Contract Law Case Study: Petronas Carigali Sdn Bhd

The Petronas Contract:

In accordance with a Letter of Award (LOA) dated 21. 9. 2012, Petronas Carigali Sdn Bhd (Petronas) awarded a contract to the defendant for the provision of supply, delivery, installation, commissioning, operation and maintenance of extended well test (EWT) vessel and EWT System at 2 oilfields (Petronas Contract) (pages 1-8 CB 1). This was to allow Petronas to test and produce oil at 2 projects in Kayu Manis South East (KMSE) and Anjung Kecil (AK) oilfields located off the coast of Bintulu The contract awarded by Petronas to the defendant is for the defendant to conduct all works related to the supply, delivery, installation, commissioning, operation and maintenance of EWT System at KMSE and AK oilfields. The complete contract between Petronas and the defendant was not produced.

The EWT System:

The EWT System helps the user to ascertain the quantity of oil that can be produced from the seabed oil well so as to determine the profitability of investing in drilling in that particular oil well. This requires the use of sea vessels as it takes place in open seas. The cause of the dispute between the plaintiff and the defendant occurred in one of the stages of installation of the EWT system (tensioning stage). Essentially, the location of the oil well is underwater in the seabed. Oil obtained from the underwater well will be brought up to above sea level through a pipeline. When the oil is brought to above sea level, the oil will be transported to land by sea.

To facilitate the oil transfer, a buoy will be floated to enable the vessels to moor pending the loading of the drilled oil onto the sea vessel. This buoy is similar to a floating jetty. The buoy was to be secured in its position by 6 chains. One end of each of the chain was to be hooked to the buoy while the other end would be fastened to the seabed. The anchor fastening process makes the anchors immobile. This process begins with dropping the seabed end of the chains into the sea. Due to the combined weight of the anchor and the clump, the dragging will cause the anchor to sink and lock into the seabed. The buoy end of the chains will then be attached to the buoy by way of a hook up.

The Contract Between The Plaintiff And Defendant:

The defendant subsequently issued out a LOA dated 6. 3. 2013 whereby the defendant awarded a contract to the plaintiff to conduct part of the works required for the provision of transportation and installation of the EWT Facilities System for the defendant at KMSE ((MTCE Contract) (page 9-17 of CB 1). Essentially the defendant appointed the plaintiff as its subcontractor for the works. On 23. 4. 2013, the plaintiff acknowledged receipt of the LOA dated 6. 3. 2013 and confirm that it understood and shall fully abide by the conditions set therein (Pages 18 of CB 1). At this juncture it is pertinent to note that the terms of the subcontract between the plaintiff and the defendant is as per the terms in the LOA dated 6. 3. 2013. The pleadings referred to this subcontract between the plaintiff and the defendant as the MTCE Contract. For the purpose of this judgment we shall refer to this subcontract between the plaintiff and the defendant as the MTCE Contract. The terms of this MTCE Contact is as per the terms stated in the LOA dated 6. 3. 2013.

The plaintiff's scope of work is set out in Appendix 2 to the MTCE Contract (page 17 of CB 1). The defendant issued an Installation Procedure containing specifications and the methodology for the project (pages 27-254 of CB 1). Hence the plaintiff's scope of work involved a portion of the project. There is a Baseline Schedule setting out a 26 day timeline for works under the MTCE Contract (the transportation and Installation 'T & I works') which was prepared by the defendant (pages 256- 257 of CB 1). The defendant was to pay the plaintiff RM12,400,000. 00 for the subcontract of the plaintiff, pursuant to Appendix 1 of the MTCE Contract (page 16 of CB 1). RM6,200,000. 00 was paid by the defendant to the plaintiff. There is no dispute to this fact.

The MTCE Contract was then further subcontracted to Ardent Sea Tramp Sdn Bhd (Ardent), (Ardent Contract) (pages 19-26 of CB 1). The plaintiff paid RM15,498,499. 91 to Ardent and its subcontractors for the works performed under the Ardent Contract. The project envisages the installation of a CALM buoy offshore which is divided into few phases. The plaintiff loads all equipment offshore and mobilise all vessels to the KMSE site, sets up a crane barge (In this case TH 819) and deploys flowlines from the vessels to the TARPON (the pipe which transports oil). Thereafter 6 anchors with chains are dropped onto the seabed (chain laying) with the other ends picked up and hooked on to a stevtensioner, which is used to cross tension all 6 chains (stevtensioning). Subsequently an anchor handling tug (AHT) will hook up the CALM Buoy to the chains, completing the process, and the vessels will demobilize from KMSE.

The Installation Procedure:

The Installation Procedure is a document provided and prepared by MTC Subsea Sdn Bhd (MTCS), which is a related company of the defendant. It is a document which sets out, amongst others, the 'transportation and Installation' (T & I) works, which are as follows:

• The Offshore Installation Contractor/Offshore Construction Manager (OCM) to be a MTCS representative. The OCM has the responsibility of managing the offshore construction works (page 287 of P13);
• Specified vessels named by the defendant to conduct different parts of the installation works (pages 304-307 of exhibit P13); The location of the 6 anchor drops and the procedure of laying the anchors on the sea bed (pages 341-344 of exhibit P13); and
• The stevtensioning procedure and the specifications of the stevtensioner (pages 345-346 together with page 396 of exhibit P13).

The defendant was represented offshore. The OCM and the subcontractors carried out the works offshore and sent daily progress reports to the defendant, which documented the works carried out. The plaintiff received the daily progress reports, although not the full set (pages 103-230 of exhibit P13). The defendant also engaged an independent marine surveyor from Independent Marine and Engineering Consultants Sdn Bhd (IMEC). IMEC produced 2 reports, dated 10. 6. 2013 and 20. 8. 2013 (pages 87-101 of P12 and pages 231-258 of p16 ).

The Dispute And Termination:

The T & I works could not be completed within the 26 days as provided by the Baseline Schedule. However the parties continued to work beyond the 26 days. But the contract came to a standstill during the pre-tensioning phase, because the hook up of the chain to the stevtensioner could not be done. That was required to enable the stevtensioner to do the tensioning of the chains to enable the hook up of the CALM Buoy. The marine spread was demobilized when it left the site on 2 instances. At the 1st instance the marine spread returned to site. However in the 2nd demobilization, the marine spread did not return to site despite the defendant's threat of termination. The defendant terminated the contract by letter dated 9. 9. 2013 giving 4 days notice of the termination (pages 274-276 of CB Vol 1).

There is no dispute that at the time when the contractual relationship came to an end that:

• The anchors had been dropped but were not fastened to the seabed; and
• The tensioning process failed because the chains could not be hooked to the stevtensioner.

This means that the buoy was far from being commissioned. The plaintiff disputes the termination and claimed that it was unlawful for the following reasons:

• The plaintiff was not contractually bound to commission the buoy; and
• The hook up to the stevtensioner was impossible as the chains provided by the defendant were insufficient, too short to enable it to be hooked up.

Ardent commenced proceedings against the plaintiff on 2. 1. 2015 claiming a total of RM12,451,475. 00 as an outstanding payment for the works done pursuant to the Letter of Appointment (pages 509-523 of exhibit P48). However, those proceedings had since been withdrawn with liberty to file afresh as Ardent was wound up prior to the commencement of the said suit without the sanction of the Official Receiver. The plaintiff claimed that it suffered losses and damages as a result of the unlawful termination of the contract and instituted the present action against the defendant seeking for the following reliefs:

• payments made to Ardent and Ardent's subcontractors in the sum of RM15,498,499. 91;
• claims by Ardent in the sum of RM12,451,475. 00 which is being disputed by the plaintiff in separate proceedings; and
• RM6,200,000. 00 being the balance contract sum that remains unpaid by the defendant.

As such the plaintiff is entitled to recover the following:

• losses and damages (which are payments made in the sum of RM15,498,499. 91, the disputed sum of RM12,451,475. 00 and the balance contract price of RM6,200,000. 00 ) in the total sum of RM34,149,974. 91;
• wasted costs and expenses incurred by reason of variations in the work scope, and the delays in the implementation of the works, the execution of which was under the complete control of the defendant and/or;
• alternatively, payment of sums due on quantum meruit basis;
• interest on the above sums at the rate of 5% per annum from the date of this Statement of Claim till the date of full and final realization; and
• costs.

The defendant in defending the claim by the plaintiff asserts that the plaintiff was contractually bound to commission the buoy. When the plaintiff failed to commission the buoy, the plaintiff had committed a breach which resulted in the lawful termination notice to the plaintiff. The defendant contends that it suffered loss due to the plaintiff's breach as it had to employ a 3rd party to complete the works. As a result the defendant in turn instituted a counter claim seeking for special and general damages and loss of income as a result of the breach of contract by the plaintiff, namely:

• A sum of RM10,103,571. 70 as costs incurred by the defendant payable to the third party employed to complete the said works under the MTCE Contract paid in Malaysian currency;
• Loss of RM8,755,289. 74 (USD2,021,540. 00 exchange rate at RM4. 331 as at 9. 9. 2015) costs incurred by the defendant and to be paid to the third parties for the completion of the said works under the MTCE Contract in US dollars;
• Loss of RM51,520. 26 (SGD16,818. 00 exchange rate at RM3,0634 as at 9. 9. 2015) costs incurred by the defendant to complete the said works under the MTCE Contract paid in Singapore Dollar;
• Loss of RM5,630,381. 94 (USD1,300,018. 92 exchange rate at RM4. 331 as at 9. 9. 2015) costs incurred by the defendant to complete the said works under the MTCE Contract paid in US Dollar;
• Loss of income amounting to RM26,575,016. 00 (USD6,136,000. 00 exchange rate at RM4. 331 as at 9. 9. 2015) that is the loss of income for USD52,000. 00 per day starting from 1. 6. 2013 till 26. 9. 2013.
• As a consequence of the said breach the defendant seeks for the return of the sum of RM6,200,000. 00 paid by the defendant as the plaintiff had failed to perform the works under the MTCE Contract in its entirety;
• General damages for the breach of the contract to be assessed by the Court;
• Interest of 5 % per annum on general damages from the date of judgment to the date of realization; and
• Costs.

Parties agreed that the trial was to be bifurcated, the issue of liability is to be determined first and damages to be assessed later.

Issues:

It is an agreed fact that the buoy was never commissioned. Counsel for the defendant submits that the LOA is clear, in that it imposes an obligation on the plaintiff to commission the buoy. Whereas learned counsel for the plaintiff submits otherwise. The learned High Court Judge concluded, premised on Clause 1 of the MTCE Contract, that both the plaintiff and the defendant had intended for a formal contract to be executed after the MTCE Contract. However that has not been carried out. Thus, in the absence of a formal contract, the learned High Court Judge found that the MTCE Contract is the only binding contract between the parties. It was also agreed by the plaintiff that in the event of any conflict or discrepancies that should arise in respect of the contractual terms, the defendant shall have the absolute right to determine which term (document) should prevail. It is thus within the defendant's legal rights to make an election that the Petronas agreement should prevail, which is what the defendant is now doing in resisting the plaintiff's claim.

It was the findings of the learned High Court Judge that the plaintiff had committed breach of contract by the following acts:

• The plaintiff's failure to commission the buoy; and
• Failure of the plaintiff to hook the chain to the stevtensioner.

although the plaintiff tried to state his claim that the failure to hook the stevtensioner was down to the defendant’s fault for not providing enough chain. Besides that, the defendant stated that another failure to hook up was due to the vessel supplied and used by the plaintiff was underpowered and not powerful enough to pull the chains to hook up the chains to the stevtensioner. It was the plaintiff's argument that Captain Hamzah was the defendant's agent based on documentary and oral evidence. In the documentary evidence of Daily Progress Report (P15), appeared Captain Hamzah's signature on it with a stamp of MTC Subsea Sdn Bhd (MTCS), which described him as MTCS's representative in these reports. MTCS is the defendant's subsidiary company. It is the plaintiff's submission that Captain Hamzah is the defendant's agent as MTCS is the defendant's subsidiary company.

However the learned High Court Judge was not persuaded by the argument of the plaintiff as that would run foul of the doctrine of separate legal entities as enunciated in Salomon v. Salomon [1897] AC 22. Therefore, the learned High Court Judge held that the plaintiff failed to show by way of its documentary evidence that Captain Hamzah was the defendant's agent. The anchor had been dropped on 21. 6 m out of position and further was 64. 3m out of position by Encik Khairul Anuar's (2nd OCM) instruction who has taken over the job from Captain Hamzah (1st OCM). As the OCM now proved to be the plaintiff's agent, the error of dropping the anchor off the designated position, was the act of the plaintiff, which was in breach of its contractual duty. It was also proved during cross examination of PW 2 that the OCM being the plaintiff's agent could have easily rectified the situation by just moving the anchor but the plaintiff did not.

Judgement:

Paragraphs 3,4,5 and 6 of the Memorandum Rayuan Tambahan relates to the construction of the MTCE Contract. The plaintiff submitted that the learned High Court Judge erred when making her findings that the defendant could after entering into a contract with the plaintiff for a far lesser price and scope of work, elect to have the plaintiff bound by the defendant's contractual obligations under the Petronas Contract for a larger sum. It was the findings of the learned High Court Judge that the plaintiff was obliged to commission the buoy on the basis of Clause 1 and Clause 5 of the MTCE Contract.

Further, the provision of Clause 1 of the MTCE Contract does not give an election to the defendant to elect which scope of work it wanted the plaintiff to perform, after entering into the contract with the plaintiff at an agreed price, which is much less than the Petronas Contract. A reading of Clause 1 of the MTCE Contract suggests that it was intended to determine which document would prevail in the event of conflict of inconsistency between the two. Since there was no 'Terms and Conditions Agreement' entered into between the plaintiff and the defendant, there is no conflict/inconsistency between the MTCE Contract and the Petronas Contract. The MTCE Contract is a product of the sub contract of part of the works of the Petronas Contract to the plaintiff.

The evidence of SP 1 and SP 2, explained the meaning of what constitutes 'the provision of T & I PMT'. The evidence of SP 3, who is an Ardent's director who confirmed the evidence of SP 1 and SP 2, that 'T & I PMT' involved only the provision of manpower and vessels for marine spread chartering (provision of vessels), seafastening and grillage (loading of cargo), inspection and testing (ensuring cargo was on board), lifting and rigging aids (part of the assembly and lifting equipment during loading), and fuel, bunkering, bedding (provision of fuel and accommodation) (refer to Notes of Evidence pages 544-545 RR (b) Jilid 3/4). The defendant's witness, SD 1 also confirmed that a portion of the Petronas Contract and not the entire Petronas Contract was subcontracted to the plaintiff (Notes of Evidence at page 670 RR (B) Jilid 3/4). The learned High Court Judge did not give any consideration to these witnesses' testimony in interpreting the MTCE Contract.

The learned High Court Judge found that the plaintiff was contractually bound to commission the buoy. The defendant took the stand that the plaintiff was required to commission the EWT facilities, which in essence, according to the defendant, to do everything that the defendant is bound to do under the Petronas Contract (See notes of evidence dated 12. 8. 2016 page 709 Appendix E). In addition, the evidence shows that the defendant was in control of the project. This is apparent from the following:

1. the defendant's representatives were situated offshore;
2. the OCM was the defendant's representative (described as MTC's representative) until 12. 7. 2013 when he resigned (this issue will be addressed in the later part of this judgment);
3. the project manager is SD 1 who is the defendant's representative; and
4. the IMEC reports dated 10. 6. 2013 (pages 958-973) and dated 20. 8. 2013 (pages 1100-1127 CB 3) show the personnel on KMSE site were that of the defendant's representatives, namely:

• Mr. Asral Fikri, representative-MTC Engineering Sdn Bhd
• Captain Hamzah Mohammad, Construction Supt-MTC Subsea Sdn Bhd;
• Mr. Harris Shariff, Field Engineer-MTC Subsea Sdn Bhd;
• Mr. Tawfik Ahmad Fadzil-MTC Subsea Sdn Bhd.

The learned High Court Judge found that the plaintiff was in breach of its obligations to hook up and commission the EWT Facilities System. It is also the finding of the learned High Court Judge that there was sufficient chain length provided by the defendant for the hook up. According to the Installation Procedure, which was provided by the defendant to the plaintiff, the required chain length for the anchor chains was 650 m (page 50 of the CB 1). Apart from the recommended 650m of chain, Vryhof Anchors, the stevtensioner providers in the Installation Procedure also says that an additional 124m of chain is required (page 151 of CB 1), given that 20m clump weight has already been included in the configuration. As such, the minimum requirement chain length as prescribed by the Installation Procedure, after taking into consideration of the 20m clump weight, would be: 650m (Chain) + 124m (additional chain length)

The IMEC Report dated 10. 6. 2013 (page 961 of CB 3) showed that only 600m of chain was loaded out. Clearly the chain length loaded out was insufficient. It is undisputed that the 6 drag anchors were dropped out of its designated positions. Appendix F of the Installation Procedure provides the designated location for the anchors to be dropped off (page 150 CB 1). The IMEC Report dated 20. 8. 2013 recorded the 6 anchors were indeed dropped not at the target position. The learned High Court Judge accepted this fact. However, she found that the error could be remedied by moving the anchors into the correct position, which the plaintiff failed to do (paragraph 61 of the grounds). Her basis was based on the evidence of SP 2 where she had reproduced at paragraph 50 in her grounds, that it was possible to move the anchors. Apart from finding that the plaintiff has failed to establish that the hook up of the chains to the stevtensioner failed due to insufficient chains, the learned High Court Judge also found that the probable cause of the hook up failure was, as contended by the defendant, due to the fact that the vessel was underpowered (paragraph 54 of the grounds. ).

Conclusion

Given the aforesaid the learned High Court Judge was plainly wrong in coming to the conclusion that the plaintiff was in breach of the MTCE contract. As the MTCE contract was unlawfully terminated, the plaintiff is entitled to damages for wrongful termination. We allowed the appeal with costs here and below. The order of the learned High Court Judge is set aside and judgment to be entered in favor of the appellant/plaintiff with the result that the counter claim is dismissed. Damages to be assessed for wrongful termination of the contract.