A Brazilian shipowner was hired by Petrobras to charter a PSV 1500 vessel to be used in the provision of maritime support to the oil company's offshore base. In order to fulfil the contract, the shipowner hired a Brazilian shipyard to construct the vessel and entered into a financing contract with Banco Nacional do Desenvolvimento Econômico e Social (BNDES) to support the construction.
The financing bank delayed the release of the funds for construction, resulting in a delay in the delivery of the vessel, so the parties set a new deadline for delivery. Despite this agreement, further delays occurred before the vessel was delivered to the shipowner. There were mutual accusations between the parties as to the cause of this non-compliance and its effects, and the case was brought before the courts, with a main claim and a counterclaim.
In the lower court, the judge partially granted the claim. However, the parties were dissatisfied with the decision and filed an appeal with the Rio de Janeiro Court of Appeals.(1)
The Second Civil Chamber of the appellate court discovered that on March 21 2003 the shipowner and the shipyard had signed two contracts with the same object (ie, the construction of a vessel to be chartered to Petrobras) for different amounts - the first was was valued at $12.4 million and the second at $14.5 million.
The lower value one did not refer to the BNDES financing and was not duly registered with the appropriate public registry office. In contrast, the higher-value contract mentioned the financing expressly and was duly registered.
The parties disputed which of the two contracts was valid - depending on the contract, the consequences would favour one or the other party. The shipyard defended the validity of the lower value contract, under which it would benefit from a favourable exchange rate. However, the shipowner argued that the higher-value contract, which mentioned the BNDES financing, should apply, as it contained provisions for penalties in case of a delay in the delivery of the vessel.
The court ruled that:
"the diverging arguments are thus linked to the financing and the registration - financing, because it would attribute official character and economic viability to the contract that mentions it, rather than the other that is silent about it [and] registration, because in maritime law, the lack thereof renders a ship construction contract invalid."
On examining the issue, the court of appeals confirmed the understanding of the lower court, considering the lower-value contract as valid. Three facts supported this decision. The court first considered the parties' conduct in the performance of the obligations of the construction, including at the time of the agreement's renegotiation, when adjustments were made to the portions referring to Brazilian currency and foreign currency.
The court then observed that if the higher-value contract were to be in effect:
"the initial period of construction, set at 455 days, would only start to run as from the effective date of the financing granted by BNDES, being that the disbursement of the first installment only occurred on 13.10.2003, which would make the deadline for delivery of the vessel fall in 2005, making the addendum for extension of the term to August 2004, meaningless."
The reporting judge lastly observed that:
"[the] split of the value in Brazilian reais and U.S. dollars is the one that better meets the nature of the contract, taking into account that a portion of the services and equipment in the construction of a vessel is imported."
In addition, the court understood that the contract for ship construction into which the parties had entered was in the nature of a building contract (ie, a job order contract), according to which the parties agreed on a construction job whose object was the delivery of a finished construction job. The court pointed out that the deadline set forth in a contract does not necessarily coincide with the termination of the obligation. In the case at hand, by the end of the set term the job had not been completed, but the obligation survived as the desired result (ie, the finished ship delivered in seaworthy conditions) had not been achieved. As defined by the judging entity:
"the term set forth in the job order contract is simply for the purposes of establishing the basis for default. If at the end of such period the job is not completed, the term is extended and the responsibilities of the parties giving cause to the default are ascertained."
Addressing the issue of the registration being a requirement for the validity of the ship construction contract, the judge observed that:
"in the Brazilian legal framework there is no legal rule determining that the registration of the vessel construction contract with the respective Maritime Registration Office is a requirement for the validity thereof. The effect of its registration is only to provide publicity to the transaction with respect to third parties. Therefore, considering this aspect, it is also possible to confirm the legal feasibility of deeming valid the lower value contract."
By defining the type of contract applicable to the case, the court defined the liability of the parties in the claim brought to court, thus confirming the lower court's ruling that the claims were partially valid.
For further information on this topic please contact Godofredo Mendes Vianna at Law Offices Carl Kincaid by telephone (+55 21 2276 6200), fax (+55 21 2253 4259) or email ([email protected]).