U.S. Fidelity and Guar. v. Braspetro Oil Services

• Decision Date: 25 July 2002
• Docket Number: No. 98 CIV.3099 JGK.,No. 97 CIV.6124 JGK.,97 CIV.6124 JGK.,98 CIV.3099 JGK.
• Citation: 219 F.Supp.2d 403
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY and American Home Assurance Company, Plaintiffs, v. BRASPETRO OIL SERVICES COMPANY, Bank of Tokyo-Mitsubishi, Ltd. (formerly known as Bank of Tokyo Ltd.-Japan), and Long Term Credit Bank of Japan, Ltd., Defendants. United States Fidelity and Guaranty Company and American Home Assurance Company, Plaintiffs, v. Petroleo Brasileiro S.A. — Petrobras, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

219 F.Supp.2d 403

UNITED STATES FIDELITY AND GUARANTY COMPANY and American Home Assurance Company, Plaintiffs, v. BRASPETRO OIL SERVICES COMPANY, Bank of Tokyo-Mitsubishi, Ltd. (formerly known as Bank of Tokyo Ltd.-Japan), and Long Term Credit Bank of Japan, Ltd., Defendants.

United States Fidelity and Guaranty Company and American Home Assurance Company, Plaintiffs, v. Petroleo Brasileiro S.A. — Petrobras, et al., Defendants.

No. 97 CIV.6124 JGK.

No. 98 CIV.3099 JGK.

United States District Court, S.D. New York.

July 25, 2002.

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Dana Klings, New York City, Andrew J. Lorin, Wold, Block, Schorr and Solis-Cohen, LLP, New York City, Neil L. Glazer, Dana B. Klinges, Wolf, Block, Schorr and Solis-Cohen, LLP, Philadelphia, PA, for U.S. Fidelity & Guar. Co., American Home Assur. Co.

Duncan Hume, Cameron, Cameron, Hornbostel & Butterman, Washington, DC, Howard L. Vickery, II, Cameron & Hornbostel, LLP, New York City, for Braspetro Oil Services Co.

Steven R. Schindler, Schindler Cohen & Hochman LLP, New York City, for Bank of Tokyo-Mitsubishi, Ltd., Long Term Credit Bank of Japan, Ltd.

Howard L. Vickery, II, Cameron & Hornbostel, LLP, New York City, Larry W. Thomas, Duncan Hume, Cameron & Hornbostel, Washington, DC, for Petroleo Brasileiro SA Petrobras.

John W. Dreste, Ernstrom & Sreste, LLP, Rochester, NY, for Sequip Participacoes SA, Industrias Verolme-Ishibras SA, Sade Vigesa SA, SV Engenharia SA.

J. Peter Coll, Jr. Orrick, Herrington & Sutcliffe LLP, NY, John G. Lipsett, Forsythe, Patton, Ellis, Lipsett & Savage, New York City, for Sade Vigesa SA.

J. Peter Coll, Jeffrey A. Conciatori, Kristen Bancroft, Orrick, Herrington & Sutcliffe, LLP, New York City, for Sade Vigesa Corp. of America, Sade Vigesa (Chile), Sade Vigesa Industrial E. Servicios SA.

Jeffrey A. Conciatori, Orrick, Herrington & Sutcliffe, LLP, New York City, for Internacional De Engharia SA.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

KOELTL, District Judge.

                TABLE OF CONTENTS
                Introduction .............................................................. 409
                FINDINGS OF FACT .......................................................... 410
                The Parties ............................................................... 410
                Brasoil Retained Petrobras to Manage the P-19 and P-31 Contracts .......... 414
                The P-19 International Bid Process ........................................ 415
                

                The P-19 Consortium Underbid the P-19 Project ..................................... 416
                The Sureties' Issuance of the P-19 Bond ........................................... 418
                Relevant Provisions of the P-19 Contract .......................................... 419
                Delays in the Commencement of the P-19 Project .................................... 422
                The P-31 International Bid Process ................................................ 424
                The P-31 Consortium Underbid the P-31 Project ..................................... 425
                The Issuance of the P-31 Bond ..................................................... 425
                Relevant Terms of the P-31 Contract ............................................... 426
                Initial Efforts to Address the Consortia's Cash Flow Problems ..................... 428
                Changes to the EAP and the Establishment of Blocked Accounts in the First
                 Amendments ....................................................................... 431
                Comfort Letters and Direct Payments for Equipment ................................. 434
                IVI and the Petrobras Defendants Kept the Sureties Fully Informed of the
                 Developing Crisis ................................................................ 436
                Critical Problems at the end of 1996 and the Beginning of 1997 .................... 438
                Discussions between Petrobras, the Sureties, and the Consortia Regarding the
                 Financial Problems of the Consortia and the Sureties' Obligations under the
                 Bonds ............................................................................ 442
                Additional Funds to Continue Work on the Projects ................................. 447
                Declarations of Default ........................................................... 449
                Brasoil Did Not Fundamentally Change the P-19 Project, Interfere with Construction
                 Make Excessive Changes, Fail to Recognize Change Orders, Fail to Grant
                 Extensions of Time or Otherwise Breach the P-19 Contract ......................... 456
                Brasoil Did Not Fundamentally Change the P-31 Project, Interfere with Construction
                 Make Excessive Changes, Fail to Recognize Change Orders, Fail to Grant
                 Extensions of Time or Otherwise Breach the P-31 Contract ......................... 462
                Accounting Issues ................................................................. 464
                Marubeni .......................................................................... 467
                Damages ........................................................................... 470
                CONCLUSIONS OF LAW ................................................................ 472
                Jurisdiction ...................................................................... 472
                Choice of Law ..................................................................... 474
                The Sureties' Liability under the Performance Bonds ............................... 476
                Damages ........................................................................... 484
                

                The Indemnification Action ................................................ 486
                The Tortious Interference Claim ........................................... 488
                CONCLUSION ................................................................ 490
                

Introduction

These consolidated cases concern the obligations and liabilities of United States Fidelity & Guaranty Co. ("USF & G") and American Home Assurance Co. ("AHAC") (collectively the "Sureties"), pursuant to performance guaranty bonds that were issued by those companies in connection with two massive naval construction projects in Brazil known as the P-19 and P-31 Projects. The Sureties issued the P-19 Performance Bond in the amount of $110,512,660 on behalf of the construction consortium which was to perform the P-19 conversion, as principal, in favor of Braspetro Oil Services Co. ("Brasoil"), as the obligee. The Bank of Tokyo-Mitsubishi Ltd. ("Bank of Tokyo") and the Long-Term Credit Bank of Japan, Ltd. ("LTCB") (collectively the "Japanese Banks"), which had provided funding for the project, were additional obligees on the P-19 Performance Bond under a Dual Obligee Rider to the Bond. The Sureties issued the P-31 Performance Bond in the amount of $163,000,000 on behalf of a similar construction consortium that was to perform the conversion of the P-31 Project, as principal, in favor of Brasoil as the obligee.

The P-19 Project involved the design and conversion of a platform formerly used for oil and natural gas exploration, known as the Treasure Stawinner, into a semisubmersible oil and natural gas production platform. The conversion of the P-19 vessel, which is registered under Panamanian law, was the largest of its kind ever undertaken. The P-31 Project involved the design and conversion of an oil tanker (Very Large Crude Carrier, or "VLCC"), known as the Vidal de Negreiros, into a Floating Production, Storage, and Offloading vessel ("FPSO").

Both the P-19 and the P-31 Projects were plagued by huge cost overruns. Brasoil and its indirect parent, Petroleo Brasileiro S.A.Petrobras ("Petrobras"), claim that these overruns were caused by the construction consortia's substantial underbids on both projects and by market conditions for which Brasoil and Petrobras were not responsible. Therefore, Brasoil and Petrobras claim, they justifiably declared the construction contracts to be in default and called on the Sureties to meet their obligations on the Bonds. When the Sureties failed to do so, Brasoil had the projects completed and now looks to the Sureties for the cost of the completion of the projects and costs of delay for the projects. In addition to many other arguments and theories, the Sureties claim that Petrobras, which was managing the projects for Brasoil, substantially changed the nature of the projects by making numerous changes in the requirements of the contracts, without notice to the Sureties, and that it was these changes, for which the construction consortia had not been compensated, that vastly increased the costs of the projects. The Sureties claim that the construction consortia were not actually in default under the construction contracts and that, because of the substantial changes which changed the nature of the contracts, the Sureties were discharged from any requirement to pay any amounts under the Bonds.

In the Declaratory Judgment Action, No. 97 Civ. 6124, the Sureties seek a declaratory judgment against Brasoil and the Japanese Banks that the Sureties have no obligations or liabilities under the Bonds. Brasoil, joined by the Japanese Banks with respect to the P-19 Bond, denies the Sureties' allegations and counterclaim to require the Sureties to pay the amounts owed under the Bonds. In the Indemnity Action, No. 98 Civ. 3099, the Sureties sue Petrobras, the individual members of the construction consortia, and others, claiming, under numerous alternative theories, that the Sureties are entitled to indemnification for any costs they are required to pay under the Bonds. In the Indemnification action, the Sureties claim that by its domination and control of the construction consortia, as well as pursuant to theories of partnership, Petrobras is liable for the indemnification obligations of the construction consortia to the Sureties. The Sureties also claim that Petrobras tortiously interfered with the payment obligations of the construction consortium on the P-19 Project and Brasoil under a payment bond issued to secure financing provided to the P-19 Project by Marubeni America Corp. ("MAC"). The Sureties have also sued the members of the construction consortia and others, but those...