Case Nos: 2004 1912 A3
2004 1913 A3
2004 1915 A3
2004 1917 A3
Neutral Citation Number: [2005] EWCA Civ 891
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION (COMMERCIAL COURT)
Mr Justice Moore-Bick
[2004] EWHC 127 (Comm)
Royal Courts of Justice
Strand, London, WC2A 2LL

Friday, 15 July 2005
Before :

LORD JUSTICE PILL
LORD JUSTICE MANCE
and
LORD JUSTICE LONGMORE
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Between :

	PETROMEC Inc
PETRO-DEEP Inc
SOCIETA ARMAMENTO NAVI APPOGGIO SpA	Appellants	
	- and -		
	PETROLEO BRASILEIRO SA PETROBRAS
BRASPETRO OIL SERVICES COMPANY
DEN NORSKE BANK ASA	Respondents	

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(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)
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Miss SUE PREVEZER QC
(instructed by Curtis Davis Garrard, UB11 1AU) for Petromec and Petro-Deep
DAVID SCOREY Esq
(instructed by Watson Farley & Williams, EC2 2HB) for SANA
CHRISTOPHER HANCOCK Esq QC and MALCOLM JARVIS Esq
(instructed by Linklaters, EC2Y 8HQ) for the Respondents
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Judgment
Lord Justice Mance:
(A)	THE APPEAL BY SOCIETA ARMAMENTO NAVI APPOGGIO S.p.A. (“SANA”), PETRO-DEEP INC. AND PETROMEC INC. AGAINST MOORE-BICK J’S JUDGMENT [2004] EWHC 1180 (Comm) 1180 
Introduction and Outline of contractual arrangements
1.	On 20th March 2001, after an explosion and fire involving tragic loss of life, the Petrobras 36 (formerly known as Spirit of Columbus) capsized and sank in the deep water of Brasil’s Campos Basin. She was a vessel constituting the world’s largest offshore production platform, and had been working the Roncador field, discovered in late 1996. Petroleo Brasiliero S.A. (“Petrobras”) had the use of the vessel under a 12 year Bareboat Sub-Charter from 1st January 1997 granted by an associated company, Braspetro Oil Services Company (“Brasoil”).  Brasoil in turn had her use under a 12 year Bareboat Charter and Purchase Agreement (“the Bareboat Charter”) from Petro-Deep Inc. (“Petro-Deep”). Petro-Deep had agreed to buy the vessel by prescribed quarterly instalment payments over a 12 year period from Societa Armamento Navi Appoggio S.p.A. (“SANA”) under a Head Purchase Agreement (“the Purchase Agreement”). SANA, an Italian company, had, in the late 1980s, commissioned the vessel’s construction by Sestri Cantieri Navale S.p.A. (“SCN”) with the assistance of an Italian government subsidy, a SCN credit, and design and project management services provided by Oil Fields Development Ltd. (“OFD”).  OFD, its immediate parent company Tortin Investments Ltd. (“Tortin”) and SANA were as from 1990 associated companies in a group owned by Midland and Scottish Resources plc (“MSR”). The vessel’s use in Brasil under the above arrangements followed the collapse of SANA’s original plans for North Sea use.   
2.	Had the Head Purchase Agreement and the Bareboat Charter been performed to completion, their terms would have obliged SANA to transfer the vessel by bill of sale to Brasoil (or its nominee) at the end of the 12 year payment period. Title was never intended to pass to Petrobras, although Petrobras was the source of the necessary funding in the form of the Sub-charter hire. The Purchase Agreement, Bareboat Charter and Bareboat Sub-Charter were all entered into on and dated 20th June 1997. On the same date the same parties entered with others into a Security Agency Agreement and a Participation Deed and Security Assignment (“the Participation Deed”). Their central aim was to establish a Security Agent (originally ABC International Bank plc (“ABC”), but as from 1st October 2001 Den Norske Bank A.S.A. – “DnB”) to receive and distribute payments which would otherwise have fallen due for direct settlement between the parties to the other documentation. By the Participation Deed, Brasoil assigned to the Security Agent inter alia all its right, title and interest in and to the Bareboat Sub-Charter and earnings, and Petro-Deep likewise assigned to the Security Agent all its right, title and interest in and to the Bareboat Charter and earnings. By clause 4.4 of the Security Agency Agreement, the Security Agent agreed to pay all such amounts received into the Vessel Security Account.
3.	Under the Bareboat Charter, Petro-Deep undertook to procure the upgrading of the vessel in accordance with an agreed specification to the satisfaction of Brasoil and Petrobras. For that purpose, Petro-Deep entered into an Upgrade Agreement dated 20th June 1997 with an associated company, Petromec Inc. (“Petromec”), to which agreement SANA was made party. Petromec in turn engaged a Canadian yard, Davie Industries Inc., to do the upgrading under a shipyard contract dated 14th July 1997. Petro-Deep and Petromec were special purpose vehicles formed for the purpose of these transactions by Mr Efromovich. The Sub-Charter and Bareboat Charter hire had therefore to fund two streams of expenditure, one the instalments of price payable to SANA under the Purchase Agreement, the other the upgrading costs payable by Petro-Deep and Petromec.
4.	The vessel had originally been intended by Petrobras for use on Brasil’s South Marlim field, but it soon became apparent that she would be more useful in a new field called Roncador. The bareboat charters were executed at hire rates which had been negotiated on that basis without regard to the further upgrading which would be necessary for her intended use on the Roncador field. Rather than reformulate the contractual documentation, by then in an advanced state of preparation, the parties executed it on the understanding that Petro-Deep and Petromec would start the different and more expensive upgrade necessary for the Roncador field, and the contractual position would be corrected in due course by an amending agreement. In the event, that took the form of a Supervision Agreement executed in August 1998, back-dated to 20th June 1997. 
5.	Under the agreements, the vessel was required to be and was insured for her full market value, but in any event for not less than 110% of the “Loss Payment”. The Loss Payment was basically the value, from time to time and discounted for acceleration, of all future instalments of the price in the case of the Purchase Agreement or the charter hire in the case of the Bareboat Charter and Bareboat Sub-Charter, plus other outstandings.  It was expressed to be payable “out of the proceeds of an insurance claim or claims and/or from Requisition Compensation and/or by payment [by Petro-Deep in the case of the Purchase Agreement, Brasoil in the case of the Bareboat Charter or Petrobras in the case of the Bareboat Sub-charter] direct”. The insurances (for the placing of which Petrobras was ultimately responsible) should, under clause 7.2 of each of the agreements, have been in the joint names of SANA, Petro-Deep, Brasoil and Petrobras. By an Assignment of Insurances made 20th June 1997, all these parties assigned their right, title and interest in all insurances in respect of the vessel to the Security Agent, to be applied to the Vessel Security Account and dealt with in accordance with the Security Agency Agreement. Petrobras in the event only placed insurance in its and (as the judge held) Brasoil’s names. Brasoil was in that respect in breach of clause 7.2 of the Bareboat Charter and Petrobras in breach of clause 7.2 of the Bareboat Sub-Charter.
6.	The issues before us concern the parties’ respective claims in relation to a significant balance (in round terms US$162 million) resulting from the excess of the insurance proceeds received following the vessel’s loss over any amount required to discharge the Loss Payment. Petrobras, by discounting future sub-charter hire instalments back to the date of loss (20th March 2001), calculated the Loss Payment at $325,626.616.36. They paid this sum to the Security Agent out of their own monies on 18th June 2001. The insurance proceeds, which Petrobras received into its own account in July 2001, totalled $496,750,000. Two issues at once arose from these events and have been resolved at earlier stages of these proceedings: (i) whether discounting should go back to the date of loss (20th March 2001) or the date when the Loss Payment became due (18th June 2001) - in the latter case the Loss Payment should have been $334,557,499.34 and Petrobras’s payment involved a shortfall of $8,930,882.98; and (ii) whether it was sufficient for Petrobras to pay into the Vessel Security Account for distribution by the Security Agent the full insured value of the vessel or whether they should also have procured payment into the Vessel Security Account of the insurance proceeds, or of (at least) the excess (amounting to over $162,192,000) of the insurance proceeds over the Loss Payment.
7.	Issue (i) was resolved against Petrobras and Brasoil by decision of Tomlinson J on 18th February 2003 later upheld in this court: [2003] EWHC 179 (Comm) and [2004] EWCA 156; this led on 6th June 2003 to a further order under which on 25th June 2003 $8,930,882.98 was paid into court with interest, on terms that Petrobras and Brasoil would then be treated as having paid the Loss Payment and overdue interest due under the Bareboat Charter and Bareboat Sub-Charter in full on that date. Issue (ii) was also resolved against Petrobras and Brasoil by an agreed order dated 16th April 2003, under which Petrobras provided, in lieu of the balance of the proceeds, an undertaking in the sum of $162,192,566 plus interest of $5,798,202.23 on terms that:
". . . . (1) . . . . . the Undertaking shall stand in place of the monies to be credited to the Vessel Security Account constituted pursuant to the Security Agency Agreement dated 20th June 1997, representing US$162,192,566 plus interest paid into that account on the date of the establishment of the Undertaking and is deemed to constitute payment of such sum into the Vessel Security Account pursuant to the Security Agency Agreement and (2) the provision of the undertaking shall be deemed to be and shall be treated as a payment in the sum of the undertaking to the Vessel Security Account as defined in and for the purposes of the Security Agency Agreement."
The payment provisions
8.	To set the background to the issues now before us, it is necessary to quote certain provisions of the Head Purchase Agreement:
 “1 DEFINITIONS
"Final Payment" means the sum payable by Petro-Deep to SANA, in order to effect transfer of title to the Vessel to Petro-Deep or its nominee, equal to Lire 206,250,000,000.00. 
11 TOTAL LOSS
11.1 Loss Payment
. . . . . if the Vessel shall become a Total Loss or if for any reason Petro-Deep, Brasoil or Petrobras shall be permanently deprived of her use prior to the end of the Payment Period, Petro-Deep shall pay or procure the payment to SANA (out of the proceeds of an insurance claim or claims and/or from Requisition Compensation and/or by payment by Petro-Deep direct) of the Loss Payment and all Other Indebtedness within 90 days of the occurrence of such total loss or permanent deprivation. 
11.4 After Full Payment
Upon the full payment of the Loss Payment . . . . the Price for the Vessel shall be deemed to be paid in full and Petro-Deep shall or SANA shall ensure that Petro-Deep shall . . . . . (ii) receive from SANA a bill of sale transferring to Petro-Deep or its nominee . . . . . all of SANA's right, title and interest, if any, in the Vessel, including its right, title and interest in and to any insurance proceeds . . . . 
12.2 Payment of Instalments
(1) Petro-Deep shall, throughout the Payment Period, pay the Instalments to SANA for the Vessel on any and each of the Payment Dates up to (and including) 31st December 2008.
(2) The amount of any and each of the instalments to be payable on 1st through last Payment Dates shall be (i) zero (0) for the first (1st) to (and including) the eighteenth (18th) Payment Dates; (ii) Lire 11,458,333,333.00 for the nineteenth (19th) to (and including) the forty-seventh (47th) Payment Dates; and (iii) the aggregate of Lire 11,458,333,333.00 and the Final Payment on the forty-eighth (48th) Payment Date.”
Under the Purchase Agreement, therefore, all instalment payments due and the Final Payment in the event of a total loss or permanent deprivation of the vessel were denominated in Italian Lire (SANA being an Italian company). The basic amount payable quarterly was Lire 11,458,333,333, but nothing was to be paid for the first 18 quarterly instalments. The Final Payment equated in amount with the total of 18 instalments at the basic rate. The reason why 18 instalments were to be withheld and made the subject of a Final Payment relates to the Tortin debt, to which I come in paragraphs 10-11 below.
9.	The Bareboat Charter has been described colloquially as involving an assumption of risk in respect of the vessel by Brasoil on a “hell or high water” basis. Brasoil was in other words to pay the bareboat charter hire, in one way or another, in all conceivable circumstances – in particular, without set-off, deduction, counterclaim or possible counterclaim and whether or not the vessel was available or totally lost or compulsorily acquired. The Bareboat Sub-Charter contained back-to-back provisions to like effect. The Bareboat Charter further provided as follows:
“1 DEFINITIONS
"Final Payment" means the sum payable by Brasoil to Petro-Deep, in order to effect transfer of title to the Vessel to Brasoil, equal to that amount of the Outstanding Indebtedness under the ABC loan which Brasoil acquires from ABC pursuant to the Debt Purchase Agreement. 
11 TOTAL LOSS
11.1 Loss Payment
. . . . . if the Vessel shall become a Total Loss . . . . Brasoil shall pay or procure the payment to Petro-Deep . . . . . of the Loss Payment . . . . . within 90 days of the occurrence of such Total Loss . . . . . 
11.4 After Full Payment
Upon the full payment of the Loss Payment . . . . the Charter Hire for the Vessel shall cease to accrue and Brasoil shall or Petro-Deep shall ensure that Brasoil shall . . . . . (ii) receive from SANA a bill of sale transferring to Brasoil . . . . . all of SANA's right, title and interest, if any, in the Vessel, including its right, title and interest in and to any insurance proceeds . . . .
12 PAYMENT OF CHARTER HIRES
12.2 Payment of Fixed Hire
(1) Brasoil shall, throughout the Charter Period, pay the Fixed Hires to Petro-Deep for the Vessel on any and each of the Hire Payment Dates up to (and including) 31st December 2008.
(2) The amount of any and each of the Fixed Hires to be payable on 1st through last Hire Payment Dates shall be equal to 1/48th of the total hire payable in respect of the Bareboat Charter of the Vessel hereunder . . . . . being US$13,678,612.50 per quarter."
10.	These provisions of the Bareboat Charter were qualified by the Participation Deed. Brasoil required immediate protection as the intended ultimate owner of the vessel. The vessel was subject to a first secured mortgage granted by SANA to secure borrowings by Tortin from ABC to fund the work done by OFD (“the Tortin debt”). So it was agreed that Brasoil should by instalments buy the Tortin debt from ABC, and thus by degrees stand in ABC’s shoes and acquire protection as first preferred mortgagee. To achieve this, clause 9.7 of the Participation Deed provided:
“9.7 It is agreed between all the parties hereto that out of the amount (which shall never exceed US$7,490,000 together with Overdue Interest thereon except in the event of a Loss Payment . . . . . ) of each Fixed Hire Payment, an amount determined in accordance with the Debt Purchase Agreement shall be applied by the Security Agent on behalf of Brasoil towards purchases of the Aggregate Drawings . . . until such time as ABC confirm that they are no longer owed any amounts of principal in respect of the Tortin Debt. . . . . . [T]he parties agree that, notwithstanding clause 9.2, to the extent that any part of such Fixed Hire is paid out of the Vessel Security Account to ABC, such amount shall be deemed to be a direct purchase by Brasoil from ABC of Aggregate Drawings under the Debt Purchase Agreement. Upon such payment and purchase, Brasoil shall be released from its obligation to pay a like amount of Fixed Hire under the Bareboat Charter and Purchase Agreement to Petro-Deep and shall, in lieu thereof, have an obligation to make the Final Payment on the terms and subject to the conditions contained or referred to in clause 12.4 hereof."
11.	Brasoil was thus released from its obligation to pay bareboat charter hire to the extent that it spent money purchasing the Tortin debt from ABC. Clause 12.4 of the Participation Deed provided for amendment of the Bareboat Charter as provided in its second schedule, the effect being that, in the event of the vessel becoming a total loss, Brasoil was obliged to make the Final Payment on the same date as the Loss Payment. The longer the bareboat charters ran, the more of the Tortin debt Brasoil would have acquired, and so the greater would be the Final Payment due from Brasoil to Petro-Deep in respect of the vessel as upgraded. In contrast, the Final Payment due from Petro-Deep to SANA on account of the price of the basic vessel was a flat sum, representing in Lire the original equivalent of the Tortin debt. The Lire depreciated substantially against the dollar between mid-1997 and mid-2001, and one aspect of Petro-Deep’s case is that Petro-Deep was able accordingly to satisfy all its obligations towards SANA in respect of the Loss and Final Payments due under the Purchase Agreement, without needing to use any of the Final Payment it received from Brasoil for that purpose. I shall in due course consider whether the judge was right to reject this submission.
The Issues
12.	In his judgment now under appeal, Moore-Bick J was faced with certain claims which do not arise before us. First, there were minor claims, one by DnB to certain expenses and the other by SANA for failure to place the insurance in its name. Moore-Bick J adjourned these for further consideration and they can be put on one side. Second, Moore-Bick J rejected Petromec’s claim to own any part of the vessel at the time of its loss, on the grounds that items incorporated into the vessel during its upgrade became SANA’s property as and when incorporated and, in any event, that Petromec could have no claim on the insurance, not having been, or been required to be, insured under it. The main issues with which Moore-Bick J was and we are concerned turn upon the application and scope of the Security Agency Agreement and Participation Deed, in the light of the Head Purchase Agreement and the Bareboat Charter and Bareboat Sub-Charter. In very broad outline, it is the contention of SANA and Petro-Deep that the provisions of the Security Agency Agreement (clause 4.1 in particular) are both automatic and mandatory, and that payments have, or ought to have, become due thereunder (after payment of the Security Agent’s charges) as follows:
(a) to SANA under clause 4.1(b)(ii): $248,928.04; 
(b) to Petromec under clause 4.1(b)(iv): $373,158.70; and
(c) to the “SANA account” under clause 4.1(g): the residue, originating from the excess of the insurance proceeds over the Loss Payment.
13.	Once monies reach the SANA account under clause 4.1(g), it is SANA’s and Petro-Deep’s common contention that they belong to SANA. If, contrary to this contention, there is any basis on which Brasoil can claim all or any of such monies out of the SANA account, then
(a) SANA and Petro-Deep maintain that Petro-Deep is, under clause 3.1(i) of the Participation Deed, a secured creditor and/or entitled in priority to the extent of $93 million – this sum equates with the total hire withheld by Brasoil from Petro-Deep to acquire the Tortin debt (cf paragraphs 10-11 above); Petro-Deep pursues its claim to be a secured creditor and to priority on the basis that it acquired the Tortin debt; and
(b) SANA and Petro-Deep seek further to advance for the first time in this court a contention that Brasoil’s claim cannot have arisen prior to 25th June 2003 (when $8,930,882.98 was paid into court with interest after the issue regarding discounting had been resolved - cf paragraph 7 above), and that accordingly SANA must in any event be entitled to the interest which would have been earned on the $162,192,566 (representing the excess of the insurance proceeds over the Loss Payment) if such excess had been paid into the Vessel Security Account in June/July 2001 until 25th June 2003; such interest corresponds broadly with the $5,798,202.23 deemed to have been paid into the Vessel Security Account under the undertaking recited in paragraph 7 above plus further interest earned or deemed to have been earned in the period between 16th April 2003 and 25th June 2003.
The Security Agency Agreement and Participation Deed
14.	These submissions involve analysis of the relevant provisions of the Security Agency Agreement and Participation Deed. Clause 4.1 of the Security Agency Agreement provides: 
“4.1	Waterfall in respect of the Vessel Security Account: Subject to the Security Agent receiving notification from the Account Bank of any credit to the Vessel Security Account prior to 5 p.m. (London time) on any date (the "Relevant Date"), the Security Agent (both before and after any enforcement of the Collateral) shall as provided in this Agreement by 2 p.m. (London time) on the Relevant Payment Date give an Instruction to the Account Bank to make payments out of the Vessel Security Account for same day value in respect of the Proceeds in the following order:
(a) first, to the Security Agent (i) in an amount equal to the amounts payable pursuant to Clause 10.2, to the Security Agent, and (ii) to meet the Security Agent’s obligations under Clause 8.15, to the Security Agent Account;
(b) secondly:
(i) in an amount not exceeding the Vessel Basic Hire Payment  . . . . . to the extent that any amount is then due and payable under the Debt Purchase Agreement, to the ABC Account;
(ii) in an amount equal to the Vessel Basic Hire Payment less the amount paid pursuant to paragraph (i) above, to the SANA Security Account;
(iii) in an amount not exceeding the Upgrade Basic Hire Payment equal to the amounts payable pursuant to Clause 10.1, to the Security Agent Account; and 
(iv) in an amount equal to the Upgrade Basic Hire Payment less any amount paid pursuant to paragraph (iii) above, to the Petromec Account;
…..
(g) seventhly, any remaining balance, to the SANA Account."
15.	Clauses 3.1, 3.2, 3.3 and 3.4 of the Participation Deed provide as follows:
“3 Assignment and Covenants
3.1 SANA and each of the Obligors hereby undertakes and covenants to the Security Agent as follows:
(i) in the case of SANA, to pay or discharge all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally or in any capacity whatsoever) on the due date and in the manner provided therefor (the “SANA Secured obligations”) (a) as guarantor of the Tortin Debt, and as obligor under the SCN Debt and the SANA Obligations and (b) to account to Petro-Deep under the Head Purchase Agreement for any excess sales proceeds deriving from any sale by it of the Vessel or any excess insurance proceeds following any total loss of the Vessel pursuant to Clause 13.3(2) or Clause 11.4, as the case may be, of the Head Purchase Agreement;
(ii) in the case of Petro-Deep to pay or discharge all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally or in any capacity whatsoever) on the due date and in the manner provided therefor (the “Petro-Deep Secured Obligations”) (a) to SANA under the Head Purchase Agreement and (b) to Petromec under the Upgrade Contract and (c) to account to Brasoil under the Bareboat Charter and Purchase Agreement for any excess sale proceeds deriving from its interest in any sale of the Vessel or any excess insurance proceeds following a total loss of the Vessel pursuant to Clause 13.3(2) or Clause 11.4, as the case may be, of the Bareboat Charter and Purchase Agreement; and 
(iii) in the case of Brasoil to pay or discharge all present and future obligations and liabilities (whether actual or contingent and whether owed jointly or severally or in any capacity whatsoever) on the due date and in the manner provided therefor (the “Brasoil Secured Obligations”) to Petro-Deep under the Bareboat Charter and Purchase Agreement;
the SANA Secured Obligations, the Petro-Deep Secured Obligations and the Brasoil Secured Obligations being herein together referred to as the “Secured Obligations”.
3.2 SANA and each of the Obligors hereby assigns and agrees to assign with full title guarantee to the Security Agent as fixed security for the performance by each of them of their respective Secured Obligations all of its right, title and interest, if any, in and to any Vessel Proceeds to which it may be or at any time become entitled and will upon the request of the Security Agent from time to time give notice to any person by whom any such Vessel Proceeds may be payable requesting such person to pay any such Vessel Proceeds directly to the Vessel Security Account or as the Security Agent may from time to time direct.
3.3 SANA hereby:
(i) assigns to the Security Agent as fixed security for the payment and due performance by it of the SANA Secured Obligations with full title guarantee all of its right, title and interest in and to the Head Purchase Agreement and the Earnings, including all sums payable or paid to it in respect of the Price;
(ii) assigns to the Security Agent as fixed security for the payment and due performance by it of the SANA Secured Obligations with full title guarantee all of its right, title and interest in and to the Petro-Deep Security; and 
(iii) charges in favour of the Security Agent as security for the payment and due performance by it of the SANA Secured Obligations, by way of first fixed charge all moneys (including interest) from time to time standing to the credit of the SANA Security Account and the SANA Account.
3.4 Brasoil hereby assigns to the Security Agent as fixed security for the payment and due performance by it of the Brasoil Secured Obligations with full title guarantee all of its right, title and interest in and to the Bareboat Sub-Charter Agreement and the Earnings, including all sums payable in respect of Lease Rentals.”
The Waterfall
16.	I take first the submission that the “waterfall” provisions of clause 4.1 of the Security Agency Agreement have the automatic and mandatory effect of requiring any balance to be paid into the SANA account and of precluding any claim by Brasoil or Petrobras to them, irrespective of whether SANA or Petro-Deep can show any other basis of entitlement. Brasoil’s and Petrobras’s first response is that the Security Agency Agreement must be seen as security, and as inapplicable to the excess of the insurance proceeds over the Loss Payment, once all primary obligations under the Bareboat Charter and Bareboat Sub-Charter were satisfied and no other obligations remained under any of the transaction documents other than the Security Agency Agreement. Their alternative response is that, even if the waterfall provisions remain applicable in such circumstances, the “excess” of the insurance proceeds remaining after paying the Loss Payment and any other such obligations must have been intended to be paid to Brasoil. The judge rejected the first response. In describing the general relationship between the Head Purchase Agreement, the two bareboat charters and the Upgrade Agreement on the one hand and the other agreements, particularly the Security Agency Agreement, on the other, he accepted that they were intended to dovetail and be mutually consistent. But he also considered that the former could be described as “primary” contracts, to which the security arrangements were essentially “secondary” in the sense that (a) the intention behind them was to ensure that those who ought to be paid were paid and (b) they were not themselves the source of the obligations to buy and sell the vessel, to pay the price for it, to insure it, to carry out upgrade work and to pass title to it.  However, although this was the general rationale of the agreements, the obligation to pay the insurance monies into the Vessel Security Account was on its face absolute (as Petrobras and Brasoil had accepted by the order dated 16th April 2003) and, once such monies were received into that account, the waterfall applied. But that did not in the judge’s view mean that the insurance proceeds were not intended to retain their character as insurance proceeds in the waterfall, to the extent necessary to enable any “excess” to be identified at the foot of the waterfall and to be paid to Brasoil if the primary agreements so contemplated. In the judge’s view, such an intention appeared in clause 11.4 of the Bareboat Charter and Bareboat Sub-Charter and was reflected in clause 3.1 of the Participation Deed.
17.	Mr Hancock QC representing Brasoil and Petrobras made brief submissions before us challenging the judge’s rejection of Brasoil’s and Petrobras’s first response. He referred us, as he referred the judge, to clause 13 of the Security Agency Agreement:
"13 Reassignment of Collateral
Upon and subject to (a) each of the Secured Parties being under no commitment, obligation or liability (whether actual or contingent) to make advances or provide other financial accommodation to any of Brasoil, Petro-Deep and SANA under or pursuant to the Transaction Documents or to any other person in respect of whose liabilities any of Brasoil, Petro-Deep and SANA has undertaken a liability to any of the Secured Parties under or pursuant to the Transaction Documents and (b) none of Brasoil, Petro-Deep and SANA having any liability (whether actual or contingent) to any of the Secured Parties under or pursuant to the Transaction Documents in respect of any matter or thing whatsoever, as soon as reasonably practicable thereafter and at the request and cost of Petro-Deep, the Security Agent shall . . . . . reassign the property and assets assigned to the Security Agent by or pursuant to the Transaction Documents and release or otherwise discharge the Collateral but any such reassignment, release or discharge shall be subject to the terms of the Transaction Documents."
The Secured Parties in this Agreement are defined as meaning the Security Agent, Petro-Deep, SANA, Brasoil, Petromec, ABC, SCN, OFD, Tortin and others. The judge considered that funds actually credited to the Vessel Security Account (as opposed to the right to receive such funds) could not constitute “property and assets” which might fall to be reassigned under clause 13. It is unnecessary to consider whether this was correct. Mr Hancock accepted before us that if, as the judge also said, any requirement to re-assign under clause 13 depended upon all obligations between all parties having been completely satisfied, then the position must have been at any relevant date that no such requirement had arisen and the collateral remained vested in the Security Agent. In my view, the language of clause 13 does clearly make reassignment dependent upon all obligations between all parties having been satisfied. Mr Hancock then argued that there was nevertheless no basis on which the Security Agent was entitled to pay any balance into the SANA account, having regard to the provisions of clauses 4.12 to 4.13 of the Security Agency Agreement. But this is in my view to read too much into the second and third sentences of clause 4.12 and into clause 4.14. The second and third sentences of clause 4.12 are in my view directed only to the requests for notifications and notifications received in relation to the specific subject-matter of clauses 4.6, 4.7, 4.8 and 4.10; they do not apply to all payments out of the Vessel Security Account, or therefore to payments out of it into the SANA account under clause 4.1(g). Clause 4.14 is directed to payments which are in terms of the Security Agency Agreement mistaken.  The judge was therefore in my opinion correct in concluding that the waterfall was and is applicable to the Loss Payment and to the further sums to be treated as paid into the Vessel Security Account under the undertaking of 16th April 2003.
18.	I turn on this basis to consider the challenge by Miss Prevezer QC for Petro-Deep and Mr Scorey for SANA to the judge’s acceptance of Brasoil’s and Petrobras’s alternative response. Miss Prevezer (who, although not formally representing SANA, presented oral arguments which embraced their case as well as Petro-Deep’s) maintains that clause 11.4 in the Purchase Agreement and the Bareboat Charter has no relevance to the present situation, for a variety of reasons. She points out, first, that it appears in the original transaction agreements, and suggests that it is in effect superseded by the automatic and mandatory provisions of the Security Agency Agreement. She relies, secondly, on the fact that it refers to “SANA’s right, title and interest, if any, in the Vessel, including its right, title and interest in and to any insurance proceeds”, and points out that Petrobras failed to ensure that SANA was a named insured, and that SANA therefore had no right, title or interest in the insurance proceeds, except insofar as the judge was right to consider that it did under the Security Agency Agreement as a result of the undertaking given on 16th April 2003. Miss Prevezer’s third and basic submission is that the SANA account cannot be regarded as containing insurance proceeds at all. Once monies have gone into the waterfall, she submits that they are funds, nothing more, and the judge was wrong to consider that clauses 11.4 and 3.1 could have any relevance. Further, even if they did have any relevance, their only effect, having regard to the provisions of clauses 3.3(iii) and 3.5 of the Participation Deed, would be to require the payment of further monies into the Vessel Security Account which would then have to be redistributed down the waterfall and would end up once again in SANA’s account under clause 4.1(g) of the Security Agency Agreement.
19.	The first of Miss Prevezer’s points faces the difficulty that clauses 3.1 and 3.2 of the Participation Deed envisage clause 11.4 as having continuing relevance. Indeed, as I understand it, Miss Prevezer would be prepared to accept that clauses 3.1 to 3.5 could operate after and outside the waterfall if SANA had had any interest in the insurance proceeds independently of clause 4.1(g) of the waterfall. That seems to me in any event correct. Clause 3.1 is designed to create obligations on SANA and Petro-Deep which are capable of operating on and binding the SANA account. The rights conferred in favour of Petro-Deep by SANA under clause 3.1(i) are supported by the charge on inter alia the SANA account under clause 3.3(iii). Clause 3.1(ii) contains back-to-back rights granted by Petro-Deep in favour of Brasoil and supported by the charge under clause 3.5. These provisions must have been intended to operate after the waterfall, not to lead to a circular reactivation of the waterfall.
20.	But that leads to Miss Prevezer’s second point, which amounts to this: that SANA would have to account for insurance proceeds received if it had a right to them, but need not account for insurance proceeds received if it has no right to them. That would be paradoxical. It is true that Petrobras should have insured the vessel in SANA’s name, but, if it had done so, and so given SANA (as the vessel’s actual owner) a right to recover from insurers in respect of the vessel’s loss, clause 11.4 would have meant that SANA’s entitlement would pass to Brasoil upon payment of the Loss Payment together with any Other Indebtedness and any Over-due Interest. SANA can claim any specific loss arising from the failure to insure in SANA’s name, but it is not possible to see any sensible basis upon which SANA can claim to be better off in this situation than it would have been had Petrobras performed its obligation to insure in SANA’s name.
21.	In my view the concept of a “right, title and interest in and to any insurance proceeds” in clause 11.4 is itself wide enough to embrace a de facto interest in proceeds received into the SANA account. But, even if this were not so, the specific obligation under clause 3.1 of the Participation Deed “to account …. for ….. any excess insurance proceeds following a total loss of the Vessel pursuant to ….. Clause 11.4 ….” confirms that clauses 11.4 and 3.1, taken together, should be read as wide enough to cover any receipts out of the insurance proceeds in excess of the Loss Payment together with any Other Indebtedness and any Over-due Interest required to be paid to SANA under the Purchase Agreement or, as the case may be, to Petro-Deep under the Bareboat Charter. 
22.	The conclusions reached in the previous paragraphs correspond with what the judge considered was the obvious commercial sense of the situation. Brasoil was the intended owner of the vessel. Once the full price of the vessel had been paid in bareboat charter hire, the intention was that property should pass to Brasoil. On a total loss before property passed, the intention was that the Loss Payment should, to the extent necessary, stand in lieu of the bareboat charter hire, the price should be treated as paid, and Brasoil should, despite the vessel’s loss, be given a bill of sale transferring to it any interest in the vessel and should receive the benefit of the insurance proceeds – see clause 11.4 of the Purchase Agreement and Bareboat Charter. Agreements expressed to be by way of security should not readily be construed as having been intended to lead to a radically inconsistent result.
23.	Miss Prevezer repeatedly urged on us the supposed need to construe the agreements according to their terms, regardless of commercial considerations. They were, she submitted, highly complex and the parties may have reached a bargain containing elements of chance or apparently haphazard risk that reflected the strengths of their respective positions when contracting. This is possible, but there is nothing to support it in the general structure or language of the agreements. Complex though they certainly are, their natural and obvious interpretation is that the security arrangements constituted by the Security Agency Agreement and Participation Deed were intended to give effect to the general aims of the original Purchase Agreement and the Bareboat Charter and Sub-charter. Clauses 3.1 to 3.5 of the Participation Deed with their reference to clause 11.4 of the Purchase Agreement and Bareboat Charter confirm this. Courts do not now construe agreements literally and without regard to the consequences (if they ever did). Courts construe them in context, and, if and where there is room for legitimate doubt about their intended meaning, courts will favour the meaning which appears better to reflect the general sense and aim of the overall transaction. There is in my view no doubt what that meaning is in this case. I would therefore uphold the judge’s decision on this aspect of the case.
The Final Payment and the Netting procedure
24.	There is however a further reason why, in Miss Prevezer’s submission, clause 11.4 of the Bareboat Charter and clause 3.1 of the Participation Deed did not operate to entitle Brasoil to recover any excess insurance proceeds out of the monies in the SANA account under clause 4.1(g) of the Security Agency Account. It relates to the alleged non-payment by Brasoil of the Final Payment to Petro-Deep. Such payment, being part of “the Other Indebtedness” referred to in clause 11.4 and being required to be paid at the same time as the Loss Payment (cf paragraph 11 above), was a precondition to the operation of clause 11.4. The sum of $93 million by way of Bareboat Charter hire was withheld by Brasoil from Petro-Deep to acquire the Tortin debt (cf paragraphs 10-11 above). That sum became due from Brasoil to Petro-Deep on the vessel becoming a total loss (cf paragraph 11 above). Petro-Deep maintains that it has never been paid. Brasoil maintains that the obligation to pay it was satisfied by a netting procedure provided by clauses 12.1-3 of the Participation Deed. In the event that Brasoil is right about this, Petro-Deep makes an alternative submission, which is that the effect of the netting procedure, in the actual circumstances prevailing, was to transfer the benefit of the Tortin debt to it, and that it thus acquired a right to the value of that debt ($93 million) out of the SANA account, having regard to the guarantee of payment of the debt given by SANA in clauses 3.1(i) and (iii) of the Participation Deed. I leave that alternative submission to one side for the moment.
25.	Clause 12 of the Participation Deed provides for the Final Payment under the Bareboat Charter to be satisfied, and the Tortin debt dealt with, as follows:
“12. Acknowledgment and Variations to Charter Documents
12.1 The parties to this Deed each acknowledge that when Brasoil is required to make the Final Payment in accordance with the Bareboat Charter and Purchase Agreement . . . . . then
(i) immediately prior to making the Final Payment, Brasoil will agree to waive and release Tortin from its obligations to pay any interest in respect of the Tortin Debt . . . . .
(ii) Brasoil shall pay the Final Payment subject to (a) Tortin simultaneously repaying to Brasoil in full the amount of the Tortin Debt . . . . ; and (b) title to the Vessel passing from SANA to Brasoil simultaneously with or immediately prior to the making of such Final Payment (except as provided in the Second Schedule hereto in the event of a Loss Payment falling due); and
(iii) the parties hereto agree that [the] obligation to make the Final Payment referred to in (ii) above may be netted off against and/or effected by instructions to pay, the obligation of Tortin referred to in (ii)(a) above;
(iv) upon such payments or netting being made, Petro-Deep shall be deemed to have fulfilled its obligation to pay a corresponding amount of the Final Payment (as defined in the Head Purchase Agreement) in respect of the Price to SANA and SANA shall have recourse solely to Tortin for that amount; and
(v) Brasoil shall enter into such additional documents as Petro-Deep, Tortin and SANA may reasonably require to release and discharge the ABC mortgage, the ABC security and the Tortin Debt.
12.2 The parties hereto agree that the operation of the provisions of each of clause 12.1(ii), (iii), (iv) and (v) shall each be conditional on the others and shall occur simultaneously with or immediately after title to the Vessel passing to Brasoil or its nominee pursuant to the Bareboat Charter and Purchase Agreement.”
26.	The Debt Purchase Agreement between Brasoil and ABC provided for Brasoil to purchase part of the outstanding principal (described as the "aggregate drawings") each quarter. It provided for three original transfer certificates to be issued by ABC in respect of each instalment for signature by Brasoil, one of which was to be returned to ABC and one sent to Tortin. In the event this did not happen. The judge found that:
“75.	…. those procedures were not properly implemented with the result that by 18th June 2001 no transfer certificates had been issued by ABC despite the fact that Brasoil had by then paid for almost the whole of the debt. ABC sent Brasoil a batch of certificates covering the individual instalments of the debt each dated 10th October 2002 under cover of a letter of the same date, but they were not signed and returned by Brasoil at the time, or indeed subsequently. They were eventually signed by Linklaters on behalf of Brasoil on 27th February 2004. It must follow, therefore, that on 18th June 2001 Brasoil had not acquired the legal title to the Tortin Debt. ”
27.	Miss Prevezer submits that, since Brasoil acquired no legal title, the netting envisaged by clause 12 of the Participation Deed cannot have occurred, at least until 27 February 2004. The judge rejected this submission. He said:
“76.	However, I do not think that necessarily means that the netting off was ineffective. Having paid ABC for the debt pursuant to the terms of the Debt Purchase Agreement, Brasoil had acquired the right to require ABC to complete the transfer of the legal title and had thereby become an assignee of the debt in equity. It is true that clause 12.1 of the Participation Deed did not expressly contemplate that situation, but the effect of netting off the Final Payment against the Tortin Debt was not to discharge the debt but simply to transfer the benefit of it to SANA. Clause 12.1 made no specific provision for Brasoil to novate the debt to SANA, but clause 12.1(v) did oblige Brasoil to execute any documents necessary to discharge it. At any time, therefore, SANA could have required Brasoil to execute whatever documents might be necessary to bring that about. In these circumstances I do not think that legal ownership of the Tortin Debt can be regarded as an essential precondition to an effective netting off under clause 12.1(iii). ”
28.	I agree with the first two sentences of paragraph 76 of the judge’s judgment. For the purpose of netting what matters, in my view, is that Brasoil had the equitable title. Although it does not affect the result on this point, the judge’s analysis of the effect of netting in the remaining sentences of paragraph 76 is more questionable and it gives rise to Miss Prevezer’s alternative submission, to which I now turn.
The effect of netting on the Tortin Debt
29.	Miss Prevezer’s alternative submission is that, if there was (as in my view there was) any netting at all, its effect was to transfer the Tortin debt to Petro-Deep, not to SANA. The submission focuses on the apparent disconformity between the Lire denominated obligations under the Head Purchase Agreement and the Dollar denominated obligations under the bareboat charters. It is here necessary to refer to further parts of clause 9 of the Participation Deed, governing the manner in which obligations under the Purchase Agreement and the bareboat charters were to be treated as satisfied:
“9 Application of Payments
9.1 All sums received into the Vessel Security Account pursuant hereto shall be applied in accordance with the provisions of the Security Agency Agreement and this clause 9.
9.2 SANA and each of the Obligors [i.e. Brasoil and Petro-Deep] and the Security Agent agree that to the extent that any amount is paid under any Charter Document directly into the Vessel Security Account as a result of the assignments by SANA or either of the Obligors contained herein, except as provided in clause 9.7, such payment shall be regarded as satisfying pro tanto the obligation of the Obligor which would, but for such assignment, have been the recipient thereof, to make the corresponding payment due from it to SANA or another Obligor under any other Charter Document.
9.3 The provisions of clause 9.2 shall apply notwithstanding that Petro-Deep's obligation is to pay each instalment of the price in Italian Lire under the Head Purchase Agreement”
30.	It is also relevant to note the provisions of clause 6.16 of an Upstreaming and Standstill Agreement, also dated 20th June 1997, relating primarily to MSR and its subsidiaries (cf paragraph 1 above), to which Petro-Deep was also party. Clause 6.16 provided:
“Petro-Deep agrees that if, as a result of the security assignments contained in the Participation Agreement and pursuant to the provisions of clauses 9.2 and 9.3 of the Participation Agreement it might have been entitled to claim that it had made any overpayment or early payment under the Head Purchase Agreement to SANA, it will waive and irrevocably forego its right to claim any such amount back from SANA, the consideration for such agreement being SANA's agreement to conditionally sell the Vessel to Petro-Deep on terms that the Charter Documents are all entered into simultaneously.”
31.	Miss Prevezer’s submission before us is, as it was before the judge, that, once the Loss Payment was received into the Vessel Security Account in Dollars, Petro-Deep had paid SANA sums in Dollars which were or would have been on conversion into (depreciated) Lire sufficient to satisfy not merely the Loss Payment, but also the full amount of the Final Payment referable to the Tortin debt (cf paragraphs 10-11 above). For this reason alone, she submits that the netting procedure contemplated by clause 12 of the Participation Deed cannot have applied vis-à-vis SANA, and that what in fact occurred was that Petro-Deep acquired the Tortin debt. 
32.	The suggestion that netting would give rise to a transfer or assignment of the Tortin debt was made by Brasoil and Petrobras before the judge. But their final submissions below put the matter more generally, speaking of clause 12 as having the effect of discharging the Tortin debt. The correct analysis of clause 12 is one of law. In my view discharge is the correct analysis of what was intended. Tortin’s liability to Brasoil (as assignee) was to be netted off against Petro-Deep’s claim against Brasoil for the Final Payment. Tortin and Petro-Deep were in short to be treated as if they were one. Alternatively, in order to put Brasoil in funds to pay Petro-Deep, Petro-Deep was to be given instructions to pay Tortin’s debt - a strange concept but one which again implies that Petro-Deep and Tortin were to be equated. Petro-Deep was then to be excused from paying a “corresponding amount of the Final Payment” to SANA. Thereafter, Brasoil was to enter into any additional documents required to release and discharge the ABC mortgage and security and the Tortin debt.
33.	As to the difference between the Lire denomination of the payments due under the Purchase Agreement and the Dollar denomination of the payments due under the Bareboat Charter and Bareboat Sub-Charter, the judge drew the conclusion from clause 9.3 of the Security Agency Agreement that any Dollar hire instalment due under the Bareboat Charter between Petro-Deep and Brasoil and paid under the assignment of hire into the Vessel Security Account fell to be treated not merely as satisfying Brasoil’s corresponding obligation to Petro-Deep under that Bareboat Agreement, but also as satisfying Petro-Deep’s obligation to SANA to the extent that such payment would, apart from its assignment and payment into the Vessel Security Account, have been passed onwards by Petro-Deep to SANA under the Head Purchase Agreement. Petro-Deep was thus protected against all upwards fluctuation in the Lire as against the Dollar. Conversely, as the judge read clause 6.16 with its cross-reference to clauses 9.2 and 9.3, its intention was that, if (as happened) the Lire depreciated against the Dollar, Petro-Deep should not be able to assert that it had made any overpayment or early payment under the Head Purchase Agreement to SANA.
34.	Like the judge I reject the submission that currency fluctuations between the Lire and the Dollar could affect the extent to which the obligations of Brasoil towards Petro-Deep and of Petro-Deep towards SANA marched hand-in-hand in relation to the payments attributable to the capital value of the vessel. As the judge said:
“67.	The inclusion of clause 6.16 also points towards two other conclusions that may have a bearing on the construction of the transaction documents. First, it tends to suggest that the parties were treating this as a dollar transaction, despite the fact that the price payable for the vessel under the Purchase Agreement was denominated in Lire. That would make good sense, of course, because many of the obligations that were to be discharged out of the hire were dollar obligations and the hire payable under the Bareboat Sub-charter was denominated in dollars. Secondly, it suggests that it was not the parties' intention that Petro-Deep should make a profit out of the transaction. It could not make a loss, of course, even if the Lire appreciated against the dollar, because clauses 9.2 and 9.3 of the Participation Agreement between them ensured that a payment by Petrobras was treated as discharging Petro-Deep's corresponding obligations to SANA.”
35.	It follows that the netting which Brasoil was entitled to effect as equitable (or as from February 2004 legal) assignee of the Tortin debt did not transfer the Tortin debt to anyone. Rather, its intended and actual effect was to discharge that debt, and to excuse Brasoil from any further obligation in respect of the Final Payment to Petro-Deep and Petro-Deep from any corresponding obligation (if any) towards SANA.
SANA’s application to amend
36.	It is convenient next to deal with the new point that SANA wishes to advance for the first time in this court, as set out in paragraph 13(b) above. It is possible that, if it had been raised in good time below, this point might have been regarded as within the general language of paragraphs 52-57 of SANA’s Amended Defence and Part 20 Claim and paragraph 4(a) of its Particulars of Claim before the judge. But this itself is questionable and, in any event, the point was never conceived or identified before the judge and does not appear in the notice of appeal or skeleton arguments before us. Mr Scorey for SANA has thus applied to amend SANA’s notice of appeal, and he also seeks if necessary permission to amend SANA’s Particulars of Claim. After reading the documentation which he submitted and hearing further argument from Miss Prevezer (on this point by now specifically instructed by SANA), we indicated that we would refuse SANA’s application to amend its notice of appeal for reasons to be given. We now give our reasons.
37.	The principles applying to an application like the present have been stated in Jones v. MBNA International Bank (CA) (30th June 2000) cited in Civil Procedure Vol. 1 at para. 52.8.2, and were recently applied in this Court in McDonald v. Coys of Kensington [2004] EWCA Civ. 47:
“….. a party cannot ….. normally seek to appeal a trial judge’s decision on the basis that a claim, which could have been brought before the trial judge, but was not, would have succeeded if it had been brought. The justice of this as [a] general principle is ….. obvious. Parties to litigation are entitled to know where they stand. The parties are entitled, and the court requires, to know what the issues are. Upon this depends a variety of decisions, including, by the parties, what evidence to call, how much effort and money it is appropriate to invest in the case, and generally how to conduct the case; and, by the court, what case management and administrative decisions to make and give, and the substantive decision of the case itself. Litigation should be resolved once and for all, and it is not, generally speaking, just if a party who successfully contested a case advanced on one basis should be expected to face on appeal, not a challenge to the original decision, but a new case advanced on a different basis. There may be exceptional cases in which the court would not apply the general principle which I have expressed.”
38.	The most that Miss Prevezer can say in this case is that, if the primary case regarding SANA’s general entitlement had succeeded, then this alternative argument would not have arisen at all, and that it may not raise many or any issues of fact. But I am not myself sure of the latter suggestion. In any event, it seems to me that the point is pre-eminently one of some complexity which would have benefited by being considered and decided in the light of all the evidence by the trial judge before coming to this court. I see nothing in those circumstances to justify permission to raise it for the first time now.
39.	The proposed argument is that, had the excess insurance proceeds of $162,192,566 been paid into the Vessel Security Account when they should have been, they would have earned interest, which, it is said, would have been for SANA’s account, until 25th June 2003 when Brasoil for the first time acquired a right to any payment out of the Vessel Security Account by paying the final $8,930,882.98 of the Loss Payment into court with interest (cf paragraph 7 above). In support of this argument, it is pointed out that the operation of clause 11.4 of the Bareboat Charter depends upon full payment of the Loss Payment, and that this did not occur until 25th June 2003, because of the dispute about discounting which was only then resolved. If, in the meantime, the excess insurance proceeds had been (or are treated as having been) in the Vessel Security Account, then, it is said, any interest earned on them would have enured to SANA’s benefit, without Brasoil having any claim on it when on 25th June 2003 Brasoil acquired a right to the excess insurance proceeds.
40.	There is on any view an element of incongruity in a case which rests on two assumptions, one that the obligation to pay the excess insurance proceeds into the Vessel Security Account was met, the other that the obligation to pay the full Loss Payment was not met. It is far from obvious that SANA could pursue a claim on the basis that Brasoil and Petrobras should have performed one of their obligations, but not the other. I add, as a minor detail, that the claim proposed also includes an allegation that the insurance proceeds should, but for Petrobras’s or Brasoil’s default, have been recovered in June, rather than July 2001, a claim involving a factual assertion upon which the judge never had the chance of ruling. Second, if one proceeds on the basis that the insurance proceeds should have been paid into the Vessel Security Account in June/July 2001, they would have stood there as security for performance of Brasoil’s obligations, and it seems very arguable therefore that the Security Agent could and should have applied them accordingly to meet any shortfall in the Loss Payment, in which case clause 11.4 would at once have been activated. SANA submits that the Security Agent would have been bound to follow the contemporaneous advice given to Brasoil and Petrobras (by Mr Hancock) that the Loss Payment should be discounted to 20th March 2001 and amounted therefore to only £325,626,616.36, but this itself raises potential issues of fact as well as construction. Third, SANA’s claim to automatic entitlement to interest on any sums which did happen to reside for any period in the SANA account is itself not self-evident. There is nothing at all about interest in the Security Agency Agreement or Participation Deed. An informal understanding appears to have been reached in respect of interest on the $325 million Loss Payment during the period between 18th June 2001 and its payment out in early July 2001(cf. further paragraph 43 below). But, even making the (on its face somewhat unlikely) assumption that the further $162 million excess insurance proceeds would, if paid into the Vessel Security Account in July 2001, have remained there until 25th June 2003, there would have been room for argument about who obtained their benefit once Brasoil established its right to the $162 million. In any event, the $162 million was not in fact in that account during that period, and there could be room for argument how far the terms of the undertaking meant that it should be treated as if it was there, earning the interest referred to in the undertaking. The context and purpose of the undertaking could in this respect have been relevant.
41.	Viewing the matter more generally, it would be a pure windfall if the interest enured to SANA. There has been no suggestion that SANA has as a result of the late payment of the full Loss Payment incurred any liability or exposure not compensated by the interest that it has received on the $8,930,882.98 which was withheld but made good on 25th June 2003. Some or all of these points could well have been clarified or elucidated by evidence at first instance. For all these reasons, I do not consider that this court should contemplate attempting for the first time to understand and analyse complicated hypothetical scenarios, uninvestigated and unconsidered at first instance, with a view to permitting a novel claim of questionable value and general merit.
The claims relating to interest earned in June/July 2001
42.	That leaves for consideration SANA’s and Petromec’s claims that payments have, or ought to have, become due to them under clause 4.1 of the Security Agency Agreement (after payment of the Security Agent’s charges) as follows: (a) to SANA under clause 4.1(b)(ii): $248,928.04, and b) to Petromec under clause 4.1(b)(iv): $373,158.70. The claims rest on two facts, the first that interest was earned between 18th June 2001 and payment out in early July 2001 on the $325,626,616.36 paid by Brasoil into the Vessel Security Account on 18th June 2001, and the second that, because of a prior claim of the Security Agent to expenses under clause 4.1(a), there was insufficient money in the Vessel Security Account in early July 2001 to pay out the full amount of SANA’s and Petromec’s entitlement to the Loss Payment plus a proportionate percentage of the interest so earned. The case is that, if the balance of the insurance proceeds (some $162 million) had been paid into the Vessel Security Account in June or July 2001, then there would have been sufficient money in the Vessel Security Account to pay SANA and Petromec the full amounts of their entitlements by way of respectively Vessel and Upgrade Basic Hire Payments under clauses 4.1(b)(ii) and (iv), together with the interest earned thereon since 18th June 2001.  The judge did not deal specifically with these claims put in this way, although there were before him and he dealt with and rejected two alternative ways in which SANA and Petromec sought to advance claims to the same or similar amounts.
43.	Mr Hancock submits that the claims must fail. There was no provision in the Security Agency Agreement for interest to be earned or paid, and, if it happened to be earned, it became no more than another sum in the Vessel Security Account. Further, in his submission, SANA’s and Petromec’s entitlements were satisfied by the payments made into that account in respect of the Vessel and Upgrade Basic Hire Payments, and if it happened that those payments, once in that account, were used up in part in (say) expenses under clause 4.1(a), that was SANA’s and Petromec’s misfortune. They had no right in respect of any other monies which might happen to have been paid into the Vessel Security Account. In my judgment, those submissions fail to distinguish appropriately between Brasoil’s obligations to pay into the Vessel Security Account, and SANA’s and Petromec’s rights to payment out of the Vessel Security Account. The latter rights exist against whatever sums are in that account as security from time to time. Under clause 4.1(b)(ii) SANA had a right to payment out of the Vessel Security Account of the amount of the Vessel Basic Hire Payment (after deduction under clause 4.1(b)(i) of the amount outstanding to ABC for the purchase of the Tortin debt under the Debt Purchase Agreement), while under clause 4.1(iv) Petromec had a right to payment out of the amount of the Upgrade Basic Hire Payment, in each case if there were sufficient monies held in the account by way of security. This there should have been, and would have been, had the balance of the insurance proceeds been paid into the account, as they should have been at latest when received in July 2001. As to interest, the Security Agent approached those interested and asked for agreement that the monies should be taken out of the Security Account and put on deposit, pending their distribution, which it was evidently envisaged might take a little time and in the event took a little longer than the 10 days envisaged by the Security Agency Agreement. SANA and Petromec agreed to this, although Brasoil and Petrobras did not, taking the view at that stage apparently that they were not concerned. The judge recited in paragraph 68 of the judgment that it was at trial common ground that any interest earned would be for the benefit of those entitled to the principal (i.e. for present purposes SANA and Petromec). That seems to me also the inevitable inference. I understand the figures involved will in the light of what I have said be common ground, but, if not, I would invite submissions.
Conclusions
44.	It follows on this appeal that I would allow SANA’s and Petromec’s appeal to the limited extent of their claims in relation to the interest earned in June/July 2001 (cf paragraphs 42-43 above), and dismiss the appeals against Moore-Bick J’s judgment in [2004] EWHC 1180 (Comm) 1180 in all other respects.
(B)	THE APPEALS BY PETROBRAS, BRASOIL AND PETROMEC AGAINST MOORE-BICK J’S JUDGMENT [2004] EWHC (Comm) 127 
45.	I have had the benefit of considering in draft Longmore LJ’s judgment on the issues raised by these further appeals, and, since I am in full agreement with his reasons, I need add nothing other than that I agree that they should be dismissed.
Lord Justice Longmore: 
Introduction
46.	For the purpose of disposing of the second part of this appeal it is necessary to set out some further factual background which I can gratefully take from the judgment of Moore-Bick J.
47.	In August 1995 the semi-submersible oil production platform Spirit of Columbus was delivered in her original form to her owners, Societa Armamento Navi Appoggio S.p.A. (“SANA”), on completion of her construction by the Italian shipyard Sestri Cantieri Navale S.p.A.  However, SANA was unable to employ the vessel and it therefore allowed Maritima Petroleo e Engenharia Ltda (“Maritima”), to negotiate a sale to a third party.  Maritima is a Brazilian company which has for many years been involved in the management of projects for the construction of drilling rigs and production platforms for use in the offshore petroleum industry.  Much of its work had been undertaken for Petroleo Brasileiro S.A. (“Petrobras”), the Brazilian state petroleum company, with which it once had a long and fruitful association.  Maritima was founded by Mr German Efromovich who was at material times its managing director.
48.	In 1996 Mr Efromovich knew that Petrobras had been interested for some time in obtaining the Spirit of Columbus and adapting it for service in the South Marlim oilfield in the Campos Basin.  In about June 1996 Petrobras provided Maritima with a general specification for a production platform suitable for use in the South Marlim field and thereafter  Mr Efromovich began negotiations with SANA, its parent company, Midland & Scottish Resources Plc (“MSR”), the banks and other institutions which had provided finance for the building of the vessel,  and with Petrobras itself with a view to putting in place a scheme that would enable the vessel to be upgraded and made available for that employment.
49.	The first formal record of the parties’ commitment to the project is to be found in a Memorandum of Agreement (“the MOA”) dated 6th November 1996 made between Maritima and Petrobras.  One of the issues for determination in this appeal is whether that agreement was intended to create binding obligations of any kind, but for present purposes it is sufficient to say that it set out the main terms that were to govern the project while contemplating that detailed agreements would be entered into at a later stage to give effect to its terms.
50.	The essential elements of the contractual structure envisaged by the MOA were:-
(1)	Maritima, or a wholly-owned subsidiary to be incorporated for the purpose (referred to in the document as ‘Leaseco’), was to acquire the vessel with a view to upgrading it and transferring title to the second defendant, Braspetro Oil Services Co (“Brasoil”), a wholly-owned subsidiary of Petrobras, under a 12 year bareboat charter with a purchase option at the end of the period;
(2)	Brasoil would in turn make the upgraded vessel available for use by Petrobras under a bareboat sub-charter for the same period.
In the event a new company, Petro-Deep Inc., was incorporated by Maritima for the purposes of purchasing the vessel from SANA and entering into the relevant contracts with Brasoil.  On 10th January 1997 Petro-Deep and Brasoil entered into an agreement described as an ‘Agreement in relation to Bareboat charter with Purchase option’ paving the way for the execution of a 12 year bareboat charter with an option to purchase the vessel at the end of the charter period and a contract for the upgrading of the vessel to make her suitable for service in the South Marlim field.  The vessel was to be re-named P-36.
51.	Towards the end of 1996, however, a very large new oilfield, which has since become known as the Roncador field, was discovered in the Campos Basin. Its discovery came at a time when Brazil was liberalising the regime under which petroleum exploration and production licences were granted with a view to ending the existing state monopoly.  Petrobras considered it vital to its interests to bring the new field into production before these changes came into effect and by January 1997 a proposal had emerged to put P-36 into service in Roncador instead of South Marlim.  It was approved by the board at the end of February.
52.	At that time the Roncador field was still being evaluated and indeed further information about sea conditions and the characteristics of the crude oil contained in the field continued to emerge for some months.  It was already becoming apparent, however, that conditions there were quite different in many respects from those in South Marlim and that it would be necessary to make some significant changes to the design of the upgraded platform to render it suitable.  As a result this became an unusual project in which the design was being developed even while the work on the upgrading was in progress.  This was a new experience for both parties and was made more difficult by the fact that they were acting under severe pressure of time.  From about March 1997 Maritima began working on the design for the Roncador project in place of South Marlim, but the change was not then recorded in any formal agreement.
53.	The negotiation of agreements that satisfied the requirements of all those involved with the vessel, including not only the banks which had financed its original construction but also the banks that had agreed to finance the purchase and upgrading project, proved to be complicated and time-consuming.  This had the result that, having reached agreement in principle on terms to implement the South Marlim project, neither Maritima nor Petrobras wanted to re-open the discussions in order to make the changes that were required to give effect to the Roncador project. That explains why on 20th June 1997 the parties entered into formal agreements designed to give effect to the South Marlim project despite the fact that that project had been superseded months earlier.
54.	The existing liabilities relating to the construction of the vessel as well as the purchase and upgrading of P-36 were all to be financed out of the hire payable by Petrobras under the bareboat sub-charter. In the event it was agreed that the hire should be divided into two;  “Vessel Basic Hire” (in the sum of $7,490,000 per quarter) was to be payable ultimately to SANA interests, while “Upgrade Basic Hire” (in the sum of $6,188,612 per quarter) was to be payable to the company with whom Petro-Deep contracted for the upgrade, Petromec Inc, who intended to assign its share of the hire to banks supporting the project as security for loans. Similarly, the banks that had financed the construction of the vessel were to recover their loans out of the Vessel Basic Hire and they also required security.  In order to protect their position those banks insisted that the company to which the hire was payable should be insulated from any potential liability in respect of the upgrading work.  Accordingly, although Petro-Deep formally undertook to procure the upgrade of the vessel, it was agreed that it could fulfil its undertaking simply by entering into contracts for the work, provided they were approved by Brasoil.
55.	At an early stage in the project Davie Industries Inc, which operated a shipyard in Quebec, was identified as a suitable contractor to carry out the shipyard element of the upgrading works.  Davie enjoyed a reputation for high quality work and it was thought that financial support for the shipyard work could be obtained from the Export Development Corporation of Canada (“EDC”).  However, in order to secure the position of Petro-Deep and to enable it to retain the management of the project, Maritima had incorporated Petromec, for the sole purpose of entering into a contract with Petro-Deep for the upgrade of the platform and managing the work.  Petromec itself entered into contracts with various contractors and suppliers for equipment and specialist services and a contract with Davie for the necessary shipyard work.
56.	Despite the large number of different bodies involved in what was on any view a complicated contractual structure, there were really only two main parties to the project:  Maritima and Petromec, on the one hand, and Petrobras and Brasoil on the other.  Petromec was the contracting party representing Maritima’s interest, but it had no assets of its own and depended entirely on the support it received from Maritima to carry out its functions.  Although Petromec employed a project manager, Mr. Otoniel Reis, and a project team to supervise the upgrade, all commercial decisions of any consequence were taken, on behalf of Maritima interests, by Mr Efromovich.
57.	The relationship between Brasoil and Petrobras was also very close.  Brasoil engaged Petrobras to provide all the management services necessary to perform its obligations in relation to the project and as a result the general supervision and day to day management of the upgrade was carried out by members of Petrobras’s Engineering department.  As might be expected, the funds needed to carry out the project were provided entirely by Petrobras which took all the effective decisions in that respect also.  One consequence of these arrangements was that although Brasoil was a party, and in some cases the only party, to most of the agreements with Petromec and Petro-Deep, all communications were conducted with employees or representatives of Petrobras and all decisions affecting the project were taken by Petrobras both on its own behalf and on behalf of Brasoil.  In these circumstances, whatever Petrobras said or did was intended to affect its own position and that of Brasoil and accordingly, except where it is necessary to distinguish between them, I shall refer in this judgment simply to ‘Petrobras’ as a convenient way of referring to both companies.
58.	Even as the contractual documents giving effect to the South Marlim project (which have been fully described by Mance LJ in the first part of this appeal) were being signed in June 1997, Petromec and Petrobras were aware that at some point it would be necessary to enter into further agreements to reflect the change to the Roncador project.  It is, no doubt, somewhat surprising that Mr Efromovich was willing to begin work on the new project without any kind of formal record of the terms on which it was to be carried out, but the fact that he was so willing was a reflection of the high degree of trust and co-operation that had been built up between the Maritima group and Petrobras over many years.  Mr Efromovich was assured by Petrobras that it would bear the whole of the costs resulting from the change to Roncador and he was prepared to begin work on the faith of that assurance.  After the South Marlim documents had been signed in June 1997, however, both sides began to give some thought to the need to make formal provision for the changes in the contractual documentation required by the new project.  It was also necessary to ensure that Petrobras had the right to supervise the work.  Over the course of the next few months, therefore, there emerged a draft of a Supervision Agreement to be entered into by Petro-Deep, Petromec, Brasoil and Petrobras which, as its name implies, was designed in part to give Brasoil certain rights to supervise the upgrading of P-36.  Another of its functions, however, was to provide for the change from the South Marlim project to the Roncador project.  This it did by substituting an Amended Specification for the original (South Marlim) specification incorporated into the Bareboat Charter Agreement.  The Supervision Agreement was dated as of 20th June 1997 (ie the same date as the South Marlim agreements) but in fact it was not executed until August 1998.  One issue in this appeal is whether the provision in the Supervision Agreement whereby Brasoil agreed to be liable for the “cost to Petromec” included a liability for any profit for Petromec.
59.	The platform arrived in Quebec on 29th August 1997 and work on the upgrade for Roncador began on 26th September.  The project was in financial difficulties almost from the start because it proved difficult to persuade EDC to lend the necessary funds, but in December 1997 Chase Manhattan Bank agreed to make a loan of US$45 million that enabled the work to keep going.  However, funds remained tight and in March and April 1998 Petromec submitted the first of a series of sets of variation orders to Petrobras and hoped in that way to recover some of the cost that had arisen from the change of project.
60.	The discussions that followed gave rise to significant dispute between the parties.  The variation orders identified specific changes to the original specification and put forward claims for the cost likely to be incurred in carrying them out.  However, Mr Efromovich and Mr Reis made no secret of the fact that Petromec was making no attempt to produce detailed evidence of actual cost but was simply putting forward a figure which it regarded as a reasonable amount for the completion of the additional work.  Having costed the work for themselves, the Petrobras engineers considered that only about half the sum claimed by Petromec could be justified. Discussions then took place between the parties.
61.	In the event Petrobras, Petromec and Petro-Deep signed a letter dated 9th July 1998 in which the amount due in respect of these first variations was expressed to be agreed at a little under US$43 million.  Further sets of variation orders were submitted to Brasoil in November 1998 and at various times thereafter.
62.	Throughout the following months the financial position remained difficult, partly because Davie’s own finances were shaky and partly because Petromec was finding it hard to obtain the funds it needed to keep the project going.  In December 1998 EDC finally offered to provide finance, but it seemed likely that it would take some time to complete the formal documentation and the project had to be kept running in the meantime.  Petromec approached Petrobras for a bridging loan of US$40 million.  In the end Petrobras agreed as a first step to make available US$1.5 million a week up to a total of US$15 million in order to ensure that the workforce at the yard was not laid off.  A running battle broke out at about that time between Petromec and Petrobras over whether those payments were to be treated as loans or as further payments on account in respect of the additional costs of the Roncador project.
63.	After elections in Brazil a new board of Petrobras was appointed towards the end of April 1999.  This did not smooth the path of negotiations.
64.	In May 1999 a suggestion was made that Petrobras might make funds available to Petromec by making payments direct to sub-contractors and suppliers.  The formal document which the parties executed in order to give effect to this suggestion was entitled ‘Deed of Payment and Indemnity’ (“DPI”).  One of the recitals to that deed confirmed that certain variation orders that were attached as an appendix were not subject to any further claims.  The circumstances in which the deed came to be executed by Mr Efromovich on behalf of Petromec were in dispute at trial but the judge held that it was a binding agreement.  It is now a further issue in this appeal whether this document provided that the payments to third parties constituted loans carrying interest or whether they were merely payments which could be set off against amounts due to Petromec in respect of the additional costs of the Roncador project.
65.	While the negotiations for the provision of funds in this manner were going on, Petromec was also pursuing negotiations with EDC and Chase Manhattan. EDC was not willing to make a loan to Petromec unless it received a guarantee from Petrobras of Petromec’s obligation to repay it.  There were legal impediments to Petrobras providing a guarantee, but as an alternative Petrobras was willing to provide formal confirmation to Petromec of its obligation to pay hire under the bareboat sub-charter which Petromec could then assign to EDC by way of security. In order to implement that arrangement, Petromec and Petrobras executed a document entitled ‘Deed of Confirmation and Indemnity’ (“DCI”).  There were in fact two such documents since, once EDC had the benefit of an assignment, Chase Manhattan Bank, who had also lent money to Petromec, wanted a similar document.  The documents were, however in identical terms and one clause contained an undertaking by Petrobras to indemnify Petromec against all losses incurred by it in respect of the “upgrade”.  This wording gives rise to another issue between the parties viz whether, by executing the DCI, Petrobras incurred an independent and additional obligation to Petromec to indemnify it against all the additional costs incurred in carrying out the Roncador project.  As presented, this issue came down to the questions whether the DCI imposed obligations additional to those of the Supervision Agreement in relation to the costs of the Roncador Upgrade and, whether, if agreements reached in relation to variation orders were, as the judge held, final at the time they were made, those agreements could be unscrambled so as to allow Petromec to recover further sums in respect of such variations.
66.	By the summer of 1999 both sides seem to have become a little weary of producing and analysing variation orders and arguing over whether Petromec was entitled to additional payments in respect of work that had been covered by earlier variation orders.  A suggestion was made that they should adopt instead what became known as a ‘global payment approach’ under which Petrobras would audit Petromec’s books to ensure that the costs of the work were not being inflated and the parties would seek to agree on the costs of completing the original South Marlim project.  The idea was that Petrobras would pay Petromec the difference (after allowing for what had been paid already) and perhaps also (if Mr Efromovich could persuade it to do so) a mark-up to provide an element of profit on the additional costs.
67.	The global payment approach was attractive to both sides.  It was discussed and agreed at a meeting between Mr Efromovich and Mr Menezes, a newly appointed Petrobras director responsible for the engineering department, over breakfast during the course of a visit to Quebec in June 1999 and there were subsequently meetings between Mr Efromovich and another member of the engineering department, Mr. Nelson, at which the cost of the South Marlim project was discussed.  A team of accountants from Petrobras examined Petromec’s books during the first half of August and at a meeting in September Mr Efromovich and Mr Nelson reached agreement in principle on a figure of US$112 million for the South Marlim costs.  Mr Efromovich asked for a 10% uplift to cover administration and a measure of profit.  It is common ground that Mr Nelson did not agree to that, though Mr Efromovich said he gained the clear impression that Mr Nelson thought that would be fair. At that point Mr Efromovich thought that payment was assured and it was part of Petromec’s case at trial that as a result of the agreements Mr Efromovich had reached with Mr Menezes and Mr Nelson, Petrobras did become bound to pay the difference between the total costs of the project less the amount of US$112 million attributable to South Marlim.
68.	However, the judge held that Mr Efromovich’s optimism proved unjustified. Although a proposal for payment on that basis (including a 10% uplift) was placed before the board of Petrobras at a meeting on 7th October, it was shelved and was never approved.  Meanwhile, the work was well advanced and the approach of winter made it highly desirable from Petrobras’s point of view that the vessel should leave the St. Lawrence before it became frozen in. Arrangements had already been made for it to be dry towed to Brazil for completion, leaving the St. Lawrence during October.  As the time for its departure approached, Petromec began to express concern about payment of the additional costs, but letters were written by Petrobras personnel on 11th and 25th October saying that the matter was still being considered by the board.  In the event Petromec did not take any steps to prevent the vessel’s departure and the platform was formally released to Petrobras on 28th October.  In the event, Petrobras decided not to pursue the global payment approach and litigation ensued.
69.	The parties have made numerous claims and cross-claims against one another.  The judge nobly decided no fewer than 23 preliminary issues in order to assist the parties in compromising their differences.  It is a measure of his success that only 9 of these issues are the subject-matter of this appeal.
The Issues
70.	(1)	Was the MOA a binding agreement when it was entered into?

	(2)	If not, did it become binding in any (and if so in what respects) at any time up to and including the date of signature of the South Marlim Agreements on 20th June 1997?  In particular was Maritima liable for any delay in completion of the upgrading of the rig and for failure to provide a performance bond in respect of the work?

	(3)	If Maritima was under an obligation to provide a performance bond, did Brasoil waive its right to require such a bond?

	(4)	Once the Supervision Agreement was signed and obliged Brasoil to pay the extra costs of further upgrade to make the rig suitable for the Roncador oilfield, were Petromec under any liability to Brasoil for delay in construction?

	(5)	If, on the true construction of the Supervision Agreement, Petromec were so liable, is Brasoil estopped (by convention) from asserting that liability, by reason of a common assumption that Petromec were not so liable?
	(6)	On the true construction of the Supervision Agreement were Petromec confined to a right of receiving the actual cost expended by them in relation to the further upgrade or could they recover a further sum by way of profit on such costs?

	(7)	Was money paid by Brasoil and/or Petrobras directly to sub-contractors to be treated as a loan to Petromec by reason of the terms of the DPI of 21st May 1999?

	(8)	Are Petromec entitled to rely on the terms of the DCI of 6th July 1999 to argue for any wider liability on the part of Brasoil and Petrobras (than the liability they assumed under the Supervision Agreement) in respect of the further upgrade for Roncador?

	(9)	Was there an obligation under the Supervision Agreement on Petrobras and Brasoil to negotiate in good faith with regard to the cost of the Roncador upgrade?  If so, was there an arguable breach of such obligation at the end of 1999 when there was a failure to bring to a successful conclusion negotiations which took place for a global payment approach to such cost on the basis of a total audited cost of upgrade of the rig minus the costs which would have been incurred if Petromec had only been responsible for the originally contemplated South Marlim upgrade (together with a possible uplift)?
(1) and (2)  The Memorandum of Agreement
71.	By the time the MOA was signed on 6th November 1996 considerable progress had been made in establishing the engineering and technical content of the project for the acquisition and upgrading of the platform.  Petrobras had provided Maritima with a basic engineering design in June 1996 (although it still required further development) and the basic structure of the contractual arrangements was taking shape.  Negotiations were under way with Davie and with EDC, but since the plan was to finance both the purchase and the upgrade out of hire payable under a charter to Petrobras, it was difficult to make progress in talks with financial institutions until Petrobras and Maritima had committed themselves in principle to the project and potential lenders were satisfied that it would be structured in a way that met their basic requirements. It is right to point out that none of the parties to the project, including SANA and MSR, had yet given their unconditional agreement to the proposals and that no one expected them to do so until a formal closing took place at which documents embodying the transaction as a whole would be signed.  There was still much to be negotiated and agreed before the project could finally be established.
72.	The first question for consideration is whether the MOA was intended to give rise to legally binding obligations of any kind, or whether it was merely intended to contain a statement of intent.  It was formally laid out in the manner of a legal document and the choice of language suggests that the parties were seeking to achieve something beyond the mere recital of good intentions.  That in itself may be only a slight indication, but it is powerfully reinforced by the opening declaration that:-
“ . . . . in consideration of the mutual covenants contained herein the parties hereto agree as follows: . . . ”
73.	This was preceded by a number of recitals which were intended to provide the context for the substantive provisions that followed.  These recorded that Petrobras had decided to install a production platform;  that the Spirit of Columbus would be suitable for its purposes, if it were upgraded in an appropriate manner;  that Brasoil intended to acquire the vessel, provided it was free of encumbrances and had been upgraded in accordance with Petrobras’s requirements;  and that Maritima warranted that it (either directly or via a company to be incorporated) would acquire the right to transfer the vessel to Brasoil free of encumbrances and would upgrade it in accordance with Petrobras’s requirements.
74.	The substantive terms of the MOA dealt with various aspects of the project. The following are the most important for present purposes:
“1. PARTICIPATION AGREEMENT
PETROBRAS, BRASOIL, MARITIMA, LEASECO, SANA, ABC, FINCANTIERI and MSR, if necessary, and any other Persons, whether Public or Private, whose authorisation, approval or other consent is or might be required for the valid and legal accomplishment of the transaction contained herein, will enter into an Agreement (hereinafter referred to as PARTICIPATION AGREEMENT) with a TRUSTEE, to be nominated under mutual agreement among the related parties, . . . . .
The TRUSTEE’s responsibilities shall, without being limited to, include the following: . . . . . 
Any mortgage, security, credit, interest or other LIEN holder, will also undertake that they will timely give the above mentioned quittances . . . . . . 
2. MARITIMA’S UNDERTAKINGS AND COVENANTS:
In order to fulfil its obligations, as set forth in this MOA, MARITIMA or LEASECO, as applicable, shall, in terms acceptable to PETROBRAS and BRASOIL: (i) acquire the legal right, title and power necessary and sufficient to legally and validly transfer [the vessel’s] use and ownership to BRASOIL . . . . . .
Documentation acceptable to PETROBRAS and BRASOIL that MARITIMA and/or LEASECO, as applicable, has or can fulfil the terms stipulated in the above paragraph constitute, among others, condition precedent to the TRANSACTIONS. If they are not complied with . . . . .the Contracts and Agreements and other documents contemplated in this MOA . . . . . . shall not be signed or executed.
3. UPGRADE
MARITIMA and/or LEASECO, as applicable, undertakes to be fully responsible for the execution and completion of the UPGRADE of [the vessel] in accordance with the SPECIFICATIONS set by PETROBRAS and shall enter into one or more contracts, which will include the following terms . . . . . MARITIMA shall be responsible for builder’s risk and performance bond to be issued in the name of BRASOIL and in terms acceptable to it.  These guaranties shall survive until the UPGRADE is satisfactorily concluded . . . . :
8. CONDITIONS
The following shall constitute Condition Precedent to the existence and validity of the TRANSACTION DOCUMENTS:
. . . . . . . . . . . . . . . . . . . .
c.	Evidence and comfort acceptable to PETROBRAS and BRASOIL that MARITIMA or LEASECO, as applicable, has and will continue to comply with its undertakings and covenants as set forth in this MOA to the extent that the same has not been expressly contemplated in the TRANSACTION DOCUMENTS.
9. GENERAL PROVISIONS
The TRANSACTIONS contemplated in this MOA shall be governed by the TRANSACTION DOCUMENTS referred to herein, and by others that may be necessary to give sufficient comfort of the legality, validity and enforceability required with regard to the TRANSACTIONS. Such TRANSACTION DOCUMENTS shall contain the terms and conditions generally described herein, together with other customary reasonable terms and conditions to be agreed . . . . . . . . 
This MOA shall terminate if any condition stated herein is not satisfied unless it is waived by all the parties hereto.”
75.	The judge considered whether the MOA was intended to be a “legally binding” contractual agreement and said this in paragraphs 31-32 of his judgment:-
“The nature and content of the MOA suggest that the parties did intend it to create legal relations, even if only of a provisional nature, but whether it was effective to achieve anything more than an agreed structure for the proposed transaction is another matter.  The difficulty arises from the nature of the obligations it purported to impose.  The parties to the agreement were Petrobras and Maritima, but the agreement provided in terms for many other bodies to enter into agreements necessary to enable the project to be accomplished. Clause 1, for example, provided for a number of parties, some as yet unidentified, to enter into a ‘Participation Agreement’ and for the appointment of a trustee to be nominated by agreement between them whose function and responsibilities were likewise not fully defined.  Clause 3 set out the terms on which Maritima was to upgrade the vessel in accordance with specifications which were to be set by Petrobras but which were otherwise undefined.  Clauses 4 and 5 provided for a ‘Lease Agreement with Purchase Option’ to be executed between Maritima (or Leaseco) and Brasoil and for a bareboat charter in similar terms to be executed between Brasoil and Petrobras, but in each case the rate of hire (which was one of the critical elements in the whole transaction) was left for agreement at a later date. In view of the fact that neither the specification of work nor the price had been agreed it is difficult to see how the MOA could give rise to a binding obligation to carry through the transaction itself, and if that obligation was lacking, it is difficult to see how any of the other obligations that relate directly to it could have been legally enforceable either.  In my view, therefore, the MOA did not give rise to any legally enforceable obligations between the parties.
However, I do not think that matters very much as things have turned out because it is clear to me that the purpose of the MOA was simply to provide a framework for the transaction which, if it came into existence, would be embodied in what the MOA itself described as the ‘Transaction Documents’.  All those involved in the negotiations for the acquisition and upgrading of the vessel were experienced in transactions of that kind and were well aware that in order to satisfy all the parties involved there would have to be a series of inter-related agreements of some complexity.  That was recognised by clause 9 of the MOA itself.  The parties clearly did not intend the MOA to govern their relationship under those circumstances, except to the limited extent contemplated by clause 8.c.  That is hardly surprising.  Indeed, when one considers the nature of the project it would be surprising if the agreements necessary to implement it had not been intended to contain a complete statement of the parties’ rights and obligations in relation to it.”
76.	Mr Christopher Hancock QC for Petrobras and Brasoil attacked these conclusions of the judge.  He submitted that the judge was wrong to have looked at the matter only at the time when the MOA was concluded in November 1996 but should have considered whether as at June 1997 the MOA had been entirely superseded as a contractual document by the “transaction documents” and whether it was then certain enough to be enforceable to the extent that it had not been superseded by the transaction documents.  Mr Hancock then proceeded to identify two respects in which the transaction documents had, in his submission, not superseded the MOA viz:
(1)	Maritima’s undertaking at the beginning of clause 3 “to be fully responsible for the execution and completion of the UPGRADE of the vessel in accordance with the SPECIFICATIONS set by Petrobras”;  and
(2)	Maritima’s responsibility at the end of clause 3 “for builder’s risk and performance bond to be issued in (sic) the benefit of BRASOIL”.
He asserted that Maritima remained personally bound by these provisions of the MOA after the transaction documents had been signed in June 1997.
77.	Mr Hancock’s argument is misconceived.  First the judge was right to conclude that the MOA was not legally binding at the time it was made.  It contemplated the execution of a complex series of interlocking contractual agreements to be made in the future (as, in fact, happened).  But without any agreement in November 1996 as to (at least) the necessary upgrading to be done to the vessel and the hire to be payable for the vessel, the MOA could never be more than an agreement to negotiate to bring about the contemplated transaction documents.  At this stage, therefore, the MOA was too uncertain or incomplete to constitute a binding legal agreement.
78.	Once one concludes that there was no such binding agreement in November 1996, it is difficult to argue that it became binding at any later date and particularly difficult to argue that once binding contracts were concluded in June 1997 and the MOA had effectively served its purpose, that it should for the first time have some residuary binding effect.  Mr Hancock fastened on condition 8(c) which provided for the continuance of the MOA to the extent that the covenants it set out had “not been expressly contemplated” in the transaction documents.  But this is not a possible argument.  At best, the clause merely provided that, to the extent the covenants were not incorporated into the transaction documents, Petrobras and Brasoil were entitled to “evidence and comfort” acceptable to them that Maritima or Leaseco would continue to comply with their undertakings and covenants;  “evidence” and “comfort” are not apt words to impose legally binding obligations.
79.	Even if Mr Hancock could surmount this difficulty, he would still have to show that the undertakings and covenants on which he seeks to rely have not been provided for in the transaction documents.  He fails in this respect too.  It seems that the MOA contemplated that the company which was to be incorporated and to which it gave the name “LEASECO” was to be both the company which would acquire the vessel from SANA with the intention of chartering it to Brasoil and the company which would upgrade the vessel.  In fact, it was decided that separate companies would be incorporated; Petro-Deep was created as the acquirer while Petromec was incorporated as the upgrader making the upgrade agreement with Petro-Deep.  The purpose of this, as I have already indicated, was to insulate Petro-Deep (and thus the SANA interests) from the risk that payment of hire should (apart from any specific provision of the charter agreement) be subject to diminution for any breaches of the upgrading obligation.  Moreover, part of the purpose of this arrangement was, in the judge’s view, that Petromec should not be liable to Petrobras interests for delay in the completion of the upgrade (or indeed for defective work) such risk being assumed by Brasoil/Petrobras who had the right to approve all the contractors for and the suppliers of equipment for the rig.
80.	It is because the judge came to the above conclusions that Mr Hancock wishes to argue that Maritima became and remained responsible for the execution and upgrade of the vessel according to the specifications and were thus responsible for delays in the vessel’s construction.  The obligation at the beginning of clause 3 of the MOA is that “Maritima and/or Leaseco undertakes to be fully responsible for the execution and completion of the Upgrade” of the vessel. This obligation was performed by the making of the Upgrade Agreement on 20th June 1997 between Petro-Deep, Petromec and SANA, clause 2 of which provided:-
“2.1	Petromec undertakes to Petro-Deep that within 21 months of 3 March 1997 it will procure that the Vessel is upgraded in accordance with the Specification to the satisfaction of Petro-Deep, Brasoil and Petrobras.
2.2	Petromec is entitled to fulfil its undertaking in clause 2.1 by entering into one or more Upgrading contracts provided that
(1)	Petromec obtains Petro-Deep’s and Brasoil’s prior written approval of the Contractor selected for such Upgrading Contract;
(2)	Petromec obtains Petro-Deep’s and Brasoil’s prior written approval of the terms of the Upgrading contract (other than price);
(3)	There is express provision in the Upgrading contract for the rights and obligations under the Upgrading Contract to be transferable from Petromec to Petro-Deep or its nominee.”
By ensuring that this Upgrade Agreement was made in June 1997, Maritima complied with the obligation it had (non-bindingly) assumed in clause 3 of the MOA, Petrobras and Brasoil having the right to approve the Contractors employed by Petro-Deep and the terms of the contracts made with such contractors.  In these circumstances the transaction documents, in my judgment, superseded any obligation which Maritima assumed under clause 3 of the MOA.  There is nothing in clause 3 of the MOA which could impose any specific obligation about completing the upgrade within any particular time although the Upgrade Agreement did, in fact, impose an obligation as between Petromec and Petro-Deep that the upgrading should be completed within 21 months.  There is no justification for saying that clause 3 of the MOA imposes any separate obligation as to delay for which Maritima would become or remain liable once the Upgrade Agreement had been concluded.
81.	The same considerations apply to the question of the contemplated performance bonds.  It is true that the final part of Clause 3 of the MOA provided for Maritima to be responsible for the issue of a builder’s risk and performance bond.  This was not a provision which was forgotten when the Upgrade Agreement came to be signed in June 1997 since clause 3 of that agreement provided under the head of “Performance Security”:-
“Petromec shall, for the benefit of Brasoil, provide or procure the provision of security (whether by guarantee, bond or otherwise) in a form reasonably acceptable to Brasoil for the due and punctual performance of the upgrade of the vessel.”
It is impossible that the parties could have contemplated, once this provision of the Upgrade Agreement had been made, that Maritima should in some way remain liable under the provisions of the MOA, even if the MOA were to be a binding legal agreement.  By June 1997 any obligation there was in this respect had also been superseded by the obligations in the Upgrade Agreement and there was thus nothing on which clause 8(c) of the MOA could bite.  The fact that Brasoil was not itself a party to the Upgrade Agreement is nothing to the point;  it was content to put its name to those of the transaction documents to which it was a party in full knowledge of the manner in which the performance bond obligation was fulfilled.
(3)  Waiver of the right to require a performance bond from Maritima
82.	Since there never was any right to require a performance bond from Maritima or indeed any right to complain that such a bond had not been provided, any question of waiver is academic and need not be decided on this appeal.  It is a striking fact, however, that neither Brasoil nor Petrobras asked for a performance bond before the parties became embroiled in litigation.  Had any obligation existed, the argument that it had been waived would be strong.
(4)  The Supervision Agreement;  Liability for delay?
83.	Before considering the parties’ contentions in relation to the Supervision Agreement it is necessary to refer again to the agreements actually concluded on 20th June 1997 which the judge referred to as the “South Marlim Agreements”.  I have already said that one of the intentions of these agreements, as they were made, was that Petro-Deep should be insulated from any risk of the hire being diminished by reason of any breach of the obligation of upgrading the vessel, save as expressly accepted by Petro-Deep in the Bareboat Charter and Purchase Agreement.  I have also referred to the separate incorporation of Petromec and the fact that the obligations in relation to the upgrade were assumed by Petromec to Petro-Deep rather than to Petrobras or Brasoil.  The four critical agreements made in June 1997 were:-
	(i)	an agreement for the purchase of the vessel by Petro-Deep from SANA (“the Head Purchase agreement”);
	(ii)	an agreement between Petro-Deep and Brasoil for the bareboat charter of the vessel, including the upgrading of the vessel and her eventual sale to  Brasoil (“the Bareboat charter”); 
	(iii)	an agreement between Petro-Deep and Petromec for the upgrading of the vessel (“the Upgrade Agreement”);and
	(iv)	an agreement between Brasoil and Petrobras for the bareboat sub-charter of the vessel  (“the Bareboat Sub-charter”).
84.	The Bareboat Charter contained the following provisions:-
“20.1	Petro-Deep’s undertakings with regard to upgrade
	Petro-Deep undertakes that within twenty one (21) months of 3 March 1997 it will procure that the Vessel is upgraded in accordance with the Specification to the satisfaction of Brasoil and Petrobras.
	20.2 	Upgrading Contracts
	Petro-Deep is entitled to fulfil its undertaking in Clause 20.1 by entering into one or more Upgrading Contracts provided that:
(1)	Petro-Deep obtains Brasoil’s prior written approval of the Contractor selected for such Upgrading Contract.
(2)	Petro-Deep obtains Brasoil’s prior written approval of the terms of the Upgrading Contract (other than price).
(3)	There is express provision in the Upgrading Contract for the rights and obligations under the Upgrade Contract to be transferable from Petro-Deep to Brasoil or its nominee.”
Similar undertakings were given by Petromec to Petro-Deep in the Upgrade Agreement.
85.	As the judge observed, Petrobras and Maritima had, even before the ink was dry on the South Marlim agreements, begun to consider what further agreements were needed to give effect to the project as originally envisaged, as well as the change from South Marlim to Roncador.  It was recognised that two broad aspects of their relationship had to be covered:  Brasoil’s involvement in the supervision and approval of the work (which was essential if the agreements were to give it no effective rights against Petro-Deep or Petromec) and the changes to the financial arrangements needed to accommodate the new project.  During the autumn of 1997 drafts of an agreement passed between the parties which reached their final form in early 1998.  However, the agreement itself was not signed until August 1998.
86.	The Supervision Agreement is dated “as of 20th June 1997” and it is common ground that it was intended to be read together with and as part of the South Marlim agreements.  It is also common ground, therefore, that it was intended to regulate the parties’ relationship with respect to events that had occurred between June 1997 and August 1998.  Petro-Deep, Petromec, Brasoil and Petrobras were all parties to the agreement and this is a convenient moment to set out the terms on which both Mr Hancock and Miss Prevezer QC (for Petromec) sought to rely in their arguments on this part of the appeal:-
“Whereas:
(A)	. . . . . . Petro-Deep has undertaken to Brasoil to procure that the Vessel is upgraded in accordance with the Original Specification to the satisfaction of Brasoil and Petrobras within a specified period; and
(B)	. . . . . . . Petromec has undertaken to Petro-Deep to ensure the Vessel is upgraded in accordance with the Original Specification to the satisfaction of Petro-Deep, Brasoil and Petrobras within a specified period; 
. . . . . . . . . . . . . . . . . . . .
2	Shipyard Contract
Subject to the rights of supervision herein granted:
2.1	Brasoil hereby approves the terms of the Shipyard Contract for all purposes under the Bareboat Charter and Purchase Agreement.
2.2	Petro-Deep hereby approves the terms of the Shipyard Contract for all purposes under the Upgrade Agreement
3	General Right of Supervision
Petrobras, Petro-Deep and Petromec hereby grant to Brasoil or its nominee certain rights of supervision and approval in respect of the carrying out of the work 
. . . . . . . . . . . . . . . . . . . .
5	Specific Rights of Supervision
5.1	Brasoil shall be entitled to approve (or otherwise):
(i)	the Upgrade Contractors;
(ii)	the Contracts other than price:
(iii)	any plans, drawings specifications, calculations and other matters required under the terms of the Contracts and changes thereto;
(iv)	the material, workmanship and manner of construction and installation of the Work;
(v)	any claim from any of the Upgrade Contractors made prior to the Actual Delivery Date of the Vessel for an extension of time for the completion of the Work.
. . . . . . . . . . . . . . . . . . . .
9	Petromec’s Obligations
9.1	Petromec shall
. . . . . . . . . .
	9.1.4	ensure that the Upgrade is completed in accordance with the Specification, irrespective of default by any Upgrade Contractor.
. . . . . . . . . . . . . . . . . . . .
10	Change Orders
10.1 	Both for the purposes of this Agreement and on an ongoing basis, Brasoil shall be entitled to instruct Petromec to propose:
	10.1.1	any alteration to the Amended Specification; or
	10.1.2	any change to any plan, drawing, specification, calculation or other document submitted to Brasoil pursuant to this Agreement; or
	10.1.3	any alteration to the arrangement for the maintenance and repair of the Vessel prior to the Actual Delivery Date.
10.2	On receipt of an instruction pursuant to Clause 10.1 Petromec shall be obliged to use its best endeavours to agree the alteration(s) or change(s) set out in that instruction with the relevant Upgrade Contractor(s) pursuant to the terms of the relevant Contracts. If Petromec and the relevant Upgrade Contractors fail to agree on the alteration(s) or change(s) within fourteen (14) days of receipt by Petromec of such proposal, Brasoil shall be entitled to require Petromec to take such steps as may be appropriate to enable the alteration or change to be effected including (but without prejudice to the foregoing) replacing the relevant Upgrade Contractor(s).
11	Amendment to Specification
11.1	It is hereby agreed that, pursuant to Clause 10 hereof, the Original Specification is amended by:
	(i)	Substituting for the General Technical Specification for the South Marlin Field in document ET.3010.38-1200-940-PPC-001 the Revision A which contains the requirements for the Roncador Field.
	(ii)	Adding the Metocean Data - Roncador - contained in document ET.3010-56-1200-941-PPC-001, Revision 0.
12	Compensation
12.1	In consideration of Petromec’s agreement to upgrade the Vessel in accordance with the Amended Specification Brasoil agrees to pay to Petromec an amount equal to the reasonable extra cost (if any) to Petromec of Upgrading the Vessel in accordance with the Amended Specification over and above the cost that Petromec might reasonably have incurred in Upgrading the Vessel in accordance with the Original Specification.
12.2	In the case of any further alterations or changes instructed by Brasoil pursuant to Clause 10 hereof, Brasoil agrees:
	(i)	to pay to Petromec the reasonable costs (if any) incurred by Petromec and its contractors in progressing the engineering in accordance with such Specification as was agreed before the alteration or change;
	(ii)	to pay to Petromec an amount equal to the reasonable extra cost (if any) to Petromec of Upgrading the Vessel in accordance with the Specification as altered or amended; and
	(iii)	to extend the date by which Petromec must complete the Upgrade.
12.3	The additional costs referred to in Clauses 12.1 and 12.2 above will become due and payable on the production by Petromec of evidence of expenditure satisfactory to Brasoil and Brasoil being satisfied that such costs were reasonable and properly incurred.
12.4	Brasoil agrees to negotiate in good faith with Petromec the extra costs referred to in Clauses 12.1 and 12.2 above and the extra time referred to in Clause 12.2 above and upon the determination of the same Brasoil and Petromec agree to enter into one or more addendums to this Agreement specifying the amounts to be paid by Brasoil to Petromec pursuant to this Clause 12 in good time for Petromec to meet its obligations to its contractors and specifying the date by which Petromec must complete the Upgrade of the Vessel in accordance with the Amended Specification.”
87.	Mr Hancock relied on clause 9.1.4 and argued that this imposed an obligation on Petromec owed to Brasoil for delay in the upgrading of the vessel.  The judge dealt with this by construing the Supervision Agreement against the background of the already concluded South Marlim agreements.  He pointed out (paragraph 46) that the agreement fell into 3 parts, Clause 2 giving specific approval for the contract with the Davie shipyard, clauses 3 to 9 giving Brasoil the right to supervise and control the course of the work and clauses 10 to 12 dealing with the necessary amendments to the original specification by (a) the substitution of the Roncador specification for the South Marlim specification and (b) by variation of the Roncador specification.  He said that, although clause 9.1.4 appeared to be somewhat different in terms from clause 9.1.1 to 9.1.3 which provided support for the rights of supervision given to Brasoil under clauses 5 and 6, the obligation in clause 9.1.4 to complete the upgrade in accordance with the specification regardless of any default by any sub-contractor could also be regarded as supporting the rights given by clause 5.  He then concluded that, since Petromec had never assumed any liability to Brasoil for delay in construction under the original 1997 agreements, it would have made no sense for it to have assumed such an obligation in clause 9.1.4 of the Supervision Agreement without much clearer wording to that effect.
88.	Mr Hancock submitted that these conclusions of the judge were wrong, partly because it was not right to construe a contract to which Brasoil and Petrobras were parties (the Supervision Agreement) by reference to a contract to which they were not parties (the Upgrade Agreement) and partly because the negotiations for the Supervision Agreement were already taking place in any event in June 1997 and so the Supervision Agreement should be seen as a completion of the contractual structure rather than any change to it.  He also relied on clause 12.2(iii) and its specific reference to Brasoil’s obligations, in the event of its instructing Petromec to make any further alterations or changes, to extend the date by which Petromec must complete the upgrade.  How, asked Mr Hancock, could Brasoil be obliged to grant Petromec an extension of time, if Petromec were not already obliged to Brasoil to complete the upgrading within the 21 months referred to in the Upgrade Agreement or any agreed extension of that time?
89.	These are formidable arguments but I am unpersuaded.  The judge was right to emphasise that the original Upgrade Agreement was made only between Petromec and Petro-Deep and that the only obligation assumed to Brasoil was that of Petro-Deep in the Bareboat Charter and Purchase Agreement.  It is, moreover, significant that the requirement of these contracts as to the upgrading of the vessel in accordance with the Original Specification “within a specified period” is specifically set out in Recitals (A) and (B) of the Supervision Agreement.  When the Supervision Agreement came to deal with Petromec’s obligation in clause 9 of the agreement the obligation is stated to be to:
“ensure that the Upgrade is completed in accordance with the Specification, irrespective of default by any Upgrade Contractor”.
The contrast is easy to observe.  The Upgrade and Bareboat Charter agreements’ references to the original specification have been changed to “the Specification” which must mean the specification as amended for the purpose of the Roncador upgrade.  More importantly for present purposes the words “within a specified period” are altogether omitted from clause 9.1.4.  The reason for this can only be that it was not intended that Petromec should assume any responsibility directly to Brasoil for delay in respect of the Roncador upgrade by virtue of the Supervision Agreement any more than it had under the original agreements.  The obligation “to complete in accordance with the Specification” is just not apt to include any obligation in relation to delays in completing the upgrade.  The fact that clause 12.2(iii) requires Brasoil to consent to an extension of time in the event of yet further variations is nothing to the point since if there are obligations as to timing contained in contracts made between other parties (whether the Upgrade Agreement itself or agreements made by Petromec with contractors or suppliers) it is only sensible that Brasoil be required to consent to such reasonable extensions as may be made between those contracting parties.  That cannot affect the true construction of clause 9.1.4.
(5)  Estoppel
90.	That conclusion makes it unnecessary to consider Miss Prevezer’s argument that, if clause 9.1.4 did impose an obligation on Petromec (owed to Brasoil) to complete the upgrade within any specific time, Brasoil is nevertheless estopped by convention from relying on any such construction.  Mr Hancock did not, in fact, dispute that the underlying assumption of both parties after the conclusion of the Supervision Agreement was that Petromec had no such obligation to Brasoil but he submitted that the judge was wrong to hold that Petromec had acted on that assumption in a way that would make it unjust for Petrobras to insist on the strict terms of the agreement.  I need only say that I am far from persuaded that the judge’s conclusion on this aspect of the matter as set out in paragraph 58 of his judgment was in any way wrong.
(6)  Supervision Agreement;  “compensation” to include profit?
91.	It is at this point that Petromec’s appeal as presented by Miss Prevezer QC assumes centre stage.  She submits that Petromec must be entitled to remuneration for the Roncador upgrade over and above the mere cost paid by it to contractors and suppliers.  There might well be much to be said for her argument if the Roncador upgrade agreement was a stand-alone contract but it has to be remembered that it was not.  Petromec was already party to an agreement under which it was the recipient of that part of the hire paid ultimately by Petrobras which has been referred to as the “Upgrade Vessel Hire”.  It is true that, when this was originally agreed, the upgrade obligation only related to upgrade for South Marlim, but it does not follow that, when agreeing a further upgrade for Roncador, the parties would necessarily have included a profit element.  One can only look to the contract and see what it says.
92.	It is not irrelevant that the title of clause 12 is “Compensation”.  This is itself a different concept from remuneration as generally provided for in a building or upgrading contract.  One then finds that Brasoil’s obligation is to pay an amount equal to the reasonable extra “cost . . . to Petromec” over and above the “cost that Petromec might reasonably have incurred” in upgrading the vessel for South Marlim.  The judge held that these phrases were inappropriate to include any element of profit.  He also held that this conclusion was reinforced by the terms of clause 12.3 which provided that the additional costs referred to in clause 12.1 (and in 12.2 with respect to agreed variations) would become due and payable
“on the production by Petromec of evidence of expenditure satisfactory to Brasoil”.
93.	Miss Prevezer attacked the judge’s conclusion by submitting that no contractor would agree to work for cost only since there would be no point in his doing so and that, on the judge’s construction, there would be a right under clause 10 for Brasoil to insist on unlimited variations which Petromec would be obliged to undertake without any element of profit to itself.  She also referred to the judgment of HHJ Humphrey Lloyd in Weldon Plant Ltd v Commission for the New Towns [2001] 1 AER Comm 264 in which he awarded a contractor costs incurred together with a reasonable remuneration on top.
94.	This authority is not, however, helpful on analysis since not only was the concept of “cost” defined in the ICE Conditions utilized by the parties in that case but, more importantly, the phrase which the judge had to construe was the phrase “a fair valuation”.  That is very different from the “cost to Petromec” in the present case.
95.	As to Miss Prevezer’s other arguments they amount to little more than saying that circumstances can be imagined where it would be appropriate to construe “cost” as including an element of profit.  But that does not mean it would be appropriate to do so in the present case.  In a situation where Petromec was created specifically for the purpose of being a party to the Upgrade Agreement so that the SANA interests would not themselves be responsible for the upgrade and when it was not envisaged that Petromec would itself be doing the upgrade work but would be contracting with a shipyard and with third party suppliers for the work to be done, it is not surprising to find an agreement that Brasoil is to be responsible only for the extra cost actually incurred by Petromec.  That is certainly the natural meaning of the words “cost to Petromec”, “reasonably incurred in upgrading the vessel” and the concept of costs becoming payable “on the production by Petromec of evidence of expenditure”.  There is no compelling need to strain the language of clause 12 and, in the context of profit having already been secured in connection with the original upgrade, it seems to me that the judge’s conclusion must be correct.  It is to be remembered that he also held that Petromec were under no liability for delay (or defective work) and that he further held that Petromec were entitled not just to direct costs but to “costs in the form of additional overheads of all kinds, including additional financing costs”.  I see no reason to disagree with his decision.
96.	I can now turn to the deeds executed in May and July 1999.
(7)  Deed of Payment and Indemnity; Brasoil’s payments to sub-contractors – Loans?
97.	At paragraph 100 the judge said that the purpose of the DPI was to establish the basis on which Petrobras, through Brasoil, would make funds available to Petromec:-
“In summary, Brasoil would lend money to Petromec by making payments on its behalf direct to sub-contractors and suppliers.”
Miss Prevezer submitted that it was incorrect to describe the payments made to third party sub-contractors as loans; they were just payments made by way of discharging Brasoil’s own liability to Petromec to pay the costs of the upgrade and, in particular, the agreed price for variations.  The significance of the distinction is that, while a loan would carry interest, a payment by way of discharging a liability would not.
98.	Miss Prevezer sought to construe the deed by reference to a memorandum of Petrobras’s juridical superintendent, Mr Dias, saying that the DPI was just a funding mechanism which enabled Petrobras to put Brasoil in funds in order to pay Petromec for the cost of extra works covered by variation orders.  But a memorandum of this kind cannot be used to interpret the express wording of the document itself.  That wording included recitals to the effect that Brasoil had already paid Petromec $15,446,500, that Brasoil might in the future make payments directly to upgrade contractors and that Petromec had agreed to pay and indemnify Brasoil in respect of such amounts.  The interpretation clause then stated that the words “Payment Amount” meant the amounts due from Petromec to Brasoil from time to time referred to in the recitals “together with accrued interest thereon pursuant to clause 5.3”.  The operative provisions of the DPI then provided:-
“2.3	Petromec unconditionally and irrevocably agrees that, subject to Brasoil not previously having received the Payment Amount by exercise of its set-off rights in clause 2.4, it shall repay the Payment Amount to Brasoil in accordance with Clause 5.
2.4	Petromec hereby . . . agrees and confirms that Brasoil may from time to time set-off the whole or part of the Payment Amount against any amount due from Brasoil to Petromec from time to time in respect of a Change Order.  Any such set-off will first be applied against accrued interest and thereafter against the principal of the Payment Amount . . .”
Clause 5.1 then provides for “Repayment” which will be applied first against accrued interest and clause 5.3 provides for interest at the “Interest Rate” which is defined as 14.25% per annum in the interpretation clause.
99.	This wording makes it all too clear that the sums paid to sub-contractors by Brasoil are loans.  Rational argument to the contrary is not possible.  It is not surprising that the judge dealt with the point as summarily as he did.
(8)  Deeds of Confirmation and Indemnity
100.	The DPI is significant background to the DCIs because the judge held that Recital E of the DPI confirming that the first and second set of change orders were agreed was correct in fact and that Petromec were not therefore entitled to seek further money in respect of their subject-matter.
101.	I have already set out the reason for the DCIs coming into existence.  The clause relied on by Miss Prevezer as giving Petromec additional rights of recovery over and above those conferred by the Supervision Agreement in respect of the Roncador upgrade was clause 3.2 in the following terms:-
“3.2	Indemnity
	(a)	Covenant to Pay
		In consideration of Petromec’s continuing performance of its obligations under the Upgrade Agreement . . . . . . .
. . . . . . . . . . . . . . . . . . . .
		. . . . . . . . Petrobras further undertakes, in consideration of Petromec’s continuing performance of its obligations under the Upgrade Agreement to pay to Petromec on demand all amounts due from and losses incurred by Petromec . . . . . . in respect of the Upgrade and/or Petromec’s obligations under the Upgrade Agreement which have not already been satisfied directly or indirectly out of any Upgrade Hire received from time to time by Petromec.
	(b)	Indemnities, payments and set-off
		Petrobras . . . . . . in recognition of Petrobras’ obligations to pay all costs of the Upgrade including, without limitation, any financing arrangements in respect thereof entered into by Petromec and notwithstanding any default by Petromec under any of the Relevant Documents and/or . . . . . . the Upgrade Agreement shall on demand indemnify Petromec against any loss, cost, charge, expense, obligation or liability which Petromec or any of its assigns sustains or incurs as a consequence of:
		(i)	Petromec performing its obligations to Upgrade under the Upgrade Agreement which have not already been satisfied directly or indirectly out of any Upgrade Hire received from time to time by Petromec;
		 . . . . . . . . . . . . . . ”
102.	The judge held that the phrases “Upgrade”, “Upgrade Agreement” and “Upgrade Hire” referred only to the upgrade for South Marlim (not the Roncador upgrade) and that this made sense because the only purpose of the DCIs was for Petrobras to confirm its liability to pay the upgrade hire under the documents originally executed in 1997, which did not refer to the Roncador upgrade at all.  That was the entitlement which was to be assigned to EDC and to Chase Manhattan bank (“CMB”).  There was no need for any further liability to be confirmed, since it was only the payment of the upgrade hire that was intended to be security for the EDC and CMB loans.  The way the judge put it was to say (paragraph 124) that:-
“the drafting of the DCI reflects a desire to limit its scope to the payment of charter hire which was providing the security for the loans.”
103.	Miss Prevezer attacked this conclusion by submitting that, when Recital (F) to the DCI recorded that Petromec had agreed to procure the upgrade of the vessel in accordance with the Specifications as defined in the Bareboat Sub-charter Agreement of June 1997, that must include the Roncador upgrade since the Supervision Agreement was to be effective as at 20th June 1997 and had amended the original specification by substituting for it the new (Roncador) specification.  If, then, the word “upgrade” in Recital (F) must mean the Roncador upgrade, the losses incurred by Petromec in respect of the Upgrade in clause 3.2 of the DCI must mean losses incurred in respect of the Roncador upgrade.  Miss Prevezer also relied on the fact that the upgrade which was being performed by Petromec was the Roncador upgrade or (perhaps more accurately) the South Marlim upgrade as amended to become the Roncador upgrade, so that the common sense of the matter would be that Petrobras were promising not merely to pay the Bareboat Sub-Charter hire but also the cost of the Roncador upgrade.  She referred us to a memorandum of Linklaters for Petrobras of May 1999 which explained the position for the benefit of EDC and their lawyers (Norton Rose), in the context of EDC potentially lending money for the Roncador upgrade, in the following terms:-
“. . . . given its interest in the completion of the upgrade and its commitment to pay all costs associated with such upgrade, Petrobras will agree to indemnify Petromec on a dollar for dollar basis for any amounts which it is obliged to pay (including finance costs) in connection with the upgrade”.
Despite the inappropriateness of construing a contractual document by reference to the views of one of the parties’ lawyers before the agreement contained in the contractual document was actually made, it is fair to say that the fact that the upgrade actually being performed at the time of the DCI was the Roncador upgrade is a powerful factor in favour of Miss Prevezer’s construction.
104.	In the light of the competing submissions in relation to the DCI, I must confess to being unsure whether the judge was correct to hold that it referred only to the South Marlim upgrade.  But that is not sufficient for Petromec’s purposes.  It has to persuade the court that, even if the DCIs contemplated the Roncador upgrade, the Supervision Agreement was amended by it to enable Petromec to claim profit not permitted by the Supervision Agreement and, further, that the DPI was amended to permit the agreements reached in respect of the first and second set of variation orders to be set aside so that further claims can be made in respect of their subject matter.
105.	On no view could the DCIs have been intended to do that.  Not only is there not a whisper of any such amendments being agreed, but the wording is entirely inapt for any such purpose.  Clause 3.2 constitutes a covenant to pay
“all amounts due from and losses incurred by Petromec . . . in respect of the Upgrade”.
The claim for profit on costs is a claim for something which is neither an amount due from Petromec not a loss incurred by Petromec.  Likewise a claim for sums additional to those specifically agreed for variation orders is not an amount due from or a loss incurred by Petromec.  In my judgment this part of the appeal must fail for that simple reason, whether or not the judge was correct in his view that the “Upgrade” only referred to the upgrade for South Marlim.
Failure to negotiate in good faith;  a legal obligation?
106.	At trial this question first arose in the context of negotiations in relation to the cost of variations ordered pursuant to clause 10 of the Supervision Agreement and, secondly, in the context of negotiations in relation to the overall cost of the Roncador upgrade.  It will be remembered that the compensation to which Petromec were entitled under clause 12.1 of the Supervision Agreement was an “amount equal to the reasonable extra cost to Petromec of upgrading the vessel in accordance with the Amended Specification over and above the cost that Petromec might reasonably have incurred in upgrading the vessel” for South Marlim.  Clause 12.2 then provided that in relation to further alterations or changes required by Brasoil under Clause 10, Brasoil would pay the reasonable costs of progressing engineering agreed before the alteration or change and an amount equal to the reasonable extra cost to Petromec of upgrading the vessel in accordance with the alteration or amendment of the Specification.  (Brasoil were also required to extend the date for completion.)  Clause 12.3 then provided that the additional costs contemplated by clause 12.1 or 12.2 would become due and payable on production of evidence of expenditure and Brasoil being satisfied that such costs were reasonably and properly incurred.  Clause 12.4 then provided:-
“Brasoil agrees to negotiate in good faith with Petromec the extra costs referred to in Clause 12.1 and 12.2 above and the extra time referred to in Clause 12.2 above . . . .”
107.	With regard to the cost of the first sets of (clause 10) variation orders, the judge held (a) that final and binding agreement was reached that Petromec would be paid US$42,972.000 and (b) that that agreement could not be regarded as ineffective because of any breach of any obligation to negotiate in good faith.  He said (in paragraphs 85 – 92) that that was, first, because any such obligation was as a matter of English law too uncertain to be enforceable, secondly because the obligation to negotiate (if enforceable) only related to costs in respect of which evidence had been produced pursuant to clause 12.2 whereas what had happened in fact was that Petromec had put forward a quote for the work covered by each variation order and expected the negotiations to proceed from that base, and thirdly because there was no absence of good faith in fact.  All this is academic in the present appeal since there is no appeal from the judge’s decision that there was a final and binding agreement in relation to the first set of variation orders, but it is important background since it was in the context of the variation orders that the judge gave his reasons for saying that a “good faith” obligation to negotiate was unenforceable in English law.
108.	What is in issue in the present appeal is the cost of the Roncador upgrade itself.  It will be recalled that there came a time when, as the judge put it, the parties became rather weary of negotiating variation orders separately and decided to try and negotiate on the basis of a global payment approach.  This involved assessing a total audited cost of upgrading the rig and deducting from that the costs which would have been incurred if Petromec had been responsible for the originally contemplated South Marlim upgrade and then applying a possible uplift for profit of, say, 10%.  This aspect of the matter was dealt with comparatively briefly by the judge largely because there was a pending application by Petromec, in the light of recently obtained documentation, to amend their pleadings to allege (1) that Petrobras had fraudulently misrepresented that a settlement on the basis of a global approach was under active consideration by the board of Petrobras and might soon be approved and (2) that Petromec had relied on that representation when they handed the vessel over to Petrobras and Brasoil in late October 1999.  This amendment, if allowed, could cover some of the same ground as an allegation of failing to negotiate in good faith.  In these circumstances the judge merely held that the negotiations for a global settlement of Petromec’s claim did not fall within clause 12.4 of the Supervision Agreement any more than the claim in respect of the first set of variation orders had done.  In so deciding, he was echoing the second reason given for rejecting the allegation of failing to negotiate in good faith in respect of those variation orders.
109.	Miss Prevezer made a sustained attack on this part of the judgment submitting (1) that the courts ought to enforce an express contractual obligation to negotiate in good faith despite the decision of the House of Lords in Walford v Miles [1992] 2 AC 128 and (2) that the judge had construed the obligation so to negotiate too narrowly in that the negotiations that were taking place on a global basis were just the sort of negotiations contemplated by clause 12.4 of the Supervision Agreement.  The first of these submissions raises a difficult question of law which will not arise unless her second submission is correct.  I propose to consider her second submission first.
Were the global approach negotiations negotiations which were contemplated by clause 12.4?
110.	Miss Prevezer submitted that they plainly were.  She took the court through the course of the negotiations that did take place and relied on the following matters:-
(1)	Mr Hawksley (originally managing director of MSR but now a consultant to Maritima) first suggested the global basis on Petromec’s behalf in about May 1999;
(2)	despite initial difficulty in assessing the costs that would have been incurred in respect of South Marlim, Petrobras were willing by the end of July 1999 to pursue the global payment approach provided Petromec were willing to open their books to Petrobras’s accountants to enable them to see what costs had actually been incurred;
(3)	the books were so opened between 6th and 12th August and Petrobras’s accountants had unrestricted access;  apart from two matters, the accountants expressed themselves satisfied that the costs had been reasonably and properly incurred;
(4)	negotiations in relation to notional costs of South Marlim resulted in a figure agreed between subcontractors of US$112 million, a figure which Mr Menezes, a director of Petrobras, regarded as a reasonable figure;
(5)	Mr Menezes thereafter submitted a formal recommendation to the Petrobras board for approval of that figure.
Thus the position at this stage was that, while the global payment approach was being pursued, there was no binding agreement on either the audited cost or the South Marlim cost.  Still less was there any agreement on the contentious question of uplift.  One earlier indication given by Mr Efromovich and recorded in paragraph 130 of the judgment was that Petromec would accept US$120 million for the cost of the South Marlim upgrade if it received an uplift of 25% for administration and profit.  At a later stage when agreement in principle had been reached in the sum of US$112 million, Mr Efromovich said he would settle for 10% to bring the matter to a speedy conclusion (paragraph 134).  In the event no legally binding agreement was ever reached.
111.	In the light of these circumstances, Miss Prevezer submitted that the parties were negotiating the extra cost to Petromec of upgrading the vessel in accordance with the Amended Specification over and above the cost that Petromec might reasonably have incurred in upgrading the vessel in accordance with the original specification and that that was entirely in keeping with the regime of Clause 12 of the Supervision Agreement.
112.	I cannot accept this submission.  In the first place, clause 12 makes separate provision (a) for upgrade in accordance with the Amended Specification which had to take into account what Petromec might reasonably have incurred in the upgrade for South Marlim (clause 12.1) and (b) for sums payable in respect of variation in orders placed pursuant to clause 10 (clause 12.2).  Secondly clause 12, as a whole, only related to costs and included nothing for uplift (whether for administration or profit).  Thirdly clause 12.4 provided that, after good faith negotiations had occurred, the parties agreed to enter into one or more addendums to the agreement
“in good time for Petromec to meet its obligations to its contractors”.
Although this provision contemplated the possibility of one addendum, that was to cater for the possibility of agreement being possible pursuant to clause 12.1 in the event that there were no variation orders.  But once there were variation orders as well (as in fact happened), the obligations to contractors would, in all probability have had to be met at different times, which would be impossible on a global approach.
113.	For these reasons which, even if they are slightly more elaborate than the reasons given by the judge, are essentially the same, I agree with him that the negotiations were ordinary commercial negotiations in which the parties were seeking to resolve the differences between them without resorting to the strict terms of the contract.  They were, therefore, negotiations outside the ambit of “the cost to Petromec” contemplated by clause 12.4 of the Supervision Agreement and this ground of appeal must accordingly fail.
114.	It is, moreover, fair to say that since the traditional view is that any obligation to negotiate is, to say the least, problematic in its enforceability, it is inevitable that if any such obligation could be held to exist, it will be restrictively construed in accordance with its exact wording.
Enforceability?
115.	This brings me to the question whether an express obligation to negotiate in good faith is enforceable or not.  Anything I say on this topic is not essential to the disposition of the appeal but in deference to the arguments presented, I would like to say a few words.
116.	The traditional objections to enforcing an obligation to negotiate in good faith are (1) that the obligation is an agreement to agree and thus too uncertain to enforce, (2) that it is difficult, if not impossible, to say whether, if negotiations are brought to an end, the termination is brought about in good or in bad faith, and (3) that, since it can never be known whether good faith negotiations would have produced an agreement at all or what the terms of any agreement would have been if it would have been reached, it is impossible to assess any loss caused by breach of the obligation.  I doubt, however, if any of these objectives would be good reasons for saying that the obligation to negotiate in good faith contained in clause 12.4 is unenforceable in this particular case.
117.	The first objection, that the obligation is an agreement to agree, carries little weight in the present case.  It is contained in the Supervision Agreement which is itself legally enforceable.  (No one suggested that, if the obligation to negotiate the cost of the upgrade is unenforceable, that affects the rest of the agreement.)  The obligation only relates to the cost to Petromec of the Roncador upgrade over and above the South Marlim upgrade and the cost of any variation orders.  The “cost to Petromec” is comparatively easy to ascertain (especially if no element for profit is to be included).  If agreement is not reached, the court will itself have to ascertain what the reasonable cost of such upgrade should be.  If there are any ascertainable losses which arise from a failure to negotiate in good faith, they will likewise to ascertainable with comparative ease.
118.	These reasons also apply to the third objection, the difficulty of ascertaining loss.  If the court is able to conduct the exercise of finding the reasonable cost to Petromec of the upgrade, there should be no difficulty in deciding what the result of good faith negotiations is likely to have been.  Unless there are special factors present, it is likely to be the same as the reasonable cost.  No doubt there could be argument in the present case as to whether, if negotiations did not proceed (but should have proceeded) in good faith, they would have embraced an uplift and whether, in that event, the uplift would have been in any particular amount, but it is not uncommon for courts to have to assess, by way of calculating damages, whether a claim against a third party was good or not and for how much it might have been settled.  Any exercise in relation to uplift would raise similar (but not insurmountable) problems.  To this extent, therefore, I would not share the concerns which the judge expressed in paragraph 170 of his judgment.
119.	It is the second objection that is likely to give rise to the greatest problem viz that the concept of bringing negotiations to an end in bad faith is somewhat elusive.  But the difficulty of a problem should not be an excuse for the court to withhold relevant assistance from the parties by declaring a blanket unenforceability of the obligation.  Once the fraud amendment has been permitted, the court is going to have to consider the reasons why the negotiations were terminated in any event.  If fraudulent representations as to the intention to continue negotiations were made, the obligation to negotiate in good faith is likely to fall away as a separate obligation; if there was no fraudulent representation, it is perhaps less likely that there will have been bad faith in terminating negotiations but it will not be particularly difficult to tell whether there was or not.
120.	The authority chiefly relied on by Mr Hancock in support of blanket unenforceability was the decision of the House of Lords in Walford v Miles, which (of course) binds us for what it decides.  The main distinction between that case and this was that in that case there was no concluded agreement at all since everything was “subject to contract”;  there was, moreover, no express agreement to negotiate in good faith.  There were negotiations for the sale of a business in the course of which the defendant prospective vendor agreed not to negotiate with any third party and to negotiate only with the claimant prospective purchaser.  All the negotiations were subject to contract and the House of Lords held that the “lock-out agreement” was unenforceable because there was no provision saying how long it was to last.  The claimants sought to resolve this difficulty by asserting that it was an implied term of the agreement that, while the defendant wanted to sell the business, they would negotiate in good faith with the claimants.  The House of Lords held that it was impossible to imply such a term since it was unworkable in practice and inherently inconsistent with the position of a party negotiating “subject to contract”.  The lock-out agreement was therefore too uncertain to be enforceable.  As Lord Ackner (with whom the rest of their Lordships agreed) said at page 138G:-
“. . . . while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason.  There can be thus no obligation to continue to negotiate until there is a ‘proper reason’ to withdraw.  Accordingly, a bare agreement to negotiate has no legal content.”
121.	That shows the difference from the present case.  Clause 12.3 of the Supervision Agreement is not a bare agreement to negotiate.  It is not irrelevant that it is an express obligation which is part of a complex agreement drafted by City of London solicitors and issued under the imprint of Linklater & Paines (as Linklaters were then known).  It would be a strong thing to declare unenforceable a clause into which the parties have deliberately and expressly entered.  I have already observed that it is of comparatively narrow scope.  To decide that it has “no legal content” to use Lord Ackner’s phrase would be for the law deliberately to defeat the reasonable expectations of honest men, to adapt slightly the title of Lord Steyn’s Sultan Azlan Shah lecture delivered in Kuala Lumpur on 24th October 1996 (113 LQR 433 (1977)).  At page 439 Lord Steyn hoped that the House of Lords might reconsider Walford v Miles with the benefit of fuller argument.  That is not an option open to this court.  I would only say that I do not consider that Walford v Miles binds us to hold that the express obligation to negotiate as contained in clause 12.4 of the Supervision Agreement is completely without legal substance.
Conclusion
122.	In the result, however, I would dismiss both sets of appeals and would not disturb the order of the judge in any way.
First Appeal
123.	I have nothing to add to the judgment of Mance LJ in relation to the first appeal that was argued before us and agree with the disposition of that appeal which he proposes in paragraph 44 of that judgment.
Lord Justice Pill:
124.	I also agree that, save as indicated in paragraph 44, the appeals should be dismissed, for the reasons given by Lord Justice Mance and Lord Justice Longmore.