precisely because the judge had imposed too stringent a test when requiring evidence of conscious assumption of responsibility by the defendants. In White v Jones Lord Browne-Wilkinson explained that the concept required the defendant to assume responsibility for performing the task but not for legal liability to the claimant: "If the responsibility for the task is assumed by the defendant he thereby creates a special relationship between himself and the [claimant] in relation to which the law (not the defendant) attaches a duty to carry out carefully the task so assumed."
8-89 Three-stage test The three-stage test of foreseeability, proximity, and fairness, justice and reasonableness introduced by the House of Lords in the 1989 decision, Caparo Industries v Dickman provided a more sophisticated test for duty than its Donoghue precursor and was used in Caparo to reject the argument that an auditor owed a duty of care to a shareholder who relied on the audit report when making a further investment and suffered loss when it transpired that the audit report had negligently endorsed an overvaluation of the company…
8-90 Multi-test approach Both the tests of assumption of responsibility and proximity and fairness have their strengths. Assumption of responsibility points to the analogy with contract and fairness allows broader policy factors to be considered. Rather than regarding the tests as rivals, the most helpful approach may be that taken by Sir Brian Neill in BCCI (Overseas) Ltd v Price Waterhouse (No.2). After explaining that "the search for a principle or test has followed three separate but parallel paths" (the threefold test stated by Lord Griffiths in Smith v Bush; the assumption of responsibility test; and the incremental approach recognised by Lord Bridge in Caparo), he commented that:
"The fact that all these approaches have been used and approved by the House of Lords in recent years suggests
(a) that it may be useful to look at any new set of facts by using each of the three approaches in turn …
(b) that if the facts are properly analysed and the policy considerations correctly evaluated the several approaches will yield the same result."
This analysis sees the different approaches as mutually supportive rather than exclusive in their application. Each may be used to check the provisional conclusion reached by application of the other approaches…
8-92 Purpose of statement Where the statement is provided in response to the claimant's request, its purpose may be identified from the nature of the request. In other cases, the purpose may be clear from instructions given to the professional by a third party. Thus in Hedley Byrne where the bank responded to a request to supply information about its customer's creditworthiness, it was clear that the purpose was to enable the person to whom it was directed, i.e. a client of the requesting bank, to advance credit to the customer. In other cases, the context of the professional's retainer will identify the purpose. Thus, in Caparo the House of Lords held that in its statutory context, the purpose of an audit report was restricted to enabling shareholders to exercise their proprietary interests in the management of the company and did not extend to enabling shareholders or anyone else to make informed investment decisions. It followed that no duty was owed to shareholders or investors suffering investment losses as a result of relying on a negligent audit report. …
8-95 Knowledge of the particular use Although a statement has been provided for a client for one purpose, the defendant's knowledge that it is being used by a third party for another purpose may be sufficient to give rise to a duty. Thus, in Smith v Eric S Bush the House of Lords held that a surveyor who prepared a valuation for a building society to enable it to meet its statutory duty in relation to loans, owed a duty of care to a purchaser to whom the valuation was passed and who relied on it as an indication of the value of the property to be purchased. The Lords stressed both the surveyor's knowledge that the purchaser would probably rely on his report and the fact that the purchaser had paid the society a sum to defray the surveyor's fee, when coming to the conclusion that the surveyor had assumed responsibility to the purchaser. It is clear that the imposition of a duty depends on the defendant knowing as opposed to merely foreseeing, that specific interests of claimant are at issue. …
8-96 Knowledge of reliance Knowledge that the advisee will rely on the statement without obtaining independent advice may also be relevant. In James McNaughton Paper Group Ltd v Hicks Anderson & Co. the defendant accountants had shown the draft accounts of their client to the claimants who were proposing to take-over the client. The defendants were held to owe no duty of care as they had no knowledge that the claimants would rely on accounts marked "draft" or on their oral statements about the accounts "without any further inquiry or advice for the purpose of reaching a concluded agreement with [the client]". The same principles apply where the defendant has provided a service. The case for imposing a duty will be strongest where the defendant knows that his service is likely to impact directly upon the claimant without there being any independent check on the quality of that service. Thus, in the case of a building employer suffering loss as a result of the negligent work of a subcontractor or local authority inspector, one reason for the reluctance to impose a duty on the negligent defendant has been that the employer will be likely to have engaged his own professionals to check on the quality of the work…
8-98 Knowledge of the class to which the advisee belongs The defendant may know of the claimant only as a member of a class of persons likely to be relying on his work. The larger the class of persons the more difficult it may be to infer that a duty of care was owed to the individuals within it. …
8-99 Reasonable reliance or dependence The test is one of reasonable reliance or dependence, because in some cases there is no factual reliance by the claimant on the defendant. In cases of negligent statements the claimant's loss is usually caused by his factual reliance upon the statement but this is not always the case. In Spring v Guardian Assurance plc the claimant had lost his job as a result of a negligently prepared reference sent by the defendant, his ex-employer to his new employer. The House of Lords held that the employment relationship justified reasonable reliance by the claimant on the defendant. But to distinguish this type of situation from one where the claimant actually relies on the statement, it may be preferable to describe the claimant as reasonably depending on his employer to take care in giving the reference. This is all the more the case with negligent services. In White v Jones members of the House of Lords struggled to analyse the relationship of the claimant, a disappointed beneficiary, and the defendant solicitor in terms of reliance. Lord Nolan described the relationship as one of "implicit" reliance and in the earlier case of Ross v Caunters Megarry V.C. had termed it "passive reliance". Lord Browne-Wilkinson in White, admitted that there was no personal reliance but justified a duty on the ground "society as a whole does rely on solicitors to carry out their will-making functions carefully". Again, it may be helpful to describe this as a relationship of reasonable dependence to distinguish it from a situation of actual reliance. Whether the relationship is termed reliance or dependence, the key question is whether it was reasonable for the claimant to rely or depend on the defendant to take care. Clearly, where the defendant expressly assumes a responsibility towards the claimant it will be reasonable for the claimant to trust the defendant to exercise care. In the absence of an express undertaking, a number of other factors will be relevant to the reasonableness question: the dependence and vulnerability of the claimant, the availability of independent advice, the contractual context and opportunity to secure contractual safeguards, the authority and status of the defendant and the informal context in which the advice is given…
8-101 Availability of independent advice In McNaughton Papers Group Ltd v Hicks Anderson & Co. (a firm) Neill L.J. observed that "In business transactions conducted at arms' length it may sometimes be difficult for an advisee to prove that he was entitled to act on a statement without taking any independent advice". On the facts, he found that it was to be anticipated that the claimant, an experienced businessman, "would have access to and would consult with his own accountancy advisers". He was not entitled to rely on the draft accounts prepared by the defendants when purchasing the defendants' client. Similar conclusions have been reached where the claimant has relied on informal or qualified statements of accountants when purchasing the client. Conversely, the more formal the context in which the advice is given or the more it is cast in the form of an assurance, the more the recipient may be entitled to rely rather than having to verify.
8-102 Contractual context The contractual context may also be relevant to whether it is reasonable to impose a duty. In Henderson v Merrett Syndicates Ltd the House of Lords held that Lloyd's managing agents owed a duty of care to Names for whom they indirectly acted, the Names' direct contracts being with member's agents who, in turn, retained the managing agents. The relationship was such that the Names were reasonably entitled to rely on the managing agents. Lord Goff noted that the case was:
"most unusual; in many cases in which a contractual chain comparable to the present case is constructed it may well prove to be inconsistent with an assumption of responsibility which has the effect of short-cutting the contractual structure so put in place by the parties … [for example, under] the ordinary building contract, [where] the main contractor sub-contracts with sub-contractors or suppliers (often nominated by the building owner) … it will not ordinarily be open to the building owner to sue the sub-contractor or supplier direct under the Hedley Byrne principle."
This suggests that the earlier Lords' decision in Junior Books Ltd v Veitchi Co. Ltd. where a nominated subcontractor responsible for negligently laying defective flooring was held liable to the building owner for the economic loss resulting from having to replace the flooring, should be regarded as exceptional. It might be justifiable on the ground that the subcontractor was nominated for its special skill on which the employer was reasonably entitled to rely. An example of a contractual context inconsistent with a tortious duty is provided by Pacific Associates Inc v Baxter. The claimants were contractors engaged in dredging work under the supervision of the defendant engineer who was retained by the employer. The claimants' contract with the employer contained clauses providing that the engineer would not be personally liable for acts under the contract and for the arbitration of disputes between the contractor and employer. The contractor claimed that the geological information in the tender document issued by the engineer had under-estimated the amount of hard materials to be dredged and that the engineer had acted negligently in rejecting the contractor's claims for extra payment for removal of unforeseen hard materials. The contractor recovered some of its alleged loss from the employer following an arbitration settlement and then sought to recover the balance through a negligence action against the employer. The Court of Appeal held that it would not be reasonable to impose a Hedley Byrne duty because it would "cut across and be inconsistent with the structure of relationships created by the contracts, into which the parties had entered."
8-103 Scope of contract between parties The scope of any contract between defendant and claimant may also be relevant. In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd the Privy Council refused to impose on a customer a tortious duty to his bank which would have been more extensive than his contractual duty. Although Lord Goff in Henderson rejected the wider dicta of Lord Scarman in Tai Hing to the effect that there could never be a tortious duty between contracting parties, he seemed to accept that the decision could be justified on the grounds that the proposed tortious duty was more extensive than the duties imposed by the contract. In J Nunes Diamonds Ltd v Dominion Electric Protection Co. the Canadian Supreme Court seems to have applied somewhat similar reasoning. After entering into a contract with the claimant, the defendants negligently stated that the burglar alarm system which they had hired to the claimant was foolproof. The hiring contract expressly stated that no warranties were given as to the operation of the system. The court held the defendants not liable on the ground that to allow the claim would amount to varying the contract from one of hire to one of insurance. However, it should be noted that in Nunes Diamonds the statement was directly inconsistent with the terms of the contract. Where this is not the case, it may be argued that there is no inconsistency in imposing a duty in relation to a statement going beyond the express scope of the contract. In Holt v Payne Skivington (a firm) Hirst L.J. stated the position as follows:
"In our opinion, there is no reason in principle why a Hedley Byrne type of care cannot arise in an overall set of circumstances where, by reference to certain limited aspects of those circumstances, the same parties enter into a contractual relationship involving more limited obligations than those imposed by the duty of care in tort. In such circumstances the duty of care in tort and the duties imposed by the contract will be concurrent but not coextensive".
On the facts, no more extensive duty in tort was found to exist.
8-104 Opportunity to secure contractual safeguards In Peach Publishing Ltd v Slater & Co. one reason for denying a duty where the claimant had purchased a company relying on accounts prepared by the defendant, was the fact that the claimant had safeguarded its position by taking a contractual warranty from the company relating to the accounts. The claimant's reliance on the warranty further suggested that it was not entitled to rely on the accountants' oral assurance. The availability of contractual safeguards is particularly relevant in the construction context. Thus, in Pacific Associates Inc v Baxter one reason for holding that an engineer did not owe a duty of care to a contractor suffering economic loss as a result of his decisions, was that the contractor was safeguarded by the terms of its contract with the employer. However, despite the existence of contractual safeguards, other factors such as the skill or authority of the defendant may entitle the claimant to reasonably rely on the defendant's service or statement…
8-105 Authority and skill of defendant In Mutual Life & Citizens' Assurance Co. Ltd v Evatt a majority of the Privy Council held that a Hedley Byrne duty could only apply where the defendant carries on the business of giving the kind of advice that is sought, or claims to possess considerable skill and competence in it. Hence, no duty could be imposed on an insurance company in respect of advice it gave on investment matters. Lords Reid and Morris dissented on the ground that the question was simply whether the advice was given on a business occasion, or in the course of the defendant's business. This dissenting opinion was preferred by the Court of Appeal in Esso Petroleum Co Ltd v Mardon. In Spring v Guardian Assurance Lord Goff, noting the non-binding effect of Mutual Life and the "formidable dissenting opinion" of Lords Reid and Morris, stated that the reference to special in Hedley Byrne had "to be understood in a broad sense, certainly broad enough to embrace special knowledge" and that this could include situations where the "defendant has access to information and fails to exercise due care… in drawing on that source of information". Thus he concluded that the principle was applicable to an employer preparing a reference in respect of an employee. Although the inflexible view of Mutual Life has been rejected, it remains the case that a claimant is much more likely to be able to show that he is entitled to depend on a service or statement where the work is undertaken by a person who is exercising a special skill in a business context. This is particularly the case when the information being given relates to matters which are within the exclusive preserve of the defendant. Thus, in Smith v Eric S Bush Lord Griffiths commented: "the valuer is discharging the duties of a professional man….. The essence of the case against him is that he as a professional man realised that the purchaser was relying on him to exercise proper skill and judgment in his profession". Conversely, a duty is unlikely to be owed where a professional is giving advice clearly outside the scope of his expertise. Thus, in Stevens v Bermondsey and Southwark Group Hospital Management Committee a hospital casualty officer who erroneously told the claimant that nothing much was wrong with him, was held to owe no duty in respect of the economic loss the claimant suffered when settling his injury claim for a small sum in reliance that statement. Paull J. considered that the doctor's duty was limited to the medical sphere and, in the absence of special circumstances, did not extent to matter of legal liability.
…
8-107 Informal or social context Where the advice is given informally it is unlikely to be sufficiently authoritative to entitle reliance. An oral answer to a planning enquiry, information given by an auditor in an informal and half-remembered conversation, an off the cuff response to a business inquiry or statements which are merely sales talk, are unlikely to give rise to liability….
B. Collateral Warranty
The relevant legal principles are again common ground. A summary of the relevant legal principles is found in Halsbury's Laws (Contract) at paragraph 753 as follows:
"A contract between A and B may be accompanied by a collateral contract between B and C, whereby C makes a promise to B in return for B entering into the contract with A or doing some other act for the benefit of C. Before B can succeed in an action against C for breach of C's promise, B must prove the following: (1) that C made a promise to B animo contrahendi; and (2) in reliance on that promise, B entered into the contract with A or did the other requested act".
"with the intent of a contracting party: Alicia Hosiery Ltd v Brown Shipley & Co Ltd [1970] 1 QB 195 at 204, 205 per Donaldson J: "There can be no contract between two parties unless both intend either to enter into contractual relations or so to act toward one another that the law will imply such an intention".
"(1) a pre-contractual statement will only be treated as having contractual effect if the evidence shows that parties intended this to be the case. Intention is a question of fact to be decided by looking at the totality of the evidence;
(2) the test is the ordinary objective test for the formation of a contract: what is relevant is not the subjective thought of one party but what a reasonable outside observer would infer from all the circumstances;
(3) in deciding the question of intention, one important consideration will be whether the statement is followed by further negotiations and a written contract not containing any term corresponding to the statement. In such a case, it will be harder to infer that the statement was intended to have contractual effect because the prima facie assumption will be that the written contract includes all the terms the parties wanted to be binding between them;
(4) a further important factor will be the lapse of time between the statement and the making of the formal contract. The longer the interval, the greater the presumption must be that the parties did not intend the statement to have contractual effect in relation to a subsequent deal;
(5) a representation of fact is much more likely intended to have contractual effect than a statement of future fact or a future forecast."
1. I apply the relevant legal principles as set out above.
2. The MOA between KBR and the original seller was agreed on 19 April 2000, on amended Norwegian Sale Form terms. In January 2001 CM Continent Shipping Ltd was substituted as seller and D1 entered into the Guarantee in favour of KBR. The MOA and the Guarantee were arrived at following detailed negotiation and with the benefit of legal advice on both sides. KBR had been offered the opportunity to inspect the vessel's records in the possession of the defendants, but did not take advantage of this opportunity.
3. I reject any attempt by the claimant to rely on any alleged representation not clearly set out and evidenced in the contemporary documents.
4. I turn to consider the following exchange of correspondence which represents the high water mark of the claimant's case.
On 14 February 2000, Mr Kernaghan (KBR Vessel Engineer who was involved in the technical aspects of the vessel acquisition process) sent an email as follows to Mr Rohlen (Vice President of Stena Bulk, who was in charge of selling the Concordia Class tankers for conversion and negotiations with KBR from February 2000): -
"BCDC have issued revised documentation that clarifies how plate replacement should be assessed with repeat to "Corrosion Pattern" and included a new section "Bottom Pittings Repair". Document ET-3010.49-1200-940-PPC-202, Structural Requirements for FPSO Converted Ship Unit, containing these requirements is attached. Can you please review and confirm that the requirements contained therein are consistent with your initial assessment of the plate replacement required for the Stena Concordia …"
On 15 February (after seeking certain clarifications) Mr Rohlen replied: -
"After reviewing the revised specification ET-3010.49-1200-940-PPC-202 Structural Requirements-Revision G, re "Plate Replacement" and "Bottom Pitting", please note that these revisions are generally consistent with the ABS criteria we used in our original assumptions. Thus there will be no need to re-evaluate the guarantees/statements we have previously made regarding our vessels and steel replacement.
So business as usual."
This email when carefully analysed included the statements:
i) that the ABS criteria were used in the original assumptions and
ii) that the revised Specifications were generally consistent with ABS criteria.
5. It should be noted that the statements in the email of 15 February 2000 were far removed in time from KBR's agreement to purchase the Continent (in place of the Conductor) in January 2001, pursuant to the MOA of 19 April 2000.
6. I do not consider that any of the defendants are liable to KBR for negligent mis-statement in respect of any pleaded representations set out and evidenced in the contemporary documents for the following reasons: -
(i) any such representations were made on behalf of the relevant seller company CM Continent Shipping Ltd.
(ii) the defendants did not voluntarily assume a duty of care to ensure that any information, assurance and advice supplied was accurate.
(iii) on the application of an objective test, the defendants did not assume or undertake a responsibility towards KBR.
(iv) the conclusion in (iii) above stands on the application of all three approaches referred to above (the threefold test stated by Lord Griffiths in Smith v Bush; the assumption of responsibility test; and the incremental approach recognised by Lord Bridge in Caparo).
(v) the defendants would have contemplated that KBR would make further inquiries and seek further advice for the purposes of reaching a concluded agreement with the seller (or any substitute seller).
(vi) the contractual context and the opportunity to secure contractual safeguards mitigate against any duty of care on the part of the defendants. The contractual context was inconsistent with a tortious duty on the part of any of the defendants. A Hedley Byrne duty would cut across and be inconsistent with the structure of relationships created by the contracts and the terms of the contracts into which the parties entered, including in particular (but without limitation) a sale on amended Norwegian Sale Form terms.
The parties to the MOA and the Guarantee were alive to the relevant risks, including the possibility that steel renewal would be required. The MOA and the Guarantee contained the bargain between the parties as to the apportionment of those risks. The written agreements included all the terms the parties intended to be binding between them. There was no assumption of responsibility save to the extent set out in the two agreements. The contractual context was such that it is not reasonable to impose any duty on the part of any of the defendants.
7. As to collateral warranty, when regard is had to the totality of the evidence I find that the parties did not intend that any pre-contractual statement would be treated as having contractual effect. In the circumstances of the present case applying an objective test, none of the statements relied on were intended to have contractual effect, because the assumption of the parties was that the written agreements would include all the terms the parties wanted to be binding between them. Further, the collateral warranty claim is (without limitation) inconsistent with a sale on amended Norwegian Sale Form terms.
These conclusions were confirmed by Mr Linder when giving evidence:-
"Q. You relied on that apparent willingness to agree a guarantee with that cap?
A. From a financial perspective, yes. From a schedule and risk perspective, no.
Q. But this was a carefully negotiated contract, as was the guarantee itself, and what I am suggesting to you is that you were well aware that Stena were never prepared to agree to contractual undertakings that were not reflected in the contract itself?
A. I agree, yes. …
Q … you were well aware that Stena were never prepared to agree to contractual undertakings that were not reflected in the contract itself?
A. I agree, yes. …"
C. THE CLAIM AGAINST THE GUARANTORS
C.1 Bottom Pitting
14. Does "to - original plate thickness", as set out within Section 9.2 of the Petrobras Specification 202 Rev G, mean:
(i) "as built" thickness; or
(ii) "reassessed" thickness.
Issue 14 – Analysis and conclusions
In Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, 912H-913E Lord Hoffman summarised the principles by which contractual documents are construed as follows:
"'(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
(2) The background was famously referred to by Lord Wilberforce as the "matrix of fact", but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax.
(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. … ."
In relation to principle (2) Lord Hoffman confirmed, in BCCI v Ali, [2002] 1 AC 251, 269[39], that
"When … I said that the admissible background included "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man", I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant.
I was merely saying that there is no conceptual limit to what can be regarded as background. It is not, for example, confined to the factual background but can include the state of the law (as in cases in which one takes into account that the parties are unlikely to have intended to agree to something unlawful or legally ineffective) or proved common assumptions which were in fact quite mistaken. But the primary source for understanding what the parties meant is their language interpreted in accordance with conventional usage: "we do not easily accept that people have made linguistic mistakes, particularly in formal documents". I was certainly not encouraging a trawl through "background" which could not have made a reasonable person think that the parties must have departed from conventional usage".
In BCCI v Ali [2002] 1 AC 251, 259[8] Lord Bingham said: -
"In construing … any other contractual provision, the object of the court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the court reads the terms of the contract as a whole, giving the words used their natural and ordinary meaning in the context of the agreement, the parties' relationship and all the relevant facts surrounding the transaction so far as known to the parties. To ascertain the parties' intentions the court does not of course inquire into the parties' subjective states of mind but makes an objective judgment based on the materials already identified."
In The 'Tychy' [2001] 2 Lloyd's Rep 403, 409[29]. Lord Phillips MR said: -
"Before taking extrinsic evidence into account, it is important to consider precisely why it is said to assist in deciding the meaning of what was subsequently agreed and to consider whether its relevance is sufficiently cogent to the determination of the joint intention of the parties to have regard to it.' It is also important, though not always easy, to identify what is extrinsic to the agreement and what forms an intrinsic part of it. When a formal contract is drawn up and signed, care must be taken to distinguish between admissible background evidence relating to the nature and object of the contractual venture and inadmissible evidence of the terms for which each party was contending in the course of negotiations."
In Sirius International Insurance Co. v FAI General Insurance Ltd and others [2004] UKHL 54, Lord Steyn said at paragraph 19: -
"There has been a shift from literal methods of interpretation towards a more commercial approach. In Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191, 201, Lord Diplock, in an opinion concurred in by his fellow Law Lords, observed: "if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense." In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 771, I explained the rationale of this approach as follows:
"In determining the meaning of the language of a commercial contract … the law … generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable commercial person is hostile to technical interpretations and undue emphasis on niceties of language."
The tendency should therefore generally speaking be against literalism. What is literalism? It will depend on the context. But an example is given in The Works of William Paley (1838 ed), vol III, p 60. The moral philosophy of Paley influenced thinking on contract in the 19th century. The example is as follows: the tyrant Temures promised the garrison of Sebastia that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried them all alive. This is literalism. If possible it should be resisted in the interpretative process. This approach was affirmed by the decisions of the House in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 775E-G, per Lord Hoffmann and in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913D-E, per Lord Hoffmann."
The court may not look at the subsequent conduct of the parties to interpret a written agreement (Lewison, The Interpretation of Contracts Third Edition, paragraph 3.12 and the cases there cited).
Where a document contains technical terms which the court does not understand, the court may discover the meaning of such terms through the use of an appropriate dictionary, unless the meaning of the term is in dispute, in which case it seems that the court can only proceed upon evidence. (Lewison, paragraph 5.07).
Where a document contains technical terms which the court does not understand and the meaning of such terms is in dispute, the court may be assisted by expert evidence to explain the meaning of the technical terms used. But it is not the role or function of expert witnesses to construe an agreement or to advise the court as to what the expert considers an agreement means.
As to Issue 14: -
1. I apply the legal principles set out above.
2. I refer to and apply the relevant explanations of and meanings of the Technical Terms and Procedures set out in Appendix B to this judgment.
3. In his first Supplemental Report Mr Biles provided Industry Standard References. I refer to and have regard to all the references in paragraphs 7.1.12 to 7.1.18, including (without limitation) the following.
In "Handbook of Corrosion Engineering" by Pierre R Roberge in the Chapter on Corrosion Failures it states: -
"Uniform (or general) corrosion
Uniform corrosion is characterised by corrosive attack proceeding evenly over the entire surface area or a large fraction of the total area. General thinning takes place until failure. On the basis of tonnage wasted, this is the most important form of corrosion. However, uniform corrosion is relatively easily measured and predicted, making disastrous failures relatively rare.
Pitting
Pitting corrosion is a localised form of corrosion by which cavaties or "holes" are produced in the material. Pitting is considered to be more dangerous than uniform corrosion damage because it is more difficult to detect, predict, and design against. Corrosion products often cover the pits.
Pitting corrosion occurs when discrete area of a material undergo rapid attack while most of the adjacent surface remains virtually unaffected. "
4. "Original" is defined in The Concise Oxford Dictionary 9th edn as meaning "existing from the beginning."
5. Section 9.1 is concerned with "Corrosion Pattern". Section 9.2 is concerned with "Bottom Pittings Repair". The distinction in treatment of general corrosion on the one hand and bottom pitting on the other hand should be seen in the light of the differences between general corrosion and pitting corrosion referred to in 3 above.
6. In Section 9.1 and 9.2 the following thicknesses are carefully and separately defined.
In Section 9.1 't' is defined as the "structural element average thickness based on the ultrasonic gauging report". 'tn' is defined as the "nominal thickness, to be obtained from the strength assessment."
In Section 9.2 'tr' is defined as the "residual plate thickness below pitting". 'to' is defined as the "original plate thickness".
7. The word "original" is used elsewhere in Specification 202 Rev G. Section 7 (Tolerances) states "Misalignments of original structure shall be analyzed and reported to CS and Brasoil". Further on each of the front sheets of the three Petrobras Specifications, the first issue of each of the Specifications is referred to as "Original", with subsequent revisions listed.
8. Petrobras Specification 202 Rev G and the other two Specifications were generic specifications in the sense that they were not written with any particular source of, or type of, ships in mind. In particular they were not written specifically in relation to Stena ships. When they were written Petrobras did not know what the as built thickness of any particular ship that might be selected would be (although Petrobras probably had in mind a preference for ships with thicker scantlings). Nor did Petrobras know when they were written how much pitting there would be in any vessel that might be selected.
9. Petrobras adopted a conservative approach in certain respects. This was understandable in commercial terms in what were generic Specifications.
The following are examples of Petrobras' conservative approach.
a) The Introduction to Specification 202 Rev G provided that "The most restrictive of the requirements in the following sections and the CS Rules shall be used."
b) The Introduction also provided that the FPSO "shall be referred by CS as 'As New' (zero cycle of life) regarding CS inspection requirements".
c) Mr Corlett accepted that there was a requirement to use larger design corrosion margins than ABS would have used.
d) Mr Corlett agreed that on any view Section 9.1 adopted a more conservative approach to general corrosion than ABS.
10. As Mr Biles pointed out
"The presence of pits in the bottom of a ship in any event is never a satisfactory situation to be in. It is always going to be a problem area. As I have laid out in my reports, they are unpredictable. They can be very aggressive, very fast, and they are actually very difficult to get rid of with certainty unless you actually cut and replace. "
It was understandable in commercial terms that Petrobras would take a conservative approach to "Bottom Pittings Repair".
Mr Corlett accepted that to construe "to - original plate thickness" as meaning "as built" thickness as opposed to "reassessed" thickness would reflect a more conservative approach. His suggestion that "if the reassessed thickness was in some areas greater than the as-built thickness, it would be the other way round" was in the circumstances unrealistic.
11. I find in the light of the evidence that the Projects were intended to be fast track projects.
Section 9.2 expressly contemplated that "After bottom plating blasting and shop primer application of cargo, slop and ballast tanks, these regions shall be inspected for pittings and, if necessary, painted or renewed (if the case) using following criteria: …" The wording used contemplates that (a) blasting etc (b) inspection and (c) painting or renewal would follow on in sequence without the need for any intermediate step. I consider that there is force in the claimant's submission that if Petrobras had intended (as D1 suggests) that the claimant had (a) first to undertake the assessment referred to in Section 9.1, (b) then to get it approved by Petrobras and ABS and (c) only then to undertake the bottom pitting inspection in Section 9.2, using the "nominal thickness" derived from the strength assessment as the benchmark against which the depth of the pits was to be assessed, Section 9.2 would have said so.
12. I do not accept D1's submission that the use of as built thickness as a reference thickness leads to consequences which are technically illogical and which flout technical commonsense, given that Specification 202 Rev G was a generic Specification in the sense described above. It is possible to construct examples of alleged technical illogicalites depending on the measurements etc selected in the examples, but this is to overlook the fact that the Specification was a generic specification. Petrobras might be expected for sensible and understandable commercial reasons to adopt a conservative approach in relation to the dangers of pitting in setting a generic Specification, given the required life-time and use of the vessel ("20 years fatigue life without drydocking"). Pitting is considered to be more dangerous than uniform corrosion damage because it is more difficult to detect, predict, and design against. In relation to safeguarding against hull breaches whilst on site due to pitting corrosion, the amount of steel remaining between the bottom of a pit and the sea is the most important criterion. In general commercial terms it is always possible to reduce contractual requirements by agreement, but it is very difficult to increase requirements, without further expense and delay.
15. If it means "as-built" thickness, did the May TQ:
(i) clarify, correct or supersede s.9.2 of the Petrobras Specification in relation to the Continent, or Petrobras' requirements for its application to the Continent, so as to provide that the appropriate reference thickness for measuring pits should be the reassessed thickness (as the defendants contend by way of alternative case); or
(ii) have no effect on the required reference thickness for measuring pits (as the claimant contends).
16. If, as the defendants contend, the May TQ did provide that the appropriate reference thickness for measuring pits should be the reassessed thickness, was the May TQ superseded by the agreement of the Present Thickness criteria?
Issues 15 and 16 - Analysis and conclusions
C.1.1 If the relevant reference thickness is "as built" thickness
C.1.2 Alternative 1
17. Was it unreasonable and/or unfair and/or negligent for KBR to fail to agree criteria with Petrobras akin to TQ 1028 before they actually did so?
18. If so:
(i) at what stage ought KBR to have done so;
(ii) what criteria ought KBR to have agreed?
(iii) what are the consequences thereof and in particular does it mean that KBR cannot recover for the costs incurred as a result of their failure so to do?
19. If , as the defendants contend, the consequence is that KBR cannot recover for the costs incurred as a result of their failure to do, so issues remain as to:
(i) the application of the inserts criteria to any areas which would have been identified as defective by reference to the criteria identified in TQ1028 (see issues 25 to 27 below); and
(ii) the thickness of the replacement plate (27, 30 or 35mm) (see issue 28 below).
20. If KBR did not act unreasonably and/or unfairly and/or negligently and/or they are not precluded from recovering the costs incurred in consequence thereof, it is common ground that KBR correctly applied the Present Thickness Criteria for the purposes of arriving at the inserts shown for Stena's account on Mr Samways' fair sketches.
Issues 17 to 20 - Analysis and conclusions
"Petrobras were not unaware of the problem and were very concerned by the amount of pitting but I know from other experiences that they knew exactly what their specifications stated and were very reluctant to give them up. … They were open to reconsideration. We went as far as negotiating TQ 1027 with them and, even before submitting it, I felt that they were in a place where they were ready to approve that TQ. It included certain qualifications which they had asked us to include in it. They still rejected it. They were also not prepared to give relaxations without fully understanding the consequences of what they were doing. … They may or they may not have agreed a technical(ly) supportable argument. They had already identified what they wanted in their specification.
… I do not believe, if we had asked Petrobras in August, they would have relaxed their criteria. They relaxed their criteria quite reluctantly anyway … in November."
C.1.3 Alternative 2: Defer Dry Dock 1
21. If paragraph 20 above applies:
(i) is KBR entitled to recover from D1 in respect of the plate replaced at the 1st DD based on the first inspection; or
(ii) in the light of the matters discussed at the Heathrow meeting, did KBR act unreasonably and/or unfairly and/or negligently in failing to defer carrying out any renewals at the 1st DD until the plate had been re-inspected?
22. If KBR acted unreasonably and/or unfairly and/or negligently and if that means that KBR can only recover in respect of renewals which would have been based on criteria akin to TQ1028, issues remain as to:
(i) the application of the ABS Inserts Criteria (see issues 25 to 27 below); and
(ii) the thickness of the replacement plate (27, 30 or 35mm) (see issue 28 below).
Issues 21 and 22 – Analysis and conclusions
(a) the minutes of the meeting between KBR and JSPL on 8 August 2001;
(b) the minutes of the meeting between KBR and JSPL on 15 August;
(c) the minutes of the meeting between KBR and JSPL on 22 August;
(d) the minutes of the meeting between KBR and JSPL on 29 August;
(e) the minutes of the meeting between KBR and JSPL on 7 September;
(f) the minutes of the meeting between KBR and JSPL on 12 September;
(g) the minutes of the meeting between KBR and JSPL on 19 September;
(h) KBR's letter to JSPL dated 24 September;
(i) the minutes of the meeting between KBR and JSPL on 26 September;
(j) the minutes of the meeting between KBR and JSPL on 3 October;
(k) the minutes of the meeting between KBR and JSPL on 10 October;
(l) the minutes of the meeting between KBR and JSPL on 17 October; and
(m) V.O 16 agreed by JSPL and KBR on 17 October, whereby a rate of $4,900 for bottom plate replacement over 300 tonnes was agreed.
C.1.4 Alternative 3: Limited recovery for Dry Dock 2
23. Is KBR also entitled to recover from D1 in respect of the plate replaced at the 2nd DD based on the first inspection, or is KBR only entitled to recover in respect of that proportion of the plate replaced at the 2nd DD which would have been condemned if TQ1028 had been applied?
24. If KBR is only entitled to recover in respect of that proportion of the plate replaced at the 2nd DD which would have been condemned if TQ1028 had been applied, issues remain as to:
(i) the application of the ABS Inserts Criteria (see issues 25-27 below); and
(ii) the thickness of the replacement plate (27, 30 or 35mm) (see issue 28 below).
Issues 23 and 24 - Analysis and conclusions
i) the documents referred to in (a) and (m) above (paragraph 68);
ii) KBR's letter to JSPL dated 17 October;
iii) KBR's fax to JSPL dated 24 October;
iv) the minutes of the meeting between KBR and JSPL on 30 October 2001;
v) the minutes of the meeting between KBR and JSPL on 7 November;
vi) the minutes of the meeting between KBR and JSPL on 15 November;
vii) KBR's letter to JSPL dated 16 November;
viii) JSPL's letter to KBR dated 19 November ("The renewal of bottom plate is most critical for continuance of other critical works such as the subsequent tank coating. At this eleventh hour, it is not possible to cancel or postpone the second Dry Docking without incurring very substantial cost impact. Under the circumstances, we advise the revised structural inspection criteria (if approved by Petrobras and ABS) to be applied for those tanks scheduled for the third Dry Docking.");
ix) the minutes of the meeting between KBR and JSPL on 21 November; and
x) the letters from KBR to JSPL dated 21 November, including attachment A.
"We have a dilemma.
DD2 is scheduled for this Friday 24 Nov'01 (this is a long story). We have only completed the bottom plate re-inspection of 4S and that shows dramatic savings over the original inspection criteria, however we (VW & Roger Samways) do not believe that this will be similar in all cases. JSL have already completed the preparation of 880t steel plate for DD2 so there are inevitably costs associated with the cancellation of the DD2 if we wish to complete the re-inspections of tanks 1C, 2S & 3C.
We have been discussing this with JSL and they have presented the attached spreadsheet that shows the cost difference between cancelling the DD and progressing to the original plan. The benefits of progressing to the original are;
Downside is US$372,802.14
It's worth noting that the revised reduced btm steel replacement quantities in the spreadsheet are a "best guess" by us."
"My apologies for not copying you onto the latest developments regarding 'DD2 and Bottom plate replacement'.
The short story is that DD2 is to commence, 24 November 2001.
880 Tonne of steelwork will be replaced by JSPL during DD2.
DD2 scheduled period – 21 days.
Basis of 'accepted' agreement as follows:
The bottom line is that we are paying approximately $450k additional to replace 880 Tonne as opposed to replacing a potential $286 Tonne. This takes into account:
The 'downside' of the deal is that we are replacing 880 Tonne of steelwork in a timescale which, is to JSPL's schedule requirement, without and until recently, against KBR wishes. Also, we must consider the fact that JSPL have deliberately misled KBR, (we are the DONKEYS) with respect to the steelwork replacement / Dry dock rate i.e. U.S $4,900/Tonne. (The rate was based upon the JSPL supplied data which, indicated a maximum achievable productivity rate of 22.5 Tonne/day of bottom plate replacement.) DD1 achieved a productivity rate as follows; 780 Tonne replaced in 19 days = 41.05 Tonne/day. Double the JSPL supplied data upon which their DD was calculated i.e. 110 'additional' days. Taking this a step further:
Counter Claim:
DD1 Productivity: 41.05 Tonne day.
Revised Inspection criteria – Anticipated replacement stl = Additional 500 Tonne max. (On top of DD1 replacement tonnage @ 780 tonne = 1300 Tonne Max.)
Contract schedule for Dry docking – 42 Days (Incl mobilization of which, 28 days detailed by JSPL as bottom replacement work. 28 @ 22.5 t/day = 602 Tonne.)
1000 Tonne less 602 = 398 Tonne @ contract rate $3054.00 = $1,215,492.00 plus 300 Tonne @ enhanced rate $4900 = $1,470,000 = $2,685,492 TOTAL.
No of DD days = 1300 Tonne / 41.05 Tonne = 32 Days Total. (Not significantly different from original contract data!)
Of course, now that we (KBR site team plus T. Press), have 'agreed' to JSPL request to replace the 880 Tonne during DD2, our position regarding a 'counter-claim' is somewhat weakened, (if the intent can be found) and leaves us with a further potential problem with the likes of the Stena deal. "
C.1.5 In any event: the ABS Inserts Criteria and their application
25. In relation to the ABS Inserts Criteria the parties have helpfully identified common ground and set out the specific issues which arise, together with a brief summary of their respective contentions.
26. THE DD1 AND DD2 ABS INSERTS CRITERIA
27. It is common ground that the criteria applicable to DD1 and DD2 were as follows:
(i) Maximum of 2 inserts per plate width;
(ii) Maximum of 3 inserts per half plate length;
(iii) Minimum inserts size of 450mm x 450mm;
(iv) Where an Insert weld seam is closer than 450mm to an original weld seam, the Insert is normally to be carried out to the original weld seam;
(v) Welds cannot be closer than 450mm either to adjacent inserts welds or strake welds;
(vi) No circular inserts;
(vii) No weld to be closer than 100mm to other weld connections (longitudinal stiffeners or transverse frames).
28. It is also common ground between the experts that in applying these criteria the following ABS Rules and general requirements are also relevant:
(i) Partial renewal of a plate is permitted providing the remaining portion is satisfactory. Small inserts are to be avoided because fractures frequently develop, probably due to cumulative shrink stresses and notch effect at corners. Preferred renewal is full width and length no less than the width; or at least half-width and length equal to one plate width or more. For less than full inserts, the corner that does not land on a seam or butt should be radiused. For local inserts, it is suggested that the minor dimension should never be less than 450mm (18 in.) [See ABS Rules Part 7 Appendix 4]; and
(ii) the application of these criteria is subject to the reasonable discretion of the attending ABS surveyor [See ABS general requirements for building and Classing Steel Vessels 2001 Part 1-1-1/3.1]
29. THE DD3 ABS INSERTS CRITERIA
30. It is common ground that these criteria were modified in relation to DD3 in that the maximum of three inserts in a half strake length became a maximum of two inserts in a half strake width turned sideways.
SCOPE OF THE MOA IN RELATION TO THE ABS INSERTS CRITERIA
36. In order to recover under the Guarantee for steel renewals resulting from the application of the ABS Inserts criteria at each of DD1, DD2, DD3, does KBR have to prove that:
i) the amalgamation of inserts was the minimum that was required in order to comply with the ABS Inserts criteria and/or other requirements of ABS; or
ii) the amalgamation of inserts was a reasonable application of the ABS Inserts criteria and/or other requirements of ABS as understood at the time; and/or
iii) the amalgamation of inserts was in accordance with normal industry practice; and/or
iv) it was reasonable for commercial or other reasons for it to amalgamate inserts in the way that it did?
37. What quantity of steel renewals can be recovered under the Guarantee after taking account of the ABS Inserts criteria and/or other requirements of ABS?
The claimant's primary case is that it is entitled to recover the full amount claimed of 1629 tonnes in relation to DD1, DD2 and DD3 on the basis that these renewals were required pursuant to the ABS Inserts criteria. In particular:
(1) In relation to the 1560 tonnes replaced during DD1 and DD2: The claimant relies on Mr. Biles' third exercise as further evidencing that KBR's/JSPL's interpretation of the criteria as confirmed to KBR on 2 October 2001 was reasonable and in accordance with the ABS Inserts criteria applicable during Dry Docks 1 and 2; and
(2) In relation to DD3, the claimant claims 69 tonnes and relies upon an agreement with the defendants that the identification of repairs would be undertaken by ABS - on that basis the repairs undertaken were by definition those required to meet Class. The claimant also relies upon the evidence of Mr Samways that the ABS Inserts criteria for DD3 were in fact applied by the ABS Surveyor, and the evidence of both experts that KBR had little practical option but to comply with ABS' requirements.
The claimant's first alternative case is that, if it is necessary to consider the minimum quantity of inserts that ABS might have been prepared to accept, but taking into account also reasonable commercial and practical considerations which the claimant contends would reflect normal industry practice, then the claimant relies on the first exercise undertaken by Mr. Biles as showing that, using the less onerous ABS criteria applied in DD3, 1441 tonnes would be recoverable for DD1, DD2 and DD3.
The claimant's second alternative case is that, if it is necessary to consider the minimum quantity of inserts that ABS might have been prepared to accept without taking into account commercial and practical considerations, then the claimant relies on the second exercise undertaken by Mr. Biles as showing that, using the less onerous ABS criteria applied in DD3, 1,255 tonnes would be required for DD1, DD2 and DD3.
D1 relies upon the exercises carried out by Mr Corlett, which, according to D1, show that (i) the maximum quantity of renewal steel which KBR can prove was required in order to meet the Petrobras specifications for the tanks renewed at DD1 and DD2 would (on the basis of the Present Thickness criteria and replacement using 35mm plate, both of which are challenged by D1) be 997.3 tonnes; and (ii) the maximum quantity of renewal steel which KBR can prove was required in order to meet the Petrobras specifications for the tanks renewed at DD3 would (based on TQ 1028 and replacement using 35mm plate) be 50.95 tonnes.
On Mr Biles' evidence, it is 1185.6 tonnes for DD1 and DD2 to which he adds 69.9 tonnes for DD3 for comparative purposes, so as to give a total of 1,255.5 tonnes. Taking into account the thickness of plate actually fitted, the comparative totals are 1,010.9 tonnes for Mr Corlett and 1,208.1 tonnes for Mr Biles.
Issues 36 and 37 – Analysis and conclusions
(i) "It is your position that the guarantee covers more than fatigue requirements, which we deny …".
(This contention is no longer pursued by D1).
(ii) "It is our view that the specification appended to our contract is simply incorrect in defining to as original rather than nominal thickness."
I again draw attention to the use of the word "incorrect".
"We have received four sets of bottom plate steel renewal proposal. Providing all repairs and renewals are carried out in compliance with our rules and procedures and all workmanship is to attending surveyor['s] satisfaction, we would have no objection to your proposal as outlined. Three sets of bottom plate steel renewal proposal [have] been endorsed and returned to you."
It is to be noted that Mr Somerville of ABS in his email of 20 September to Mr Carlsson said that Mr Gus Bourneuf of ABS had been instructed to investigate the matter, and that Mr Chong's letter of 9 October was copied to Mr Bourneuf.
i) Can individual inserts be amalgamated for the purposes of the ABS Inserts criteria such that the ABS Inserts criteria be re-applied on the basis that there is now a single Insert? In relation to this issue. The claimant's case is that consistent with the overarching ABS philosophy in relation to plate replacement, it is not permissible to merge inserts in such a manner. D1's case is that, in practice, the ABS surveyor is looking to see whether the inserts as amalgamated will create concerns in terms of the number and proximity of welds and resultant stresses in the plate. As such, so long as his requirements about minimum separation and numbers of welds, etc., are met, it is not going to make any difference to him how these requirements are met.
ii) For the purposes of applying the ABS Inserts criteria, do the inserts need to be in a line or effectively a straight line in order that they are required to be taken into consideration for the purposes of the ABS Inserts criteria (either across the width of the plate or lengthways)? The claimant contends that this is not a requirement. Further, during the meetings that took place between KBR and ABS on 2 and 4 October 2001 (during which the ABS Inserts criteria were discussed directly with ABS), it was never stated by ABS as being one of their requirements. D1 contends that unless the inserts are in line or effectively in line over the width or half length of the plate, they do not contravene the ABS Inserts criteria, on the basis that ABS is concerned with the number of welds creating stresses across or along the plate.
C.1.6 In any event: Renewal Thicknesses
38. What thickness of renewal plate ought to have been used in each of the dry docks above (35mm, 30mm or 27mm)?
"1. That in all areas (except for keel plates), where thickness of original plate is 30mm or thicker, you shall replace with ABS approved plates 30mm thick, of equivalent grade. …
However, to secure suitable plates in time for the planned First Dry-docking, we hereby agree that you should proceed to purchase 800MT of ABS approved 35mm thick, grade EH-36 plates. JSPL is hereby instructed to source the remaining plates at 30mm thickness."
"Please be advised that ABS has decided that the structural reassessment as per SH for FPSO criteria will form the basis for renewal requirements for class purposes, and will accept replacement of scantlings to be renewed with the reassessed plate thickness. In case renewal plate has less thickness than adjacent plating, ABS requirements for edge preparation and fit-up are to be met. Details of edge preparation and fit-up are to be to the Surveyor's satisfaction."
"We notice pitting criteria, as indicated in the attached TQ, is being proposed solely based on original thickness and does not refer to the actual gauged thickness. In this case, we have no objections to the proposed attached bottom pitting repair criteria during conversion work, provided the actual gauged scantlings are 1.5mm in excess of the reassessed approved scantlings, which is 30mm amidships."
I refer to Appendix D (Plate replacement applied to mid ship section reassessed scantlings) which against the line bottom … plate stated 35.0mm (as-built), 30.0mm (2000 ABS Rules), 24.0mm (ABS Renewal), .20 (r), 1.4mm (Corrosion margin) and 26.9mm (Petrobras equation minimum allowable effective thickness).
Until 5 October replacement plate had to be at the original as-built thickness.
In broad terms KBR acted reasonably in re-confirming its verbal instructions to JSPL on 24 September. Having reviewed the contemporary documents including in particular but without limitation those referred to above, in my judgment the appropriate balance is as follows. KBR are entitled to recover
in respect of DD1 thickness of renewal plate at 35mm; and
in respect of DD2 and DD3 thickness of renewal plate at 30mm, but to the extent that 35mm plate was used in DD2 and/or DD3 which was procured for the Project prior to 25 September, this was reasonable.
Implied Term
39. Was there an agreement reached on 12 October 2001 between KBR and the Sellers in relation to seeking a "concession" to the Petrobras Specification in order to reduce the amount of steel renewal and, if so, what is the nature and effect of such alleged agreement?
40. In particular, was it an implied term of the alleged agreement that, to the extent that any concession was obtained which increased KBR's own costs of completing this work, all of those additional costs would be recoverable under Clause 4.1 of the MOA? If so, are such costs recoverable under the guarantee given by D1?
41. If yes, the claimant contends that it is entitled to recover the following:
i) the additional costs associated with the re-inspection as follows:
a) the additional costs of JSL re-blasting the bottom plate to enable the re-inspection to take place: USD 61,948.80 [F23/11]
b) the additional costs of engaging Yamamizu and Shipscan in relation to the gaugings and the bottom plating re-inspection: USD 360,187.73 [F23/13];
c) the additional costs of engaging ABS to lead the re-inspection process: USD 149,525 [A1/58A];
ii) the additional cost associated with the increased number of pit welding repairs which would otherwise not have been required had plate been replaced. This comprises pit repairs undertaken during DD3 less an allowance for pits which would have been required to be repaired in any event under the original criteria. The data is extracted from the JSL invoice summary sheet [F23/3] for tanks 1S, 1P, 2P, 3S, 4P, 5P, 5C, 5S and 6C as follows:
a) total number of pits repaired during DD3 = 11,860
b) less allowance for 620 pits which would have required repair under the original criteria (based upon 40% of the 1032 pits identified for weld repair during the original inspection becoming painted pits when the bottom plate was re-inspected under the less onerous 1028 criteria)
c) claimants claim: 11,240 pits at USD 49.36 = USD 554,806
42. The total amount claimed by the claimant in respect of work done in substitution for plate replacement is therefore: USD 1,126,468.
Issues 39-42 - Analysis and Conclusions
Tonnages
46. Taking into account the above issues, what tonnage of renewal steel should have been required on this basis for Dry Docks 1, 2 and 3.
Rates
47. What is the appropriate rate(s) per tonne for bottom plate recoverable under the terms of Clause 4.1 of the Particular Conditions of the MOA and the Guarantee given by D1. In particular:
i) what quantity (if any) ought to be charged to D1 at the contractual "credit" rate of US$2880;
ii) what quantity (if any) ought to be charged to D1 at the contractual rate for additional steel of US$3054; and
iii) what quantity (if any) ought to be charged to D1 at the varied rate agreed with JSPL in VO16 of US$4900.
48. To what extent should D1 have the benefit of the credit given by JSPL in respect of the cost of the 2nd DD?
"shall be to Seller's account, calculated at the weight of additional steel in excess of 150 tonnes, times the rate per tonne charged by the conversion yard to Buyer as documented and technically justified in the invoice"
It is the actual rate per tonne that was charged by JSPL to KBR as documented in the JSPL invoice which is the amount that has to be paid under Clause 4.1 (No issues now arise in relation to technical justification).
VO16 was a binding agreement reached between JSPL and KBR as to the rate to be applied for the bottom plate renewals over and above the first 300 tonnes. It was the best deal that KBR could achieve in the circumstances. It was negotiated with JSPL that the 1,000 tonnes included in the lump sum contract would be allocated as to 300 tonnes to bottom plates and 700 tonnes to other areas. That was a firm agreement as confirmed by Mr. Phillips in evidence. All of the 300 tonnes was utilised and no question of any credit rate being applied for bottom plate renewals arises. Even if that was not the case, there is no basis for applying the credit rate of US$2,880 (which applies to work not carried out) to variation work (i.e. work which was additional and which was actually carried out). The VO16 rate was a normal composite rate as Mr. Phillips confirmed in evidence. D1 has not adduced any evidence to challenge that or suggest that the component parts were inappropriate. In any event, it was the rate charged by JSPL per tonne for the bottom plate renewals and is recoverable as such under the terms of Clause 4.1. There are no grounds on which the rates actually charged by JSPL should be adjusted.
A discount was negotiated with JSPL in relation to DD2. The claimant has reflected this discount by way of a discounted rate of US$ 4121 which has been applied to the tonnage installed during DD2 (764 tonnes).
Issues 47 to 48 – Analysis and conclusions
"The Lump Sum set-out within Item 1.1.4, Accommodation Unit, Item 1.1.5 Office Block and Item 1.1.6 Vessel Structure/ outfitting, shall be based upon the Structural Quantities included within Annex A-I, Attachment 2, Steel Weight Table. In the event that the final agreed measured quantities for each of these categories vary by more than +/- 5% then the Lump Sum amounts shall be adjusted by the application of the unit rates set-out in Item 3.2. Unit Prices. These Lump Sum Adjustments to the Subcontract Price shall be in accordance with the provisions of Article 12 as set forth in the General Terms & Conditions.
In addition, BRES may request, and Subcontractor shall provide, proposals, for other Scope of Work changes (additions and deletions) which are to be priced, at BRES' option, by one or a combination of the following methods:
…
2.3 Unit Prices
2.3.1 Unit Rates for Changes in Steelwork Weight. The Unit Prices below are to be inclusive of, but not limited to construction engineering, material supply, prefabrication, supervision, installation, blasting and protective coatings, NDT as required, making good, indirect services such as fire-watching and scaffolding.
| Item | Unit | Unit Price Additions US$ |
Unit Price Deletions US$ |
| 1.1.6.A – Hull Repair & Replacement | T | 3,054 | 2,880 |
"The agreed, all inclusive unit rate against 'additional' tonnage of replacement steelwork is $4900/tonne (No detailed breakdown of this rate has been made available or could be reasonably justified by JSPL)."
"Attached is the latest 'forecast' regarding costs allocated to Stena in connection with P43 steelwork renewal / repair.
You will note that the cost forecast includes the following categories:
All are included on the basis that 'ancillary/supporting' trades are necessary to complete the prime function i.e. the renewal/repair of steelwork to ensure that vessel meets the required standards. (Bottom line is that Stena will dispute most if not all of the ancillary costs and a large proportion of the steelwork renewed during DD1 & DDQ.)
DD1: Steelwork renewed. 967.50 Tonne. (Tonnage calculated / renewed in accordance with "original" criteria.)
DD2: Steelwork renewed. 845.40 Tonne. (Tonnage replaced in accordance with KBR requirements). **
** The 'revised' criteria against which bottom plate renewal was to be calculated, could be argued from Stena perspective, to have been available in time to allow KBR to instruct JSPL to replace a fraction of the 845.40 Tonne. (Approx 286 Tonne was estimated at the time although this has subsequently been reduced.)
Another contentious point will be the rate at which steel renewal is calculated. (DD1 + DD2 rate = U.S $4900/Tonne v U.S $3054/Tonne contract rate).
Bottom line is that I believe recovery from Stena will be in line with the following (Maximum);
Dry Dock 1 renewal steelwork 967.50 Tonne @ $3054 = 2,954,745
Dry Dock 2 'revised criteria renewal steelwork 160.00 Tonne @ $3054 = 488,640 (Approx weight)
Dry Dock 3 Steel renewal 'to go' 65.00 Tonne @ $3054 = 198,510
3,641,895 U.S $ "
Internals and Miscellaneous
Footnote
APPENDIX A
CHRONOLOGY OF EVENTS
APPENDIX B
TECHNICAL TERMS AND PROCEDURES
|
No. |
Item |
Definition / Description |
|
1 |
Scantlings |
Scantlings are the dimensions of a ship's structural members as girders, stiffeners and plates. This includes thickness and material grade of the structural members. The scantling thicknesses are gross thicknesses, i.e. they include any corrosion margins. |
|
2 |
Shell Plating |
The shell plating forms the outer skin of the vessel’s hull, i.e. the sides and bottom of the ship. |
|
3 |
Bottom Plating |
The bottom plating, or bottom shell plating, forms the bottom of the ship and is generally flat. |
|
4 |
Strake |
Strake is a course, or row, of shell, deck, bulkhead, or other plating. Plating strakes generally run along the length of the hull so, for example, the keel strake is the row of plates running along the centre of the vessel’s bottom plating. |
|
5 |
Tank Internals |
The hull is divided up internally into various tanks and other compartments by longitudinal and transverse bulkheads. The plating of the shell, deck, and bulkheads is supported internally by various frames, girders, brackets and stiffeners. These are located within the tanks and are sometimes referred to as the tank internals. |
|
6 |
Side shell longitudinals |
Stiffener is a collective term for secondary supporting structural members. The shell plating on this ship is longitudinally stiffened, i.e. the stiffeners run along the length of the ship. The side shell longitudinal stiffeners provide support for the side shell plating. They are ‘L’ shaped, being made up of a horizontal web with a vertical flange welded to it. The flanges are sometimes referred to as face flats. |
|
7 |
Longitudinal bulkhead stiffeners |
The longitudinal bulkheads divide the port and starboard wing tanks from the centre tanks. The longitudinal bulkhead stiffeners provide support for the longitudinal bulkhead plating and are generally on the outside face of the bulkhead, i.e. within the wing tanks. They are also ‘L’ shaped, being made up of a horizontal web with a vertical flange welded to it. The flanges are sometimes referred to as face flats. |
|
8 |
Bottom longitudinals |
The bottom longitudinal stiffeners provide support for the bottom plating. They are ‘T’ shaped being made up of a vertical web with a horizontal flange welded to it. The flanges are sometimes referred to as face flats. |
|
9 |
Centreline girder |
Girder is a collective term for primary supporting structural members. The centreline girder is similar in construction to the bottom longitudinals but larger and has additional brackets to help it support the loads on the keel plate when the vessel is dry docked. |
|
10 |
Transverse web frames |
The hull is transversely framed. The frames are part of the primary structure of the ship. In the wing tanks the frames consist of vertical girders, or webs, supporting the side shell and the longitudinal bulkhead, and transverse webs supporting the deck and bottom. These are combined to form a ring frame within the tank. In the centre tanks the deck and bottom are supported by transverses which join the frames in the wing tanks on either side. |
|
11 |
Cross ties |
Cross Ties are used to support the longitudinal bulkheads of oil tankers against hydrostatic and hydrodynamic loads. On this ship there are two horizontal cross ties in each transverse web frame in the wing tanks, joining the vertical webs of the transverse frame on the side shell and longitudinal bulkhead. |
|
12 |
Bulkhead horizontal girders |
The transverse bulkheads are also supported by webs or girders but they are horizontal. They are sometimes referred to as bulkhead stringers. These form three horizontal platforms on the bulkheads. |
|
13 |
Pitting corrosion |
Pitting Corrosion is local, random scattered corrosion mainly on horizontal surfaces and at structural details where water is trapped, particularly at bottom of tanks. For coated areas the attack produces deep and small diameter pits which may lead to perforation. Pitting of uncoated areas in tanks, as it progresses, forms shallow but very wide scabby patches (e.g. 300 mm in diameter) and the appearance resembles condition of general corrosion. |
|
14 |
Pitting |
Pitting is the physical result of pitting corrosion as described above. |
|
15 |
Epoxy filler |
Epoxy filler is a filled epoxy resin (similar to body filler which is used for filling dents in car bodywork). It is provided in “two pot” form with a hardener to make it cure which requires mixing in before the filler is applied. It cannot restore the strength of the steel but is intended to protect the steel in the recess (as described below) of the pit from further corrosion attack. After a pit that does not require plate replacement or weld filling has been cleaned out and the corrosion removed, it is important that it does not become active again. The basic treatment is to paint the cleaned surface, after it has been grit blasted. Some operators consider that rather than simply paint it which leaves a recess in which water can collect and which might attack the steel if there is any porosity in the paint coating, it is desirable for the pit to be filled with the filler bringing the level back up to the level of the surrounding steel. |
|
16 |
SafeHull analysis |
SafeHull is a proprietary system using Rules and computer based analysis. It has been developed by ABS to replace the traditional scantling rule based approach used for determine the required scantlings for classification. It can also be used for the verification of existing scantlings for the current application of the vessel or for a new application. The first phase provides the basic hull design to reflect overall hull girder and local structural component strength (Phase A) in terms of strength (yield and buckling) and simplified fatigue criteria. The second phase requires the performance of more detailed structural analyses to validate the scantlings from the first phase (Phase B) in terms of local strength and fatigue. The SafeHull analysis is normally limited to the Midship section of the hull (40% of the length) where the loads are greatest. The analysis is carried out using net scantlings, i.e. excluding the corrosion margins. |
|
17 |
SafeHull A |
SafeHull Phase A generates the initial scantlings for each member in the structure. These requirements are based on analytical models of individual members. The system then calculates strength requirements for the design, using dynamic design load criteria, and reports compliance or non-compliance with rule criteria. Fatigue evaluation is included in the development of the initial scantlings. |
|
18 |
SafeHull B |
Following the development of the initial scantlings in Phase A, the user creates finite element model(s) for the more detailed strength assessment in SafeHull Phase B. The software is used to calculate the global and local loads, considering the dynamic nature of the expected environmental and operational conditions. The solved model results are then evaluated against the rule failure criteria for yield, buckling and fatigue. |
|
19 |
Taper |
After the scantlings have been determined for the midship section of the hull, the scantlings for the rest of the hull can be determined by “tapering”, or systematically reducing, the scantlings from the midship scantlings towards the ends of the vessel in a manner specified in the classification rules. |
|
20 |
Strength assessment |
Section 9.1 of the Petrobras specification requires a strength assessment to “be performed for the FPSO conditions to determine the required thickness”. The introduction to the structural specification required that “The Classification Society (CS) requirements latest revision … for FPSO shall be used for verification of old structural parts”. This process would have involved the development of a SafeHull model for the hull using the existing scantlings from the hull gauging survey and checking of their adequacy using the design loads required by the ABS rules and the Petrobras specification. In practice the strength assessment required in 9.1 also involves re-running the SafeHull model of the hull structure iteratively to identify the minimum thicknesses which would be acceptable. |
|
21 |
Fatigue life |
Fatigue is the phenomenon leading to fracture under repeated or fluctuating stresses having a maximum value significantly less than the ultimate tensile strength of the material. When a ship or an FPSO is in service the structural components of the hull experience fluctuating loads and stresses due to factors such as the waves it encounters, changes in loading condition, vibration, etc. The fatigue life of a structural component is related to the number of cycles of these fluctuating stresses that it can sustain before failure occurs, i.e. a fatigue crack starts to develop. The fatigue life is a function of the magnitude and number of the fluctuating stresses and the geometry of the component. It is often expressed in terms of the length of time in service before a failure develops, i.e. 20 years. |
|
22 |
TSCF |
TSCF is an abbreviation for the Tanker Structure Co-operative Forum that is made up of Classification Societies, Oil Companies and Independent Ship Operators. In 1997 they published a book called “The Guidance Manual for Tanker Structures” which covered the inspection, maintenance and repair of the ballast and cargo tank structure of single hull tankers in service. The manual was produced in co-operation with the International Association of Classification Societies (IACS). |
|
23 |
As-built thickness |
This is the material thickness used for the construction of the vessel when it was built. It is almost always the same as the class approved rule scantling thickness at the time. |
|
24 |
Re-assessed thickness |
For any ship the existing material thickness can be re-assessed to determine their adequacy against the latest version of the classification society rules. The same process normally take place when a ship is being converted for a new application, i.e. the existing scantlings have to be checked against the rules for the new application. In both cases the process can be used either: Either the existing thickness or the minimum required thickness (or some intermediate thickness) can become the new approved scantling thickness, depending on which are submitted to Class for approval. |
|
25 |
Nominal thickness |
The nominal thickness is not the actual thickness of a component but is a thickness used for analysis or reference. A net thickness which excludes a required corrosion margin will be a nominal thickness. |
|
26 |
Zero cycle of life |
Section 1 of the Petrobras specification requires that the “unit shall be referred by CS (ABS) as “As New” (zero cycle of life) regarding CS inspection requirements”. This means that after the completion of the conversion the classification survey and inspection cycle was to start with ABS treating the vessel as new so that, for example, after 5 years the vessel would have a 1st Special Survey and not a 6th. The scope of the inspections required at 5 yearly Special Surveys increases as a vessel gets older. |
|
27 |
The role of the Classification Society, ABS |
ABS introduces its rules by saying “Classification is a representation by the Bureau as to the structural and mechanical fitness for a particular use or service in accordance with its Rules and standards”. ABS note that “The Classification process consists of the development of rules, guides, standards and other criteria for the design and construction of marine vessels and structures, for materials, equipment and machinery, The classification society normally carries out the design review and construction survey to the criteria set out in their rules but may inspect to project specific criteria by agreement with the owner and builder provided that class criteria are also met and subject to appropriate contractual arrangements. The classification society may also be retained by the owner to carry out various additional surveys and inspections on the owner’s behalf that are outside the normal scope of classification and may carry out surveys on behalf of other authorities such as the flag state. The role of the classification society is essentially the same for a new building or a conversion but the latter may involve repairs to existing structure or equipment as well as modifications and new work. |
|
28 |
Gauging survey |
A gauging survey is a survey of the thickness of some or all of the structural components in the hull to determine the extent of any loss of thickness and hence strength due to corrosion. The measurements are normally taken using ultrasonic thickness gauging equipment. They can be carried out for various reasons including classification survey, condition assessment, repair and re-assessment of scantlings. The classification society will require representative hull thickness measurements to be taken at regular intervals during the service life of a vessel, particularly in conjunction with the 5 yearly Special Surveys of the hull. The specified scope of these measurements increases as the vessel gets older and additional measurements may be required by the class surveyor. |
|
29 |
Original Thickness and Rule Thickness
|
These are two different concepts although sometimes numerically they may be the same. The Rule thickness is usually (see below) the minimum scantling thickness for the structure that comes from application of the relevant Classification Society Rules. The as-built thickness will be the approved scantling thickness. The as-built thickness is the thickness of the steel used when the ship is built. When a ship is built the Rule thickness and the as-built thickness may coincide. However, an owner may wish for an as built thickness that is greater than the Rule thickness. In this case the owner can ask the Classification Society to approve the greater as-built thickness and this will subsequently be used for future inspections. Having a scantling thickness that is greater than the minimum is not normally a concern for the Classification Society. In the event of a reassessment, it is the approved scantling thickness that changes. The as built thickness remains the same.
|
|
30 |
Section Modulus
|
In structural terms a ship can be represented as a beam. When the beam bends in response to a bending moment, the ratio between the bending moment and the stress at any location in the cross section of the hull is called the Section Modulus. It is a function of the scantlings of the cross section that depends on both shape and orientation of individual structural members. |
|
31 |
Seams |
Longitudinally orientated welds between strakes are referred to as seams.
|
|
32 |
Butts |
Transversely orientated welds where plates join together at their ends are referred to as butts.
|
STENA CONTINENT Main Structural Components
.png)
|
1 |
Deck Plating |
12 |
Longitudinal Bulkhead Plating |
|
2 |
Sheer Strake |
13 |
Longitudinal Bulkhead Stiffeners |
|
3 |
Side Shell Plating |
14 |
Deck Transverse Centre Tank |
|
4 |
Bilge Plating |
15 |
Bottom Transverse Centre Tank |
|
5 |
Bottom Shell Plating |
16 |
Deck Transverse Wing Tank |
|
6 |
Keel Plate |
17 |
Side Shell Vertical Web |
|
7 |
Deck Longitudinals |
18 |
Longitudinal Bulkhead Vertical Web |
|
8 |
Bottom Longitudinals |
19 |
Bottom Transverse Wing Tank |
|
9 |
Centreline girder |
20 |
Cross Ties |
|
10 |
Bilge Longitudinals |
21 |
Transverse Web Face Plate |
|
11 |
Side Shell Longitudinals |
|
|