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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Kellogg Brown & Root Inc v Concordia Maritime Ag [2006] EWHC 3358 (Comm) (21 December 2006) 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 :
____________________
| 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 |
____________________
Mr Nicholas Hamblen QC and Mr Sean O'Sullivan (instructed by Stephenson Harwood) for the Defendants
Hearing dates:
____________________
Crown Copyright ©
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 concl