Revisiting the offshore charter contracts in Brazil

A whole new set of recent court precedents has put several standard Petrobras charter clauses under scrutiny and a few landmark judgements might impose a severe shift in the future interpretation of some paramount conditions and inspire Petrobras to adopt a more international contractual template.

 

Litigation Increase

The number of charter judicial disputes between Petrobras and offshore contractors in Brazil has increased dramatically in the past 3 (three) years.

If in the past there were claims sporadically filed by OSV owners, it seems that since the severe crisis affecting the public Brazilian oil major with the Car Wash corruption scandal in addition with the severe downturn of the O&G market worldwide, the Brazilian courts have been very active dealing with charter disputes against Petrobras.

Those claims vary from early termination, contractual fines, downtime, off hire, contamination of bunkers, overconsumption of bunkers amongst other issues.

The reaction of the contractors against its main customer in Brazil seems to have three cumulative factors of independent strength. First, the clear need of expenditure cuts by Petrobras and reduction of its active fleet; secondly, the substantial amounts under dispute, crucial at the moment for offshore contractors due to the current depression in the market worldwide; thirdly the common point in most of those claims, in which Petrobras attempts to deduct charter revenues on the basis of its alleged credits against the owners.

 

Injunctions against retention of hires

A landmark precedent issued by the Court of Rio de Janeiro and ratified by the Superior Court of Justice in Brasilia (Seacor do Brasil Ltda x Petroleo Brasileiro SA -Petrobras) back in 2013 set an entire new balance into the contractual formula derived of the Petrobras standard form. In such case, for the first time the courts decided that Petrobras cannot withhold hires due under the contract and based on the actual operation of the vessels if such credits (or fines) alleged due to Petrobras have been disputed by the owners.

Despite the express provision in all Petrobras contracts, the courts have put a side such unilateral “retention” contractual right of the charterer based on Brazilian Civil Code concept where obligation between contractors could only be offset or retained if the claimed credit by the charterer is liquid and not disputable.

An injunction, therefore, was enacted by the local courts of Rio de Janeiro – and upheld at the superior courts – to prevent Petrobras to deduct any charter hire unilaterally.

Several other similar cases were subsequently filed and a large majority of the owners also obtained court injunctions against such attempts of retaining hires and revenues out of charter and services agreements.

 

Early termination disputes

Another interesting set of claims were filed by several foreign OSV owners in the past 2 (two) years, since Petrobras decided to reduce substantially its fleet of offshore vessels.

Under Brazilian Navigation Act (Law 9432/97), Brazilian flag has priority over the foreign flag vessels. However, if there is unavailability of local flag vessels, the foreign flag can operate within Brazilian waters. The control of such charter contracts is done by the Federal Navigation Agency – ANTAQ, which conducts the annual circularization procedures.

Petrobras as charter of the foreign vessels is the one contractually and legally responsible to obtain the authorization by ANTAQ, by means of the so-called CAA – Certificate of Charter Authorization.

As most of the OSV contracts are granted by Petrobras for a 4 (four) years term, subject to extension of additional 4 (four) and Petrobras had the obligation to fulfil the contractual term, obtaining the relevant CAA, Petrobras usually complied with such obligation.

However, due to the reduction of the fleet as there were Brazilian flag vessels which contracts were not renewed by Petrobras, such local owners started to “block” the circularization and renewal of the CAA of the foreign flag.

Due to the referred blocking Petrobras was supposed to start negotiating with the local owner for the substitution of the foreign flag, but what was seen in the market was a different behavior from the oil major.

Bearing in mind the need of Petrobras to divest and early terminate a great number of charter contracts (estimated by the brokers in 35%), there were very limited initiative to actually hire the local flag available and replace the foreign flag for the remaining term of the contract as imposed by the Navigation Act.

The bottom line was that foreign flag were taken as off hire by Petrobras during the pending issuance of a new CAA, some of the contracts cancelled at a later stage by oil major due to the blocking by local flag, but surprisingly almost none of Brazilian flag vessels were hired by Petrobras to secure their priority rights.

Two first instance decisions have been already rendered, ordering Petrobras to pay the hires during the period in which the vessels were blocked and remaining without CAA, being one of such cases already ratified by the Court of Appeal of Rio de Janeiro.

Moreover, a very recent first instance decision was rendered in case in which Petrobras early terminated the contract. The Judge ordered Petrobras to pay loss of earnings and, to decide on the amount of the indemnity, the Judge used as parameter the daily hire from the date of the termination to the original final term of the charter.

 

Conclusion

There are still trouble waters ahead and new chapters to come in this new scenario for the offshore sector in Brazil. But so far the reaction from the courts evidences that some of the contractual obligations in the past adopted by Petrobras as an irrevocable “law of the contract”, seems to have been reviewed and its effects mitigated by means of judicial interpretation.

One could say there are two possible paths ahead: Petrobras revisiting its charter templates and converting into a more international standard form (such as the Supplytime recently updated by BIMCO); or keeping its customized and unbalanced form which may continue to foment litigation, if not to say increase of the charter hire value in the long run, with the owners aggregating to their prices the costs of uncertainty.

The future will say.