U.S. Fidelity and Guar. v. Braspetro Oil Services, Docket No. 02-9185.

• Citation: 369 F.3d 34
• Decision Date: 20 May 2004
• Docket Number: Docket No. 02-9187.,Docket No. 02-9185.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Parties: UNITED STATES FIDELITY AND GUARANTY COMPANY and American Home Assurance Company, Plaintiffs-Counter-Defendants-Appellants, v. BRASPETRO OIL SERVICES COMPANY, Petroleo Brasileiro S.A. — Petrobras, Bank of Tokyo-Mitsubishi, Ltd., formerly known as Bank of Tokyo, Ltd.-Japan, and Long-Term Credit Bank of Japan, Ltd., Defendants-Counter-Claimants-Appellees.

369 F.3d 34

UNITED STATES FIDELITY AND GUARANTY COMPANY and American Home Assurance Company, Plaintiffs-Counter-Defendants-Appellants, v. BRASPETRO OIL SERVICES COMPANY, Petroleo Brasileiro S.A. — Petrobras, Bank of Tokyo-Mitsubishi, Ltd., formerly known as Bank of Tokyo, Ltd.-Japan, and Long-Term Credit Bank of Japan, Ltd., Defendants-Counter-Claimants-Appellees.

Docket No. 02-9185.

Docket No. 02-9187.

United States Court of Appeals, Second Circuit.

Argued: October 3, 2003.

Decided: May 20, 2004.

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Lawrence S. Robbins, Robbins, Russell, Englert, Orseck & Untereiner LLP, Washington, D.C. (Roy T. Englert, Jr., Gary A. Orseck, Alan E. Untereiner, Arnon D. Siegel, Robbins, Russell, Englert, Orseck & Untereiner LLP, Washington, D.C.; Ian A.L. Strogatz, Brian P. Flaherty & Anthony R. Twardowski, Wolf, Block, Schorr & Solis-Cohen, LLP, Philadelphia, Pa., on the briefs), for Plaintiffs-Counter-Defendants-Appellants.

Howard L. Vickery, Cameron & Hornbostel LLP, New York, N.Y. (Peter A. Hornbostel, Alexander W. Sierck, Jonathan S. Sanoff, Jayni Edelstein Alegeri, Cameron & Hornbostel, New York, N.Y.; John R. Horan, Kathleen M. Kundar, Oleg Rivkin, Fox Horan & Camerini LLP, New York, N.Y.; Lisa C. Cohen, Steven R. Schindler, Schindler Cohen & Hochman LLP, New York, N.Y., on the brief), for Defendants-Counter-Claimants-Appellees.

Armen Shahinian & Scott D. Baron, Wolff & Samson PC, New York, N.Y., for

Amicus Curiae, The Surety Association of America.

Before: CARDAMONE, MINER and CALABRESI, Circuit Judges.

MINER, Circuit Judge.

Plaintiffs-counter-defendants-appellants, United States Fidelity and Guaranty Company ("USF & G") and American Home Assurance Company (collectively, "Appellants" or the "Sureties"), appeal from judgments of the United States District Court for the Southern District of New York (Koeltl, J.), entered after a two-month, technically-complex bench trial that resulted in a damages award of over $370 million and generated a record on appeal of over 15,000 pages. At an earlier stage in this litigation, we were constrained to resolve the issue of subject matter jurisdiction. See U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 199 F.3d 94 (2d Cir.1999) (per curiam) (affirming exercise of subject matter jurisdiction pursuant to the commercial activities exception to the Foreign Sovereign Immunities Act). The District Court's decision in this case has been described as "perhaps the most important in the field of surety law in several decades" and as having "[redefined] the ground rules ... for surety companies."¹

One of the bedrock principles of our American system of law is that triers of fact, rather than appellate courts, are best situated to resolve issues of fact. Appellants, however, have effectively asked this Court to act in contravention of this principle by presenting us with a number of "legal" arguments that, upon close examination, devolve to a common nucleus — an invitation to this Court to set aside one or more of the factual findings underlying the District Court's determination that the Sureties were liable under the performance bonds at issue. We find no clear error in any of the District Court's factual findings and no merit in any of the challenges to the District Court's legal rulings as to Appellants' liability.

But that is not the end of the matter, as the Sureties have raised two arguments that we do find to be meritorious. Specifically, Appellants contend that the District Court erred in awarding defendants-counter-claimants-appellees $62,592,000 in liquidated damages and $36,730,905 in attorneys' fees and expenses. With regard to these discrete issues, we find ourselves in agreement with the Sureties. Therefore, we vacate those portions of the judgments of the District Court holding Appellants liable for a total of $99,322,905 in liquidated damages and attorneys' fees and expenses, and remand for recalculation of prejudgment interest and for other proceedings consistent with this opinion. We affirm the judgments of the District Court in all other respects.

BACKGROUND

Familiarity with the facts giving rise to these appeals is assumed, as those facts are set forth in the District Court's comprehensive published opinions. See U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 219 F.Supp.2d 403 (S.D.N.Y.2002) ("Braspetro I"); U.S. Fid. & Guar. Co. v. Braspetro Oil, 226 F.Supp.2d 459 (S.D.N.Y.2002) ("Braspetro II"). We relate below those facts and proceedings relevant to the present appeals.

I. The Parties

Appellants provide surety bonds to guarantee obligations in the construction industry. Defendant-counter-claimant-appellee Petroleo Brasileiro S.A. — Petrobras ("Petrobras"), is an instrumentality of the Brazilian government. "Between 1953 and August 6, 1997, Petrobras held a monopoly in Brazil on the prospecting, production, refining, processing, marketing, and transportation of oil, petroleum from other derivatives, natural gas, and other liquid hydrocarbons, as well as other related activities." Braspetro I, 219 F.Supp.2d at 411. Defendant-counter-claimant-appellee Braspetro Oil Services Co. ("Brasoil") is an instrumentality of the Brazilian government and is a wholly-owned "grandchild" subsidiary of Petrobras. Id. Although Brasoil executed the construction contracts that are the subject of these appeals, Brasoil appointed Petrobras through a series of service agreements to be Brasoil's agent — first, to oversee the bidding process leading up to the execution of those contracts; and later, to oversee their implementation. Id. at 414-15. Defendants-counter-claimants-appellees Bank of Tokyo Mitsubishi, Ltd. and Long-Term Credit Bank of Japan, Ltd. (collectively, the "Japanese Banks") provided financing in connection with one of the construction contracts that are the subject of these appeals. Id. at 409, 413. (The appellees, collectively, will be referred to in this opinion as the "Obligees.")

II. The Construction Projects & Contracts

In 1994 and 1995, Brasoil let out for bid two contracts — the "P-19 Contract" and the "P-31 Contract" (collectively, the "Contracts"). The Contracts pertained to two of several massive naval construction projects in Brazil — the "P-19 Project" and the "P-31 Project" (collectively, the "Projects"). The P-19 Contract was let out for bid in 1994; the P-31 Contract, in 1995. Id. at 415-16, 424-25. The P-19 Project involved "the acquisition and conversion of an existing semi-submersible drill rig to be deployed offshore in the Marlim [oilfield]." Id. at 415. The P-31 Project involved "the conversion of the Vidal de Negreiros (the `Vidal'), a Very Large Crude Carrier (`VLCC') into a Floating Production, Storage, and Offloading (`FPSO') unit." Id. at 424. Both Contracts were for engineering, procurement, and construction work, to be performed on a turn-key, lump-sum basis. Equipment and materials constituted most of the Projects' costs, and bids were to be submitted on a lump-sum basis, including profit and overhead. Id. at 419-21, 426.

The bidding process for each of the Contracts was conducted in accordance with Brazilian law, under which each of the Contracts was to be awarded to the lowest qualified bidder. The successful bidder on each of the Contracts was a construction consortium (the "Consortium") led by defendant Industrias Verolme-Ishibras, S.A. ("IVI").² See id. at 413, 415-16, 424-25. The P-19 Contract, which was executed on February 10, 1995, required the P-19 Project to be completed by July 23, 1997 (which date was later extended to September 21, 1997). See id. at 420-21. The P-31 Contract, which was executed on October 25, 1995, required the P-31 Project to be completed by January 11, 1998 (which date was later extended to April 14, 1998). See id. at 425-26.

The Consortium bid $165,532,660 for the P-19 Contract and $163,000,021 for the P-31 Contract, respectively. The Consortium, however, had underestimated and thus underbid both Projects, each by a substantial margin, based on its own unrealistic budgetary assumptions — especially with respect to contingencies for increased labor and equipment costs, exchange-rate fluctuations, and consequent financing costs. See id. at 416-18, 425.

Under the Contracts, progress payments were made according to milestones, which subdivided each of the Projects into individual tasks. Each task was assigned a weight or value according to a payment schedule. The Consortium invoiced Petrobras on a monthly basis, with each invoice listing the milestones that had been completed in the previous month. Petrobras was responsible for confirming that the milestones reported in each invoice had been met and then approving each invoice for payment. The Contracts also gave Petrobras broad rights to inspect the work on the Projects and insist on strict compliance with the terms of the Contracts. In addition, the Contracts permitted Brasoil to make direct payments to vendors at the Consortium's request. See id. at 419-22, 426-28.

The Contracts specified certain "default events" by the Consortium that would permit Brasoil to terminate the Contracts. These default events included bankruptcy, certain unjustified work interruptions, and failure to comply with "contract clauses, specifications, designs[,] or deadlines." Id. at 478. In addition, the Contracts imposed "multas" (which translates from the Portuguese as "penalties" or "fines"), certain of which ("multas moratórias," which translates as "delay penalties") were to be applied in the event of a failure to perform on the part of the Consortium that resulted in a delay in performance — that is, a delay in bringing the P-19 and/or P-31 facilities on line. The delay penalties were based on 0.1% of the total price of each of the respective Contracts, to be imposed for each day of delay, and were in addition to, not in lieu of, the Consortium's other liability for "losses or damages." Finally, the...