United States Fidelity & Guaranty Co. v. Braspetro Oil Services Co.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

KOELTL, District Judge.

TABLE OF CONTENTS

Introduction.409

FINDINGS OF FACT.410

The Parties.410

Brasoil Retained Petrobras to Manage the P-19 and P-31 Contracts.414

The P-19 International Bid Process.415

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The P-19 Consortium Underbid the P-19 Project...416

The Sureties’ Issuance of the P-19 Bond.418

Relevant Provisions of the P-19 Contract.419

Delays in the

Commencement

of

the

P-19 Project.422

The P-31 International Bid Process.424

The P-31 Consortium Underbid the P-31 Project.425

The Issuance of the P-31 Bond.425

Relevant Terms of the P-31 Contract.426

Initial Efforts to Address the Consortia’s Cash Flow Problems.428

Changes to the EAP and the Establishment of Blocked Accounts in the First Amendments.431

Comfort Letters and Direct Payments for Equipment.434

IVI and the Petrobras Defendants Kept the Sureties Fully Informed of the Developing Crisis.436

Critical Problems at the end of 1996 and the Beginning of 1997 .438

Discussions between Petrobras, the Sureties, and the Consortia Regarding the Financial Problems of the Consortia and the Sureties’ Obligations under the Bonds.442

Additional Funds to Continue Work on the Projects.447

Declarations of Default.449

Brasoil Did Not Fundamentally Change the P-19 Project, Interfere with Construction, Make Excessive Changes, Fail to Recognize Change Orders, Fail to Grant Extensions of Time or Otherwise Breach the P-19 Contract.456

Brasoil Did Not Fundamentally Change the P-31 Project, Interfere with Construction, Make Excessive Changes, Fail to Recognize Change Orders, Fail to Grant Extensions of Time or Otherwise Breach the P-31 Contract.462

Accounting Issues.464

Marubeni.467

Damages.470

CONCLUSIONS OF LAW.472

Jurisdiction.472

Choice of Law.474

The Sureties’ Liability under the Performance Bonds .476

Damages 484

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The Indemnification Action. .486

The Tortious Interference Claim. .488

CONCLUSION. .490

Introduction

These consolidated cases concern the obligations and liabilities of United States Fidelity & Guaranty Co. (“USF & G”) and American Home Assurance Co. (“AHAC”) (collectively the “Sureties”), pursuant to performance guaranty bonds that were issued by those companies in connection with two massive naval construction projects in Brazil known as the P-19 and P-31 Projects. The Sureties issued the P-19 Performance Bond in the amount of $110,512,660 on behalf of the construction consortium which was to perform the P-19 conversion, as principal, in favor of Braspetro Oil Services Co. (“Brasoil”), as the obligee. The Bank of Tokyo-Mitsubishi Ltd. (“Bank of Tokyo”) and the Long-Term Credit Bank of Japan, Ltd. (“LTCB”) (collectively the “Japanese Banks”), which had provided funding for the project, were additional obligees on the P-19 Performance Bond under a Dual Ob-ligee Rider to the Bond. The Sureties issued the P-31 Performance Bond in the amount of $163,000,000 on behalf of a similar construction consortium that was to perform the conversion of the P-31 Project, as principal, in favor of Brasoil as the obligee.

The P-19 Project involved the design and conversion of a platform formerly used for oil and natural gas exploration, known as the

Treasure Stawinner

1

,

into a semi-submersible oil and natural gas production platform. The conversion of the P-19 vessel, which is registered under Panamanian law, was the largest of its kind ever undertaken. The P-31 Project involved the design and conversion of an oil tanker (Very Large Crude Carrier, or “VLCC”), known as the

Vidal de Negreiros,

into a Floating Production, Storage, and Offloading vessel (“FPSO”).

Both the P-19 and the P-31 Projects were plagued by huge cost overruns. Bra-soil and its indirect parent, Petróleo Brasi-leiro S.A.Petrobras (“Petrobras”), claim that these overruns were caused by the construction consortia’s substantial underbids on both projects and by market conditions for which Brasoil and Petrobras were not responsible. Therefore, Brasoil and Petrobras claim, they justifiably declared the construction contracts to be in default and called on the Sureties to meet their obligations on the Bonds. When the Sureties failed to do so, Brasoil had the projects completed and now looks to the Sureties for the cost of the completion of the projects and costs of delay for the projects. In addition to many other arguments and theories, the Sureties claim that Petrobras, which was managing the projects for Bra-soil, substantially changed the nature of the projects by making numerous changes in the requirements of the contracts, without notice to the Sureties, and that it was these changes, for which the construction consortia had not been compensated, that vastly increased the costs of the projects. The Sureties claim that the construction consortia were not actually in default under the construction contracts and that, because of the substantial changes which changed the nature of the contracts, the Sureties were discharged from any requirement to pay any amounts under the Bonds.

In the Declaratory Judgment Action, No. 97 Civ. 6124, the Sureties seek a declaratory judgment against Brasoil and the

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Japanese Banks that the Sureties have no obligations or liabilities under the Bonds. Brasoil, joined by the Japanese Banks with respect to the P-19 Bond, denies the Sureties’ allegations and counterclaim to require the Sureties to pay the amounts owed under the Bonds. In the Indemnity Action, No. 98 Civ. 3099, the Sureties sue Petrobras, the individual members of the construction consortia, and others, claiming, under numerous alternative theories, that the Sureties are entitled to indemnification for any costs they are required to pay under the Bonds. In the Indemnification action, the Sureties claim that by its domination and control of the construction consortia, as well as pursuant to theories of partnership, Petrobras is liable for the indemnification obligations of the construction consortia to the Sureties. The Sureties also claim that Petrobras tortiously interfered with the payment obligations of the construction consortium on the P-19 Project and Brasoil under.a payment bond issued to secure financing provided to the P-19 Project by Marubeni America Corp. (“MAC”). The Sureties have also sued the members of the construction consortia and others, but those claims have been severed pending resolution of the current claims among the Sureties, Brasoil, Petrobras, and the Japanese Banks. This is only a summary of the claims, which are discussed in greater detail below.

The Court conducted a non-jury trial from January 22, 2002 through March 21, 2002. The Court heard additional testimony from experts on Brazilian law on April 10, 2002. Having heard the extensive testimony from the witnesses and having assessed their credibility, and having reviewed the massive documentary evidence in this case, the Court makes the following findings of fact and reaches the following conclusions of law.

FINDINGS OF FACT

The Parties

The Sureties

1. At all relevant times, plaintiff United States Fidelity and Guaranty Company (“USF & G”) was a corporation duly organized and existing under the laws of the State of Maryland with its principal place of business in Baltimore, Maryland. In 1998, USF & G was acquired by The St. Paul Companies. (Joint Stipulation of Facts, dated February 1, 2002 (“JS”), ¶ 4.)

2. At all relevant times, plaintiff American Home Assurance Company (“AHAC”) was a corporation duly organized and existing under the laws of the State of New York. AHAC maintained its principal place of business in New York City. AHAC is a wholly owned subsidiary of the American International Group (“AIG”). (JS ¶ 5.)

3. At all relevant times, USF & G and AHAC (collectively the “Sureties”) each engaged in the general surety bond business. (JS ¶ 6.) USF & G and AHAC each maintained its own separate underwriting and claims functions. (JS ¶ 7.)

4. At all relevant times, Anthony Buo-no and Kenneth Bazaar headed USF & G’s international surety underwriting operations and were responsible for the underwriting of surety bonds on international projects. Mr. Bazaar worked at USF

&

G from January, 1994 to April, 1997. Mr. Buono worked at USF

&

G from February, 1994 to July, 1996. (JS ¶¶ 8-10.)

5. Gary Wilson is an attorney currently in the private practice of law and was the head of USF & G’s surety claims department between 1992 and April, 1998. (JS ¶ 14.)

6. Michael Yang is a senior underwriter and a senior vice president of American International Underwriters, Inc., a part of AIG. (JS ¶ 17.) Michael Fay was a vice

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president of international surety for the commercial lines of American International Underwriters, a part of AIG, from 1994 until 1999. Mr. Yang and Mr. Fay made the decision on behalf of AHAC to underwrite the P-19 and P-31 bonds. (JS ¶¶ 12, 17.)

Petrobras, Braspetro and Brasoil

7. Defendant Petrobras Brasileiro S.A.-Petrobras (“Petrobras”) is a “mixed economy” corporation, which under Brazilian law means that is it is a joint stock corporation in which the Federal Republic of Brazil owns more than 50% of the voting shares and capital. (JS ¶ 18.)

8. Petrobras was created by government act and is duly organized and existing under the laws of the Federal Republic of Brazil. Petrobras’ principal place of business is located in Rio de Janeiro, Brazil. (JS ¶ 19.)

9. Petrobras was established in 1953 pursuant to Brazilian Law No. 2.004, dated October 3,1953. Petrobras was created to serve as the executor of Brazil’s monopoly of its national oil industry. Between 1953 and August 6, 1997, Petrobras held a monopoly in Brazil on the prospecting, production, refining, processing, marketing and transportation of oil, petroleum from other derivatives, natural gas, and other liquid hydrocarbons, as well as other related activities. Any amendments or revisions of the Charter or By-Laws of Petro-bras must be approved by the President of Brazil and/or by the Brazilian Congress. (JS ¶ 20.)

10. Brazilian statutory law and Petro-bras’ own By-Laws each require that the Federal Republic of Brazil hold a majority of Petrobras’ voting capital and total capital. The Federal Republic of Brazil currently holds a majority of Petrobras’ voting shares of capital stock and has supplied a majority of Petrobras’ paid-in capital. (JS ¶ 21.)

11. Defendant Braspetro Oil Services Company (“Brasoil”) is a wholly-owned subsidiary of Petrobras Internacional S.A.-Braspetro (“Braspetro”), which in turn is a wholly-owned subsidiary of Petrobras. Braspetro is a corporation duly incorporated and existing under the laws of Brazil, with head offices in Rio de Janeiro. Like Petrobras, Braspetro is financially accountable to the Brazilian Congress. The Administrative Council of Braspetro has exactly the same membership as Petro-bras’ Administrative Council. (JS ¶ 22.)

12. Braspetro’s administrative executive committee, which makes daily decisions concerning the management of the company, is composed of up to six members, including Braspetro’s President, who is also Petrobras’ President. The President of Petrobras also has veto power over the decisions of the executive committee of Braspetro. (JS ¶ 23.)

13. Brasoil is a corporation duly organized and existing under the laws of the Cayman Islands. (JS ¶ 24.) Brasoil is the obligee on the P-31 Bond and a co-obligee on the P-19 Bond at issue in this case.

14. Brasoil is a wholly owned subsidiary of Braspetro with the exception of qualifying shares owned by the directors of the company. Through Braspetro, Pe-trobras indirectly owns Brasoil. Brasoil’s officers, including its three directors, treasurer, chief engineering officer, secretary, and drilling services officers, are Braspe-tro and/or Petrobras employees and are paid by Braspetro and/or Petrobras. (JS ¶ 25.)

15. Brasoil and Petrobras are collectively referred to as the “Petrobras Defendants” at various points herein.

Organizational Structure and Personnel of Petrobras

16. Petrobras is governed by a Consel-ho do Administracao, also known as the

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Administrative or Management Council, the members of which are appointed by the President of Brazil. The Administrative Council functions much like the Board of Directors of an American corporation. The President of the Administrative Council is also appointed by the President of Brazil, may be summarily dismissed, and has veto power over decisions of the Administrative Council. (JS ¶ 27.)

17. Petrobras is managed by its “Dire-toria,” or executive directorate, all of whose members are officers of Petrobras. Each member of the Diretoria is also a member of the Administrative Council and is responsible for the day-to-day management of particular department(s) or function(s) within Petrobras. (JS ¶ 28.)

18. Petrobras maintains various departments and superintendencies relating to all aspects of its operations, many of which were not involved in the issues and events raised in this case. A list of the most significant Petrobras structures for purposes of this case follows:

(a) SEGEN is the acronym used to denote the Petrobras superintendency in charge of design and engineering aspects of oil and natural gas exploration, production, and transportation facilities.

(b) E & P is the acronym used to denote the Petrobras superintendency in charge of oil and natural gas exploration and production.

(c) SEFIN is the acronym used to denote the Petrobras superintendency in charge of financial services.

(d) SEJUR is the acronym used to denote Petrobras’ legal department. (JS ¶¶ 29, 30, 34-37.)

19. Joel Renno was the President of Petrobras between 1992 and 1998. (JS ¶ 41.)

20. Sebastián Henriques Vilarinho was a member of the Petrobras Administrative Council and Diretoria. At all relevant times, and among his other duties and areas of authority, Mr. Vilarinho was the member of the Diretoria responsible for the administration of SEGEN. (JS ¶ 43.)

21. Alceu Barroso Lima Neto was the general superintendent of SEGEN between August 1995 and 1998. Mr. Alceu managed Petrobras’ investments in production, transport, and refining of oil and gas, including pipelines, refineries, and platforms. Mr. Alceu was also designated to manage certain of Brasoil’s construction contracts, including engineering and assembly matters. As head of SEGEN, Mr. Alceu supervised over ten Brasoil conversion and construction contracts, including the P-19 and P-31 Projects. (JS ¶¶44-46.)

22. Luis Carlos Quintella Freire is an engineer and was the Deputy Superintendent of SEGEN between April 1996 and April 1999, where Mr. Quintella supervised Petrobras’ investments in production, transport and refining of oil and gas and Brasoil’s construction contracts, including the P-19 and P-31 Projects. (JS ¶ 46.)

23. Paulo Marcio Mauro is an engineer and, at all relevant times, was the Chief of Engineering Services for the Marlim Enterprise of Petrobras. The Marlim Field is an oil field off the coast of Brazil in which the P-19 Project was to be located. (JS ¶¶ 47,126.)

24. David Almeida Schmidt is an engineer and was the platform coordinator (“COPLAT”) for the P-19 Project between mid-1995 and early 1998. (JS ¶ 49.)

25. Arnaldo Samuel Arcadier is an engineer and, between mid-1994 and early 1995, was the coordinator of the Bid Committee and subsequently served as the COPLAT for the P-19 Project from February 1995 until July 1995. (JS ¶ 50.)

26. Marcio Ferreira Alencar is an engineer and was the Chief of the Engineering and Support Section (“SESGE”) for the P-

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19 Project from approximately February 1995 through the beginning of 1998. (JS ¶ 51.) Mr. Alencar succeeded David Schmidt as the COPLAT for the P-19 Project in about March 1998, and continued in that position until about January, 1999. (Tr. at 3045.)

27. Antonio Carlos Alvarez Justi is an engineer and, at all relevant times, was the Chief of Engineering Services for the Al-bacora Enterprise. (JS ¶ 52.) The Alba-cora Field is also an oil field off the coast of Brazil. The P-31 Project was to be located in the Albacora Field. (JS ¶ 125.)

28. Edison Krummenauer is an engineer, was the Coordinator for the Bid Committee for the P-31 Project, and was the COPLAT for the P-31 Project through September or October 1998. (JS ¶ 54.)

29. Jose Eduardo Loureiro is an engineer and was the Chief of the Engineering and Support Section (“SESGE”) for the P-31 Project from the commencement of the P-31 Project through the end of 1996. (JS ¶ 56.)

30. Paulo Henrique Ximenes Duprat provided design supervision on the P-31 Project. Mr. Duprat succeeded Mr. Lour-eiro as the Chief of SESGE for the P-31 Project in early 1997. (JS ¶ 58.)

31. Marcio Eiras Moraes was at all relevant times the Superintendent of SE-FIN. (JS ¶ 59.)

The Banks

32. Defendant The Bank of Tokyo-Mitsubishi, Ltd. (“BTM”), formerly known as The Bank of Tokyo Ltd.-Japan, is a corporation organized under the laws of Japan and has its principal place of business in Tokyo, Japan. (JS ¶ 70.)

33. Shinsei Bank, Ltd. is the successor in interest to the defendant The Long-Term Credit Bank of Japan, Ltd. (“LTCB”). Shinsei Bank Ltd. is a corporation organized under the laws of Japan and has its principal place of business in Tokyo, Japan. (JS ¶ 71.)

34. BTM and LTCB (collectively the “Japanese Banks”) are parties to a Loan Agreement dated May 22, 1995 among Brasoil, BTM, and LTCB, in which BTM and LTCB committed to loan Brasoil up to $175 million for the P-19 Project. As part of their collateral for this Loan, the Banks were named co-obligees on the P-19 Performance Bond. Brasoil, the Construction Consortium for the P-19 Project, and the Sureties entered into a Dual Obligee Rider to the P-19 Bond on August 30, 1995, in which the parties named the Banks “obli-gees” on that Bond. (JS ¶ 72.)

The Construction Contractors: TVI, Sade Vigesa, and IESA

35. Defendant Industrias Verolme-Ishibras S.A. (“IVI”) is a corporation duly organized and existing under the laws of the Federal Republic of Brazil with its principal place of business in Curitiba. IVI was the result of a merger effective September 1994 between Emaq-Verolme SA, which owned the Verolme shipyard located in Angra dos Reis (Tr. at 446-47), and Ishikawajima do Brasil Estaleiros SA, which owned the Ishibras shipyard located in Rio de Janeiro. (JS ¶ 73.)

36. Defendant SV Engenharia SA was a corporation duly organized and existing under the laws of the Federal Republic of Brazil. SV Engenharia SA was formerly known as Sade Vigesa S.A. (“Sade Vigesa” or “Sade”). Sade Vigesa changed its name to SV Engenharia S.A. on or about January 31,1997. (JS ¶ 76.)

37. Defendant Internacional de Enge-nharia S.A. (“IESA”) was at all relevant times a corporation duly organized and existing under the laws of the Federal Republic of Brazil. At all relevant times, IESA was engaged in, among other matters, the business of oil and natural gas process engineering and design. (JS ¶ 95.)

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38. IVI and Sade Vigesa entered into a formal consortium agreement on February 1, 1995 for the stated purpose of bidding for and performing the P-19 Project. The consortium agreement authorized IVI to represent the consortium (the “P-19 Consortium”) in its dealings with Brasoil. The P-19 Consortium was the successful bidder for the P-19 Project and entered into a construction contract (the “P-19 Contract”) with Brasoil for that Project. (JS ¶¶ 135-36, 144.) IESA was a subcontractor on the P-19 Project. (JS ¶ 96.)

39. IVI, Sade Vigesa, and IESA entered into a formal consortium agreement on October 5, 1995. The stated purpose of the consortium (the “P-31 Consortium”) was to bid for and perform the P-31 Contract. The consortium agreement authorized IVI to represent the P-31 Consortium in its dealings with Brasoil. The P-31 Consortium was the successful bidder for the P-31 Project and entered into a construction contract with Brasoil for that Project. (JS ¶¶ 162,164,168.)

40. Nelson Tanure was the President of Sade Vigesa until about July of 1995, and was President of IVI until August of 1995. (JS ¶ 78.)

41. David Fischel served as President of IVI from August 1995 to May 1997 and managed the P-19 and P-31 Projects on behalf of a company related to Sade Vigesa until May 1997. He was also the President of Sade Vigesa between July 1995 and December 1996. (JS ¶ 79, 88.)

42. Carlos Mauricio Lima de Paula Barros is an engineer and, from June 1995 to December 1996, was the Vice President and a statutory director of Sade Vigesa. Between December 1996 and October 1997, Mr. Mauricio received compensation from a company related to Sade Vigesa for the management services he provided on the P-19 and P-31 Projects. (JS ¶ 80.)

43. Alarico Jose Andrade de Castro is a mechanical engineer and was the Director of Business Development of Sade Vigesa between 1995 and March 1996. In March 1996, Mr. de Castro was appointed Consortium project manager for the P-31 Project. Beginning in December 1996, Mr. de Castro received compensation from a company related to Sade Vigesa for the management services he provided on the P-31 Project. (JS181.)

44. Guilherme Pires de Mello is an engineer. He was the P-19 Consortium project manager from June 1995 through his resignation in June 1997. (JS ¶ 84.)

45. David Fischel, Carlos Mauricio Lima de Paula Barros, and Guilherme Pires de Mello were employed by Montreal Engineering before they were brought in by the P-19 Consortium to manage the P~ 19 Project. (Tr. at 901-02, 905, 2019.)

Brasoil Retained Petrobras to Manage the P-19 and P-31 Contracts

46. Brasoil and Petrobras entered into a series of service agreements whereby Petrobras undertook to provide engineering, supervision, and inspection services with respect to the work carried out in connection with the P-19 and P-31 Contracts. (S — 1010; Tr. at 2949-50.)

47. On or about September 19, 1994, Brasoil and Petrobras executed Addendum No. 6 to the Revised Reciprocal Cooperation Agreement Between Petróleo Brasi-leiro S.A. — Petrobras and Petrobras Inter-nacional S.A. — Braspetro for Providing Engineering Services dated June 30, 1993 (the “Cooperation Agreement”). (PB-310; Tr. at 2950.) This addendum appointed Petrobras to manage the bidding process for the P-19 Project. (PB-310 ¶ 1.1; Tr. at 2951.) Brasoil agreed to pay Petrobras the sum of $20,000 for its services. (PB-310 ¶ 5.1; Tr. at 2951; JS ¶ 220.)

48. On or about February 1, 1995, Bra-soil and Petrobras signed into Addendum

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No. 7 to the Cooperation Agreement. (PB-311; Tr. at 2975.) This addendum appointed Petrobras to manage the conversion of the P-19 platform by the P-19 Consortium. (PB-311; Tr. at 2974-75.) In return for its services, Petrobras was to receive a payment of $2.1 million. (PB-311 ¶ 6.1; Tr. at 2975; JS ¶ 221.)

49. On or about March 18, 1995, Bra-soil and Petrobras entered into Addendum No. 8 to the Cooperation Agreement. This addendum appointed Petrobras to manage the international bidding process for the contracting of the conversion of the VLCC

Vidal de Negreiros

into a FPSO to be known as P-31. Brasoil agreed to pay Petrobras the sum of $20,000 for its services. (JS ¶ 222.)

50. On or about October 26, 1995, Bra-soil and Petrobras entered into Addendum No. 16 to the Cooperation Agreement. (PB-325.) This addendum appointed Pe-trobras to manage the conversion of the VLCC

Vidal de Negreiros

into an FPSO to be known as P-31.

(Id.)

In return for its services, Petrobras was to receive a payment of $2.1 million.

(Id.

¶ 6.1; JS S 223.)

The P-19 International Bid Process

51. The bidding process for the P-19 Project was conducted in compliance with the requirements of Law 8.666 of June 21, 1993, the Brazilian Public Bidding Law. (JS ¶ 127; Tr. at 2956-57.) The bidding process was supervised by a bidding commission. (JS ¶ 127; Tr. at 2948^9, 2956-57.) Arnaldo Areadier served as the coordinator of the bidding commission. (Tr. at 2948; S-14.)

52. A formal Invitation to Bid was published on September 16, 1994. (PB-279 at 1; JS ¶ 126; S-14 ¶ 2.) The contract was for the acquisition and conversion of an existing semi-submersible drill rig to be deployed offshore in the Marlim field. (JS ¶ 126.) The services to be provided included the supply of the platform, materials and equipment; construction and assembly; re-conditioning, maintenance, and adaptation of the platform; conditioning, tests, certification, pre-operation, transport, and assistance in the delivery phase.

(Id.;

PB-279 at 1.)

53. Pursuant to section 12 of the Invitation to Bid, prospective bidders could submit written questions to Brasoil to clarify the terms of the bid documents and any inaccuracies or discrepancies found in them. (PB-279 at 21; Tr. at 2959-60.) Any doubts not resolved through the clarification process would be subject to Bra-soil’s exclusive interpretation either at the time of the award of the bid or dining the performance of the bid. (PB-279 at 21.) Section 12.3 of the Invitation to Bid further provided that “any doubts arising after presentation of tenders will be subject to the interpretation of Brasoil.”

(Id.)

54. Prior to the submission of the sealed bids, Brasoil issued seven circular letters responding to requests for clarifications from the prospective bidders. (JS ¶ 128; Tr. at 2960; PB-279 at 73-198.) The letters were distributed to all interested parties. (JS ¶ 128; Tr. at 2960.)

55. The delivery of envelopes with sealed bid proposals took place at 2 p.m. on November 28, 1994. (JS ¶ 129; S-14 ¶ 2.) The bids were opened in three stages. (JS ¶ 130; Tr. at 2962-63; S-14 ¶¶ 3, 5, 9, 13.) In the first stage, the commission examined the financial and technical qualifications of the bidders. In the second stage, the commission determined whether the platforms proposed for conversion by the qualified bidders met the specifications set forth in the Invitation to Bid. The final stage was to open the sealed envelopes with the bid prices. (Tr. at 2962-63; S-14 ¶¶ 5,10,11.)

56. Three consortia and one company submitted bids. The bidders were: (1) Consorcio Construtores Offshore Associa-

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dos (“COA”) made up of Mendes Junior Montagens e Servicos, LTDA, Montreal Engenharia S.A., Ultratec Engenharia S.A. and Tenenge-Tecnica Nacional de Engenharia, (2) Consorcio Sembawang Bethlehem/Sembawang Shipyard, (3) Con-sorcio Industrias Verolme Ishibras made up of IVI and Sade Vigesa, and (4) Far East Livingston Shipbuilding (FELS). (JS ¶ 181; Tr. at 2962; S-14 ¶ 4.)

57. The bidding commission disqualified FELS for not complying with § 5.4c and 5.4d of the Invitation to Bid. In the second stage, the commission disqualified Consorcio Sembawang Bethelehem/Semba-wang Shipyard because the platform proposed for the conversion did not meet the minimum size requirements stipulated in the Invitation to Bid. (JS ¶ 132; Tr. at 2962-63; S-14 ¶¶ 6,11.)

58. After disqualifying FELS and the Sembawang Bethlehem Consortium, the Commission opened the sealed envelopes with the bid prices on January 3, 1995. (S-14 ¶ 13.) Consorcio IVI/Sade Vigesa was selected as the winning contractor based on a low bid of $165,532,660. (S-14 ¶ 16.) The second-place bid was COA’s, at $177,888,238.

(Id.

¶ 14.)

59. Petrobras had made its own estimate and determined an estimated average bid amount of $172.3 million, within a range having a high end of approximately $200 million and a low of approximately $150 million. (PB-1289; Tr. at 2968-69.) Consorcio IVI/Sade Vigesa’s bid was 4.09% below Petrobras’ internal estimate. (Tr. at 2968; S-14 ¶¶ 16-17; PB-1289.)

60. On January 19, 1995 the Diretoria of Petrobras recommended to Brasoil that Brasoil enter into a contract with Consor-cio IVI/Sade Vigesa (the “P-19 Consortium”) for the acquisition and conversion of P-19. (Tr. at 2970-71; S-17 at 2-3.) The contract was to be subject to the precondition that the P-19 Consortium obtain a performance bond in accordance with the terms of the Invitation to Bid. (S-17 at 3; Tr. at 2984.)

61. The P-19 Consortium and Brasoil signed the P-19 Contract (Contract No. 821-2-002-095-2) on February 10, 1995. (JS ¶ 133.)

62. The P-19 contract did not go into effect until after the Consortium obtained the performance bond. (PB-579.) The contractual provision for a performance bond issued by a first rate insurance company was a safeguard for Petrobras. (Tr. at 2988.) The performance bond was of the utmost importance to Petrobras, and the Consortium would not have been permitted to undertake the project without the performance bond. (Id. at 2984, 2987-88.)

The P-19 Consortium Underbid the P-19 Project

63. The Invitation to Bid required bidders to submit a fixed lump sum price for Schedule A services and a flexible estimate with unit prices for Schedule B services. (PB-379 at 12, 581-587.) Schedule A encompassed:

[SJupply of a semi-submersible platform, converted from an existing vessel, including for this purpose the supply of the vessel, its transportation to job site and the execution of design, procurement, construction and assembly, services in the vessel to restore to an “as new condition”, vessel adaptations and modifications, commissioning, testing, pre-operation, certification, and transportation to Campos Basin and start-up assistance....

(Id.

at 582.)

64. The schedule B price covered “direct labor support” for offshore start-up assistance.

(Id.

at 218.) The unit prices in schedule B were also to be used to calculate change orders.

(Id.

at 224.) The

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unit prices specified the wages that would be paid to workers by trade and skill.

(Id.

at 583-86.)

65. The P-19 Consortium submitted a bid of $163,000,000 for the Schedule A work and an estimate of $2,532,660 for the Schedule B work.

(Id.

at 581; Tr. at 2797.) The total bid price was $165,532,660. (S-14 ¶ 14.)

66. The Consortium initially budgeted the project at approximately $169 million. For competitive reasons, the Consortium chose to reduce this amount to $163 million in its bid. (Tr. at 2827.)

67. The P-19 Consortium budget was plainly inadequate. It contained no provision for any contingency.

(Id.

at 3829.) The P-19 Consortium hoped to realize a profit by negotiating discounts from suppliers after the Contract was signed. Indeed, the P-19 Consortium budgeted for a twenty percent reduction in vendor prices in the expectation of reduced prices after it had the contract in hand.

(Id.

at 4079.)

68. An important part of the cost of the P-19 Project was the purchase of the vessel to be used for the project. The original contract schedule provided that the P-19 Consortium would be paid $40.75 million (25% of the schedule A price of $163 million) when the platform was delivered to Brasoil prior to conversion. (PB-279 at 589-91.) The P-19 Consortium chose to purchase the

Treasure Stamnner

for the conversion project at a cost of $55 million. (JS ¶ 225; PB^438 ¶ 4.4.) Consequently, the balance of $14.25 million had to be made up by a savings in some other budget category. (Tr. at 3016-17, 4074-75; PB-760.)

69. The P-19 Consortium’s budget either did not provide or made inadequate allowance for other important budget items.

(Id.

at 3827-31; 4092, 4094.) Shipyard overhead was only budgeted for $15,000 even though the project was scheduled to last twenty-four months.

(Id.

at 3831, 4092.) In addition, the budget did not include substantial financing charges that the Consortium incurred due to its weak financial condition.

(Id.

at 4074-76.)

70. The P-19 Consortium obtained its equipment quotes for the bid in or about November 1994, but did not start placing its equipment orders until well after the quotations had expired.

(Id.

at 4078-79.) The Consortium could have locked in its equipment prices by obtaining binding quotations from vendors (at a price), but it failed to do so.

(Id.)

Consequently, the Consortium’s project costs were extremely sensitive to fluctuations in the price of equipment and materials.

71. Initially 70% of the Schedule A price was tied to the procurement of equipment, materials and the vessel itself. (PB-279 at 589.) At the request of the Consortium, on March 1, 1996 the percentage for procurement was increased to 80% of the Schedule A price through Amendment One to the P-19 Contract. (PB-71 at 1, 6.)

72. Thus, after March 1, 1996, only 20% of the total contract price was subject to the control of the P-19 Consortium. As a result, the Consortium had minimal flexibility to offset overruns on equipment with savings in budget line items under its control.

73. Commencing in or about 1995, there was an increase in the number of platform conversions worldwide and an upturn in demand for production and process equipment. (PB-438 ¶ 4.1; Tr. at 4085-88.) With increased demand, prices for production and process equipment escalated. The P-19 Consortium did not anticipate price increases and had not included a contingency provision in its budget. (PB-438 ¶¶ 4.1, 4.5; Tr. at 2246.) As a result, the Consortium found itself paying far more for essential equipment than it had originally budgeted. (PB-438 ¶¶4.4-4.5.)

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74. The P-19 Consortium also was hurt by the overvaluation of the Brazilian currency in 1995-97. (PB-438 ¶4.2.) The contract price was in United States dollars, but labor and domestic equipment had to be paid for in Brazilian

reads.

(PB-438 ¶

4.2.)

75. Many P-19 Project items ended up costing considerably more than the Consortium had budgeted. For example, IVI labor and consumables costs exceeded the budget (even after adjustments for changes) by approximately $15.4 million, an overrun of approximately 139%; shipyard overhead cost approximately $6.8 million, although the budget only anticipated $15,000; turbomachinery cost approximately $4.1 million more than the budgeted amount; the adjusted imported vessel equipment cost was approximately $19.9 million, a 67% overrun; and the adjusted domestic equipment cost was approximately $6.6 million, although the budget did not provide for any such costs. (Tr. at 3828-31, 4090-93.)

The Sureties’ Issuance of the P-19 Bond

76. On April 5, 1995, the Sureties issued a Performance Bond, Bond Nos. 29-34902-95-5 (USF & G) and 15-61-23 (AHAC) (the “P-19 Bond”), in the penal sum of $110,532,660, on behalf of the P-19 Consortium, as principal, in favor of Bra-soil, as obligee, in connection with the P-19 Contract. (S-72A.) The bond amount reflected the contract amount of $165,532,660 minus the $55,000,000 cost of the

Treasure Stawinner,

the platform to be converted. The P-19 Bond was in the form of an American Institute of Architects Document A312 (“AIA 312”) Performance Bond. On August 30, 1995, Brasoil, the P-19 Consortium, and the Sureties entered into a Dual Obligee Rider to the P-19 Bond, in which they named the Japanese Banks as additional obligees on that Bond.

(Id.

at 8; JS ¶ 150.)

77. Brasoil paid the Sureties a premium of $2,579,058 for the P-19 Bond. (JS ¶ 151.) The price of the performance bond was not part of the lump sum price for the conversion. (PB-279 at 227-28.)

78. Several provisions of the AIA 312 Performance Bond are particularly important for purposes of this case. Some of those provisions are set out below for purposes iof understanding the disputes that arose.

79. Under Paragraph 1 of the Bond, the Sureties (collectively referred to in the Bond as the “Surety”) and the P-19 Consortium (referred to as the “Contractor”) jointly and severally bind themselves to “the performance of the Construction Contract, which is incorporated by reference.”

80. Under Paragraph 3, if there is no default by Brasoil as the project’s Owner,

the Surety’s obligation under this Bond shall arise after:

3.1 The Owner has notified the Contractor and the Surety.. .that the Owner is considering declaring a Contractor Default and has requested and attempted to arrange a conference with the Contractor and the Surety....; and

3.2 The Owner has declared a Contractor Default and formally terminated the Contractor’s right to complete the contract..and

3.3 The Owner has agreed to pay the Balance of the Contract Price to the Surety in accordance with the terms of the Construction Contract or to a contractor selected to perform the Construction Contract in accordance with the terms of the Contract with the Owner.

The “conference” contemplated in ¶ 3.1 of the Bond is commonly referred to herein as a “3.1 Meeting.”

81. Under Paragraph 4,

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When the Owner has satisfied the conditions of Paragraph 3, the Surety shall promptly and at the Surety’s expense take one of the following actions:

4.1 Arrange for the Contractor, with consent of the Owner, to perform and complete the Construction Contract; or

4.2 Undertake to perform and complete the Construction Contract itself, through its agents or through independent contractors; or

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner for a contract for performance and completion of the Construction Contract.. .and pay to the Owner the amount of damages ... in excess of the Contract Price incurred by the Owner resulting from the Contractor’s default; or

4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances:

.1 After investigation, determine the amount for which it may be liable to the Owner and, as soon as practicable after the amount is determined, tender payment thereafter to the Owner; or

.2 Deny liability in whole or in part and notify the Owner citing reasons therefor.

82. Under Paragraph 8, “The Surety hereby waives notice of any change, including changes of time, to the Construction Contract or to related subcontracts, purchase orders and other obligations.”

83. Typically, a surety undertakes a rigorous investigation of a contractor’s financial condition and prior relevant experience before issuing a bond. (Tr. at 4414-15.) This is because in issuing a bond a surety undertakes the risk that the contractor will be unable to complete the project for financial reasons, and the risk that the contractor may not have sufficient financial capability to absorb or answer for any loss that occurs.

(Id.

at 4416.) A surety reviews the contract to understand the contractual obligations that are being bonded, but a surety typically does not make a determination whether the contractor can actually perform the contract for the specific price bid because the surety lacks the expertise to make that determination.

(Id.

at 4415-16.)

84. In this case, it does not appear that the underwriters reviewed the construction contracts before issuing the P-19 or the P-31 Bonds. (Tr. at 1377-78; 3302; 4423.) The financial information that the Sureties received should have raised questions about the financial condition of TVI. (Tr. at 4425-36.)

85. The Sureties had various indemnification agreements from various parties that provided them with protection should they be required to make payments under the bonds. As a named principal, defendant Sade Vigesa entered into Agreements of Indemnity in favor of USF & G, as surety, dated August 19, 1994 and February 17, 1995. The stated limit of indemnity under the August 19, 1994 Agreement of Indemnity is $200 million. The stated limit of indemnity under the February 15, 1995 Agreement of Indemnity is $500 million. On February 17, 1995, IVI, Sade Vigesa, and a company that was a significant shareholder of IVI executed another indemnity agreement in favor of the Sureties. On March 22, 1996, other companies, which have been severed for purposes of the current trial, executed an indemnity agreement in favor of USF & G. The stated limit of indemnity under the March 22, 1996 agreement is $200 million. (JS ¶¶ 195-198.)

Relevant Provisions of the P-19 Contract

86. The P-19 Contract was an engineering, procurement, and construction

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contract (“EPC Contract”) to be performed on a turn key, lump sum basis. (JS ¶ 145; Tr. at 3055-56; PB-279 at 218 §§ 5.2, 5.4.)

87. The lump sum (Schedule A) contract price covered all work for the supply of a semi-submersible platform, converted from an existing vessel, including for this purpose, the supply of the vessel; its transportation to the job site; the execution of design, procurement, construction and assembly services in the vessel to restore it to an “as new” condition; vessel adaptations and modifications; commissioning, testing, pre-operation; certification; transportation to the Campos Basin; and start-up assistance. (PB-279 at 582.) The Schedule A price was $163,000,000, as the Consortium had bid.

(Id.

at 218 § 5.1.1; JS ¶ 143.)

88. Schedule B of the P-19 Contract specified unit prices for labor for offshore services. (PB-279 at 583.) These prices could not change; however the total amount paid under Schedule B was flexible in that it was based on the actual quantities incurred to complete the work.

(Id.

at 218 § 5.3.) The estimated Schedule B price of $2,532,660 was also in accordance with the Consortium’s bid.

(Id.

§ 5.1.2; JS ¶ 143.)

89. The P-19 Contract specified that the prices in schedules A and B were to include profit and overhead. (PB-279 at 218 § 5.4.) The total contract price was $165,532,660

(Id.

§ 5.1.)

90. The P-19 Contract used a project breakdown schedule (“PBS”) or work measurement structure, for progress payments. (PB-279 at 219, 588.) The PBS is a logical and systematic means of dividing a single large project, via a hierarchal structure, into a very large number of individual tasks. Payment is linked to the completion of specified benchmarks. The benchmarks were identified in Annex VI to the P-19 Contract. (PB-279 at 588-597.) The weightings for each task were assigned in accordance with an Analytical Structure of Payments (“EAP”).

(Id.;

Tr. at 542-43.)

91. Under the P-19 Contract, the Consortium was to invoice Brasoil by submitting a Measurement Bulletin (“BM”) which outlined in full detail the services that had been performed the prior month and calculated the percentages that were due under the EAP system. (PB-279 at 219.) Pe-trobras would confirm that the services had been performed, and approve the BM for payment.

1

Petrobras and the P-19 Consortium would often negotiate whether the Consortium was entitled to credit for having achieved a given benchmark.

92. Time was of the essence. Section 6.1 of the P-19 Contract’s General Conditions required the Consortium “to comply strictly with the time period stipulated in the Contract in relation to the performance of the work contracted for.” (PB-279 at 267.)

93. The P-19 Contract was to be completed within 840 running days (720 onshore plus 120 offshore). The completion date for the on-shore work was initially set for March 23, 1997, with the offshore por

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tion to be concluded on July 23, 1997. The parties subsequently agreed in Amendment Two to the Contract to extend the completion date for the shipyard services by sixty days to May 24, 1997 and the offshore completion date to September 21, 1997. (JS ¶ 146.)

94. The Contractor was required to provide written notice of “[d]ays on which work is at a standby due to demands for modifications of design on the part of Bra-soil, and which manifestly affect the progress of the work or are the result of delays in the supply of materials for which Bra-soil is responsible” in order to claim extensions of time due to the fault of Brasoil. (PB-279 at 267 § 6.3.)

95. The P-19 Consortium had 90 days from the signing of the Contract on February 10, 1995 to transfer title to the platform to Brasoil.

(Id.

at 200, 206.) Therefore, the transfer of the vessel was to take place on or before May 10,1995.

96. Section 3.13 of the P-19 Contract required the P-19 Consortium to endorse the consistency of the Technical Documentation provided by Brasoil within sixty days of the signing of the Contract.

(Id.

at 207.) Thereafter, any errors or contradictions became the responsibility of the P-19 Consortium.

(Id.

at 207 § 3.13.1.)

97. IESA, the P-19 Consortium’s subcontractor, issued a “Report on the Basic Design Consistency Analysis,” which was received by Petrobras on April 25, 1995. (PB-1274; Tr. at 3127.) According to the Report, no serious inconsistencies were found in the basic design and “Petrobras’ basic project possesses satisfactory degrees of consistency and scope allowing, without any major difficulty, for its consolidation and subsequent elaboration.” (PB-1274 at 10-11.)

98. Offshore production of oil and gas is an inherently hazardous activity. The completed platform was to be stationed approximately one hour’s flight offshore for twenty years. (Tr. at 2947, 2980; PB-279 at 78.) There would be no opportunity to remove the platform to shipyards on shore for repair and refit, and the platform had to be capable of operating twenty-four hours a day, seven days a week in a harsh marine environment. Thus, the P-19 Contract required rigorous compliance with technical and safety specifications.

99. The Contract gave Petrobras broad rights to inspect the work on the project and insist on strict compliance with the Contract. (PB-279 at 202, 226, 260, 271-72, 716.)

100. Section 2.3.1 of Appendix III to the Contract required the P-19 Consortium to provide facilities at the job site for a Petrobras supervisory team consisting of “at least 20 and at most 40 persons.” (PB-279 at 577.)

101. The P-19 Contract authorized Pe-trobras to attend expediting and technical meetings with vendors. (PB-279 at 623-24.) Petrobras employees did not participate in the negotiation of the commercial terms of the vendor contracts.

102. The platform had to be approved and certified by a classification society.

(Id.

at 207-08.) Section 3.15.12 of the Contract provided that the classification society “shall be involved in all phases of the work contracted, from , the design phase, and including procurement, construction, assembly, commissioning, testing, pre-operation and transportation, up to final Classification/Certification” of the platform.

(Id.

at 208.) The P-19 Consortium retained Bureau Veritas as the platform’s classification society. (Tr. at 3346.)

103. The P-19 Contract expressly provided that “approval by Brasoil of documents referring to Design, Procurement, Construction and Assembly, Conditioning and Pre-Operation does not limit or modify [the Consortium’s] responsibility for

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performance of the object of this Contract.” (PB 279 at 205 § 3.3.)

104. ' Section 3.23 of the P-19 Contract stipulated that materials and equipment acquired for the purpose of the Contract became “the property of Brasoil and shall be exempt from seizure in the event of bankruptcy or bankruptcy protection proceedings involving the [Consortium], the latter being required to notify the Courts of these circumstances.” (PB-279 at 209.) The P-19 Consortium was to acquire equipment and materials as a “faithful custodian” and undertook to see to their safekeeping.

(Id.)

105. Section 3.23.2 of the P-19 Contract specified that equipment and materials acquired for the purpose of the Contract would be the property of Brasoil, even if it had not yet been received at the job site, if purchase orders had been issued for said equipment and materials.

(Id.)

106. Section 9.3 of Appendix VIII required the Consortium to supply certain documents to Brasoil for Brasoil’s approval.

(Id.

at 606.) Sections 9.3 and 9.4 stated that if Brasoil failed to return its comments within fourteen days from the date of receipt, such documents would be considered “released,” unless the delay were justified by Brasoil and reported in advance to the P-19 Consortium.

(Id.)

107. Section 5.1 of Appendix VIII specified that “all verbal communications, whenever necessary, shall be confirmed later by letter or meeting notes.”

(Id.

at 602.) Section 6.2 further provided that all subjects discussed at weekly technical or administrative meetings were to be formalized by meeting notes, issued immediately after the end of the meeting.

(Id.)

Delays in the Commencement of the P-19 Project

108. Section 9.1 of the Invitation to Bid required the'winning bidder to provide a performance bond within twenty days of the release of the bidding results.

(Id.

at 20.) The time limit could be extended at the sole discretion of Brasoil.

(Id.)

The report of the bidding commission was dated January 9,1995 (S — 14 at 4), so the P-19 Consortium was required to procure the bond no later than January 29,1995.

109. The P-19 Contract was signed on February 10,1995. (PB-279 at 258.) Section 15.6 of the Contract provided that the performance bond was to be delivered to Brasoil on signature of the Contract.

(Id.

at 228.) The P-19 Consortium was still attempting to obtain a performance bond when the P-19 Contract was signed. (PB-282; Tr. at 2985-86.)

110. The P-19 Consortium requested extensions of time to obtain the performance bond. (Tr. at 2985-88; S-51.) Bra-soil allowed the P-19 Consortium to have the extra time. (Tr. at 2986.)

111. The P-19 Consortium did not obtain the performance bond until April 5, 1995, 54 days after the execution of the Contract.

(Id.

at 2989; S-72A.)

112. Brasoil issued an Service Authorization, which allowed work on the project to go forward, immediately upon the Consortium’s obtaining the bond. (Tr. at 2697-99; PB-579.)

113. The PBS provided for a payment of 25% of the schedule A price ($40.75 million) when the platform was transported to the job site. (PB-279 at 589.) On February 10, 1995, IVI entered into an option agreement with Winner Drilling Ltd. to purchase the

Treasure Stawinner

drilling platform for $55 million. (JS ¶ 122.) At the time, the

Treasure Stawin-ner

was under lease to Petrobras and was engaged in drilling operations off the coast of Brazil. (Tr. at 2977; JS ¶¶ 121, 134.) The higher-than-budgeted price of the platform left a gap of $14.25 million to be

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financed by the P-19 Consortium. (Tr. at 1038,3016-17; ^¶241.)

114. The P-19 Consortium entered into an agreement with Marubeni America Corporation (“MAC”) to obtain the gap financing. (JS ¶242.) MAC made the gap financing contingent upon the P-19 Consortium purchasing turbogenerators from Dresser and turbocompressors from Dresser/Solar using MAC as the purchasing agent. (JS ¶242.) The Dresser and Solar equipment was $8 million more expensive than comparable equipment from another vendor. (PB-438 § 4.4.)

115. As security for the equipment financing, MAC required and the P-19 Consortium obtained a payment bond in the amount of $38 million from the Sureties. (JS ¶ 244.)

116. The closing of the purchase of the

Treasure Stawinner

occurred on June 29, 1995, 79 days after delivery was supposed to have occurred under the Contract and 24 days after Petrobras’s manager expected the platform to arrive at the shipyard, in view of the late date of the Service Authorization.

(Id.

¶ 245; Tr. at 3021.)

117. Preparatory work began on P-19 in Angra dos Reis at the beginning of July, 1995, nearly five months after the signing of the Contract. (Tr. at 2948.) The initial work involved the removal of drilling equipment. This dismantling work was not completed until November 1995.

(Id.

at 2712.)

118. On May 22, 1995, Arnaldo Arcadier, Petrobras’s P-19 project manager, wrote Amauri Rodrigues, the P-19 Consortium’s project manager, to complain about the slow progress of the P-19 Consortium in getting procurement organized. (S-77; Tr.-at 3006-07.)

119. Throughout the time that Arnaldo Arcadier worked on the P-19 Project, the P-19 Consortium lacked the capacity to procure equipment and materials effectively. (Tr. at 2997.) It lacked an international arm for procurement as well as an internal structure. The Consortium delayed in placing orders for long lead items, such as turbomachinery, and failed to plan adequately for purchases.

(Id.

at 2997-3001.) Mr. Arcadier wrote several letters to the Consortium expressing the dissatisfaction of Petrobras with the Consortium’s procurement function.

(Id.

at 3001.)

120. In June, 1995, Guilherme Pires assumed the management of the P-19 Project for the P-19 Consortium.

(Id.

at 2019.) Pires was part of the team that the P-19 Consortium brought in from Montreal Engineering which also included David Fischel and Carlos Mauricio.

(Id.)

121. On August 8, 1995, six months after the signing of the P-19 Contract, the Consortium entered into a contract with Mustang Engineering, Inc. (“Mustang”) establishing that Mustang would act as procurement agent for the Consortium in the United States. (JS ¶ 157-58.)

122. The P-19 Consortium did not line up financing for the purchase of imported equipment until October 25, 1995, when IVI and Sade Vigesa signed a Note Purchase and Credit Agreement with Mustang and the Canadian Imperial Bank of Commerce (“CIBC”). Pursuant to this agreement, CIBC agreed to purchase $80 million in promissory notes that IVI and Sade Vigesa issued to Mustang to pay for the purchase of equipment imported from the United States. The promissory notes were guaranteed by the Export-Import Bank of the United States (“Exim Bank”) under the Financial Institution Buyer Credit Policy, Consortium IVI-Sade Vige-sa, Brasil (FB 157438).

(Id.

¶ 159; PB-611.) The notes were payable 360 days after the date of issuance. (PB-611 § 3.1(a).)

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The P-Sl International Bid Process

123. On March 20, 1995 a public meeting was held initiating the international public bidding process for the award of the Contract for the conversion of the

Vidal de Negreiros

(the

“Vidal”),

a Very Large Crude Carrier (“VLCC”), into a Floating Production, Storage, and Offloading (“FPSO”) unit called P-31. The notice of the invitation to bid was published on May 15,1995. Edison Krummenauer, who later served as Petrobras’ P-31 project manager, acted as the coordinator of the bidding commission. (JS ¶¶ 120,160; S-1136.)

124. The bidding process was required to comply with the Brazilian Public Bidding Law (Law 8.666 of 1993). (JS ¶ 160.)

125. IVI, Sade Vigesa, and IESA (the “P-31 Consortium”) entered into a formal consortium agreement on October 5, 1995. Under the consortium agreement, the stated purpose of the P-31 Consortium was to bid for and perform the P-31 Contract. The consortium agreement authorized IVI to represent the P-31 Consortium in its dealings with Brasoil.

(Id.

¶ 168.)

126. The

Vidal

was made available for inspection by interested parties from May 27 to June 27,1995.

(Id.

¶ 175.)

127. The P-31 Consortium inspected the

Vidal

on two occasions.

(Id.)

As part of its bid, IVI, Sade Vigesa, and IESA each executed a declaration dated August 24, 1995 attesting that it was aware of all the works and installations that would be incorporated on the vessel in the course of the project and of the current condition of the vessel itself. (PB-24.) The declaration was signed for Sade Vigesa by Alarico de Castro as director of business development. (PB-24.) Mr. De Castro was later to serve as the P-31 Consortium’s project manager for P-31. (Tr. at 2173-74.)

128. The P-31 bidding commission issued fifteen circular letters responding to requests from the parties for clarification of the bidding documents. The circulars were distributed to all interested parties and bidders. (JS ¶ 173.)

129. On August 24, 1995 seven consortia, made up of fourteen companies, submitted bids on the P-31 Project. (S-1136 ¶¶ 5.1, 5.2; S-291 at U 2434.)

130. In its report dated August 28, 1995, the bidding commission found that the P-31 Consortium was the low bidder. The P-31 Consortium bid was $163,000,021. (S-1136 at 3.)

131. The P-31 Project was to be completed within 810 running days. The signing of the Contract was to be conditioned on the P-31 Consortium’s obtaining a performance bond meeting the conditions set forth in the Invitation to Bid.

(Id.;

JS ¶¶ 170,182.)

132. The bidding contest for the award of the P-31 Contract was entirely transparent, fair, and above board. (Tr. at 3518-21.)

133. On August 25, 1995, Brasoil entered into a contract with a consortium made up of IVI and Sade Vigesa to convert the

Cain,

a VLCC similar to the

Vidal,

to an FPSO called P-32. (S — 1476.) That Consortium was the lowest bidder on the project with a contract price of $93,000,710.

(Id.

at 10.)

134. IVI was also involved in constructing two other Petrobras/Brasoil projects known as P-25 and P-34. (JS ¶¶ 187, 189.) Despite serious concerns about the concentration of five significant projects with IVI (P-19, P-25, P-31, P-32, and P-34), Petro-bras and Brasoil were required by Law 8.666 to award the projects to the lowest qualified bidder. (Tr. at 244-246, 3248.)

135. On October 25, 1995, the Sureties issued a Performance Bond for the P-31 Contract in the face amount of $163,000,021, with Brasoil as the obligee. (JS ¶ 163.)

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136. On October 25, 1995, the P-31 Consortium and Brasoil signed the P-31 Contract (Contract No. 846-2-024-95-1). The Service Authorization was issued the same day. An on-shore completion date of August 16, 1997 and a final contract completion date of January 11, 1998 were established. (JS ¶¶ 164,167,182.)

The P-31 Consortium Underbid the P-31 Project

137. The P-31 Consortium submitted a bid that seriously underestimated the reasonable costs that would be necessary to complete the project. The P-31 Consortium prepared a budget document prior to the bid that showed in detail two budgets with total prices of $169.7 million and $195 million. (PB-856; Tr. at 2243-44.) The budget document also notes a “floor” figure of $161,250,292.50 and a “ceiling” figure of $174,829,264.50, without detail. The P-31 Consortium staff initially recommended that the Consortium bid the project for $169,000,000, but upper management reduced the bid to $163,000,021 on the day the bid was submitted. (Tr. at 2244, 3808.) No factor for contingencies, overhead or profit was included even in the $169 million proposal by the staff, and therefore not in the still lower bid of $163,000,021 determined by the Board.

(Id.

at 2247, 3814.)

138. David Fischel, president of IVI and Sade Vigesa, admitted that the P-31 Consortium counted on negotiating steep price discounts from suppliers once it had a contract in hand.

(Id.

at 1022, 2166).

139. The substantial underbid was exacerbated by market conditions that resulted in an increase in the cost of equipment as a rsult of an overheated market. Moreover, IVI’s poor financial condition resulted in increased costs because of difficulties in obtaining favorable prices and credit facilities. Thus, while the P-31 Consortium expected to earn a profit based on its ability to negotiate better prices with suppliers, exactly the opposite result occurred. The P-31 Consortium itself acknowledged in November, 1996 and April, 1997 that there were substantial reasons for the increased cost of the P-31 Project that had nothing to do with any fault of Petrobras or Brasoil. The P-31 Consortium’s stated reasons for the discrepancy between the budget and the actual costs include: (1) IVI’s poor financial condition, resulting in lack of credit and lack of negotiating leverage with suppliers, (2) the fluctuation of the

real

against the dollar; (3) an increased demand for supplies, resulting in higher prices; (4) the Consortium’s decision to purchase equipment on skids, which increased prices; and (5) the inability of some suppliers to comply with the Contract’s technical specifications. (S-342; PB-217.)

140. The P 31 overruns and delays were caused principally by the P-31 Consortium’s own practices and by market forces that were not the fault of Petrobras or Brasoil. The principal reasons that the P-31 Consortium did not complete the P-31 Project within the Contract price were the following: (1) an unrealistically low bid that failed to provide for significant items and a heating up of the offshore market; (2) poor project planning; (3) IESA’s delay in the issuance of construction drawings and material requisitions; (4) failure to manage suppliers; (5) delays in the manufacture and delivery of equipment; (6) deficient shipyard infrastructure; (7) labor strikes and inefficiency; and (8) damage to the turbocompressors. (Tr. at 4069-97.)

The Issuance of the P-31 Bond

141. The Co-Sureties issued a Performance Bond in New York in the penal sum of $163,000,021, Bond Nos. 53-0120-56276-95-1 (USF & G) and 15-11-56 (AHAC), effective October 25, 1995 (the “P-31

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Bond”). The “Contractor” named on the P-31 Bond was “Consorcio Industrias Ver-ohne Ishibras S.A. Sade Vigesa S.A.” USF & G and AHAC each signed the Bond as “Sureties,” and IVI and Sade Vigesa each signed it individually as “Contractor” and “Principal.” (S-123 at 1, 3.) The P-31 Bond was issued in favor of Brasoil, as obligee, in connection with the P-31 Contract. (JS ¶¶ 193-94.).

142. Like the P-19 Bond, the P-31 Bond was on the AIA 312 form. The P-31 Bond included the same Clauses 1, 3, 4, and 8 discussed above with respect to the P-19 Bond. (S-123.)

143. As discussed above, there is no evidence that the Sureties actually reviewed the P-31 Contract before issuing the P-31 Bond.

144. By October, 1995, the financial situation of IVI had worsened, but the Sureties proceeded to issue the performance bond despite that financial condition. (Tr. at 4433-34.) In addition, IVI was working on 5 Brasoil projects simultaneously (P-19, P-25, P-31, P-32, P-34), and in September, 1995, USF & G had issued a bond for the P-32 (Cairu) Project in the amount of $93 million. (Id at 511-12; JS ¶ 188.)

Relevant Terms of the P-31 Contract

145. The P-31 Contract was an engineering, procurement, and construction contract (“EPC Contract”) to be performed on a turn key, lump sum basis. As set forth in Section 1.1. of the P-31 Contract, the object of the Contract was the performance by the contractor of the services and procurement necessary to convert the VLCC

Vidal de Negreiros

into a floating production, storage and offloading unit (“FPSO”) for oil and gas. (PB-820 at 489.)

146. The Contract was to be completed within 810 days of Brasoil’s issuance of a Service Authorization (660 onshore, 60 for pre-operation of the oil and gas systems

offshore, and 90 days for provision of support for the assisted operation phase). (Id at 506.) The completion date for the onshore work was initially scheduled for August 16, 1997, with an offshore completion date of January 11, 1998. (Id at 506, 518.) The parties subsequently agreed in Amendment Three to extend the Contract duration by ninety-three days. (Id at 1557-58.) The deadline for completion of the onshore services was moved back to November 17,1997, and the offshore phase was moved back to April 14, 1998. (Id; JS ¶ 167.)

147. The P-31 Consortium’s total price of $163,000,021 was compiled from five schedules consisting of fixed prices and unit prices. (PB-820 at 880; JS ¶ 170.)

148. Annex VIII to the P-31 Contract provided for periodic progress payments in accordance with an intricate PBS. (PB-820 at 881-888.) The PBS provided measurement criteria for payment under the EAP based on the completion of specified activities (such as detailed engineering design and the procurement of equipment.)

(Id

at 883.) 51%

of the

lump sum amount on Schedule A was to be paid when procurement milestones were met for equipment and materials. (JS ¶ 178.) Of this total for procurement, 40% (i.e., 20.5% of the overall schedule A price) was tied to the procurement of the turret system. (Id) The turret system was a complex component which was to anchor the

Vidal,

provide a location for risers to be attached to the vessel from the oil and gas wells on the bottom of the ocean, and function as a pivot around which the vessel could change its orientation in the sea. (Tr. at 911-12, 3436.)

149. Under the P-31 Contract, the Consortium was to invoice Brasoil by submitting a Measurement Bulletin (“BM”) which outlined in full detail the services that had been performed the prior month

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and calculated the percentages that were due under the EAP system. (PB-820 at 505-06.) Petrobras would confirm that the services had been performed, and approve the BM for payment. Petrobras and the P-31 Consortium would often negotiate whether the Consortium was entitled to payment for having achieved a given benchmark.

150. Section 3.15 of the Contract required the Consortium to endorse the technical consistency of the Basic Engineering Design documents supplied by Brasoil within sixty days from the commencement date of the services under the Contract. (PB-820 at 496 § 3.15.) Thereafter, there could be no grounds for subsequent claims in relation to the inadequacy or lack of precision of the Basic Engineering Design documents.

(Id.)

The P-31 Consortium issued a Basic Design Consistency Analysis — Vidal Project letter report on December 28,1995. (PB-268.)

151. The P-31 Consortium was responsible for retaining a classification society to inspect and certify the platform. (PB-820 at 489.) The P-31 Consortium hired the American Bureau of Shipping (“ABS”) as the classification society for the vessel. (Tr. at 4145.) All work on the vessel had to be approved by ABS. (JS ¶ 180.)

152. Appendix V to P-31 Contract Annex III included a detailed vendor list with the names of approved suppliers for each item of equipment. (PB-820 at 622-64.) Brasoil was obligated to accept equipment made by these vendors that met the specifications set forth in the Contract. (JS ¶ 181.)

153. Brasoil had the contractual right to participate in technical discussions with vendors and to accompany the P-31 Consortium on expediting visits and inspections. (PB-820 at 591-93 §§ 3.14, 4.3, 5.5; Tr. at 1017.)

154. If the work fell behind schedule due to the fault of the contractor, Brasoil had the right to demand that the contractor employ a larger work force, work overtime, and/or.provide additional tools and equipment to the extent necessary to eliminate the delay and permit the work to be completed on the specified date without any alteration of the Contract prices. (PB-820 at 507 § 8.3.)

155. Appendix I to P-31 Contract Annex VIII, entitled “Procedures of Equipment Repair,” set forth detailed “as new” procedures for the equipment to be retained on the

Vidal

and reconditioned.

(Id.

at 899-985.) The object of the reconditioning was to “recover the original working conditions (similar to a new equipment) and allowing its use for the FPSO operational life-time” of twenty years.

(Id.

at 900 § 1.)

156. Under the P-31 Contract, only the project managers were allowed to issue correspondence in the name of their respective companies and “all verbal communications, whenever necessary, shall be confirmed later by letter or meeting notes.”

(Id.

at 556-57 §§ 2.2, 3.1.)

157. Weekly meetings were to be held between Brasoil and the P-31 Consortium to discuss technical and administrative matters.

(Id.

at 557 § 4.1.) All the subjects discussed in the engineering meetings “shall be formalized by meeting notices, issued immediately at the end of each meeting.”

(Id.

§ 4.2.)

158. Like the P-19 platform, the P-31 was-expected to be stationed approximately one hour’s flight offshore for twenty years. (Tr. at 2947, 2980.) There would be no opportunity to remove the unit to shipyards on shore for repair and refit.

(Id.

at 3109-10.) It had to be capable of operating twenty-four hours a day, seven days a week in a harsh marine environment. Thus, the P-31 Contract required rigorous compliance with technical and safety specifications. (PB-820.)

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159. The Contract conferred broad rights on Petrobras to supervise and in* spect the progress and quality of the work.

(Id.

at 506-08 § 8.) Annex VII required the P-31 Consortium to provide facilities for the Brasoil inspection team

(Id.

at 846-50), which it envisioned would consist of between fifteen and thirty people at the job site

(Id.

at 848). An additional six inspectors were to be stationed at the engineering office.

(Id.

at 847.)

160. Brasoil did not have the right to terminate the P-31 Contract for convenience. (Tr. at 1040.)

Initial Efforts to Address the ConsoHia’s Cash Flow Problems

161. As of early November, 1995, the P-19 Consortium was having difficulty paying for essential supplies and services for the P-19 Contract. Suppliers, including the classification society, were threatening to curtail services to the P-19 Project unless payments were made. (PB-957.)

162. On November 14, 1995 Guilherme Pires, on behalf of the P-19 Consortium, wrote to Paulo Marcio Mauro of Petrobras requesting that the schedule for progress payments for the P-19 Project be changed. Mr. Pires claimed that the working capital of the consortium had been depleted by the need to arrange gap financing for the difference between the amount allocated in the Contract for the purchase of the platform (25% of the contract price) and the $55 million that the Consortium paid for the

Treasure Stawinner.

(S — 127.)

163. On December 6, 1995, Sade Vige-sa President David Fischel met with the Diretoria of Petrobras to explain the cash flow problems facing the P-19 and P-31 Consortia and to seek financial assistance from Petrobras. In a letter written the same day, Dr. Fischel confirmed the substance of his discussion with the directors. (S — 136.)

164. Dr. Fischel admitted that IVI was suffering from negative financial influences common to the naval construction industry in Brazil including high costs resulting from labor disputes, losses from changes to the foreign exchange rate, and excessive personnel as a result of job stability agreements entered into in the past.

(Id.

at 1.) To resolve these problems, IVI had decided to undertake a drastic restructuring. This restructuring would involve: (1) transforming the company into small business units; (2) tailoring current staffing to actual project needs; (3) negotiating with workers to produce a stable and economical work relationship; (4) negotiating and rescheduling commitments with suppliers; (5) concentrating offshore work at the Ver-olme shipyard; and (6) suspending new naval construction contracts until all the above mentioned measures were implemented and consolidated.

(Id.

at 2.) To achieve these objectives, Dr. Fischel asked Petrobras for an advance of $15 million to be repaid in five equal installments. He further proposed that the Consortia would establish separate bank accounts for the projects and account to Petrobras every month on the origin and investment of funds in the account.

(Id.)

165. On December 20, 1995, Alceu Bar-roso Lima Neto, the head of Petrobras’ engineering department (“SEGEN”), sent an internal memorandum to Petrobras director Sebastiáo Vilarinho in which Mr. Alceu discussed the requests made by David Fischel and recommended various initiatives to resolve the problems caused by the concentration of projects with IVI and rVTs recurrent financial problems. (S-154A.) He observed that there was no guarantee that a loan of $15 million to IVI would resolve the IVI group’s financial problems. Mr. Alceu proposed that Petro-bras establish- blocked accounts (“contas vinculadas”) similar to those used in the construction of ships to guarantee that re

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sources related to the projects would be used for the jobs. He also observed that it would be better if the Petrobras/Brasoil projects that had been awarded to IVI but had not yet commenced — -the P-32 (Cai-ra ) and the P-31

(Vidal)

— be transferred to other contractors. Mr. Alceu recommended that the termination of these contracts be negotiated with IVI with the prospect of financial support and the implementation of the blocked accounts as the incentive.

166. Mr. Vilarinho met with Nelson Ta-nure several times in December, 1995. Mr. Tanure agreed to relinquish the P-32 Project in exchange for Petrobras adjusting the EAPs of the P-19, P-31, and P-34 Contracts to ease the contractual cash flow problems of IVI and Sade Vigesa. The parties also agreed to establish blocked accounts so that funds paid to the Consortia would be used solely to complete the Petrobras projects.

(Id.

at 465-66; 3252-55.)

167. Mr. Tanure refused to relinquish the P-31 Project, and told Mr. Vilarinho that he needed P-31 to complete P-19 and P-34.

(Id.

at 184,194,197, 3255.)

168. The Sureties have argued repeatedly that the Petrobras Diretoria made a secret decision in December, 1995 or January, 1996 to continue to fund the P-19 and the P-31 Consortia to completion of the Projects, regardless of the costs of the Projects, and not to declare a default on the Projects or to notify the Sureties of a default. (Sureties’ Proposed Findings of Fact ¶¶ 31 — 41(f).) The Sureties claim that the Diretoria made the alleged decision because Petrobras understood that declaring a default or changing contractors would seriously delay completion of the Projects, thereby causing a loss of revenues due to delayed oil and gas production. In support of this theory, the Sureties rely primarily on Mr. Vilarinho’s deposition testimony. (Tr. at 210-19.) The Sureties also argue that the consequence of this decision was that Petrobras ran the Projects like cost plus contracts, rather than lump sum contracts, and that there was no cost discipline. Therefore, according to the Sureties, the Projects were substantially changed from the projects that the Sureties had bonded and the Sureties should be released from their obligation. The Sureties rely heavily on the testimony of their engineering and construction expert, Theodore Trauner, with respect to the alleged change in the nature of the contracts.

(Id.

at 2458-67, 2470-74.)

169. As discussed in greater detail below, having considered all of the evidence, including the contemporaneous documents and the evidence of the way in which the Projects were actually funded and administered, and having assessed Mr. Vilarin-ho’s credibility, the Court finds that there was no decision (secret or otherwise) to fund the P-19 and P-31 Consortia to completion irrespective of the costs of the Projects.

(Id.

at 214-15, 218-19, 3256, 3268.)

170. Moreover, in December, 1995 and January, 1996 there was no legal basis to declare a default on the P-19 and P-31 Projects and the Sureties have pointed to none. Neither the P-19 nor the P-31 Projects could simply be taken away from the respective Consortia, and when Mr. Vilarinho proposed to Mr. Tanure that IVI give up the P-31 Project that proposal was flatly rejected. The Sureties’ argument is also thoroughly inconsistent with its position that a year and a half later, when Brasoil declared the P-19 and P-31 Consortia to be in default of their contractual obligations, the Consortia were not in fact in default. Mr. Trauner’s testimony was not credible on the subject of the administration of the contracts as cost plus contracts. His credibility was further undermined by his purportedly expert testimony as to the existence of a “secret deci

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sion,” an opinion that his engineering and construction expertise did not qualify him to give and which was based in part on the opening statement of the Sureties’ counsel.

(Id.

at 2460-61, 2761.) Further, the history of the careful way in which the contracts were administered, with the negotiation of specific changes, undercuts any argument that the contracts were being administered as cost plus contracts. Finally, when it was subsequently proposed that the contracts be transferred to another company and turned into cost plus contracts, Mr. Vilarinho flatly rejected the proposal.

{Id.

at 959, 982, 1252, 3278.)

171. It is plain that the senior management of Petrobras discussed in December, 1995 and January, 1996 what to do about the IVI situation in view of the requests for assistance. However, the results of those discussions were the approval of the blocked accounts to assure that funds were being paid for proper purposes on the Projects, a modification of the EAP schedule to allow greater funds to be provided to the Consortia at an earlier point in time, and the request for IVI to yield the P-31 and P-32 contracts.

{Id.

at 3254-56.) These proposals were adopted, except for the transfer of the P-31 Project, which was rejected by Mr. Tanure. Id. at 3255.

172. The actions by the Petrobras Diretoria did result in the continuation of the P-19 and P-31 Projects with their respective Consortia, but this did not mean that the Petrobras would not declare a default when there was a default to be declared. The Diretoria followed a strategy to “follow up these projects on a daily basis, and seek to adapt its decisions in accordance with what was happening.” (Tr. at 214.) In response to a question by the Court at trial, Mr. Vilarinho testified credibly that in December, 1995, he “could say that the prevailing idea, based on what we saw in the progress of the projects and the difficulties involved in taking the ships to other countries and loss of time, and the financial impacts of any such action, that we would work with the situation until it became unworkable. That was not so much a decision, but rather an evaluation of the situation.” (Tr. at 3268.) Mr. Vilarinho also testified credibly that in January, 1996,

the default was beginning to become a concern for the board of directors of Petrobras, based on our experience with the Brazilian naval construction industry. The matter, or the subject, was talked about frequently.

In the specific case,' or in the specific period of January of 1996, however, the idea did not go forward because there remained a lot of money in the contractual accounts, and the progress on the construction of the platforms, despite the difficulties that the shipyard was having with the unions, was going well, and the delays were very small.

So Petrobras could not make that decision independently on the default because there remained a lot of money in the contracts and the construction was going reasonably well.

(Tr. at 3256.)

173.The Consortia were in compliance with the P-19 and P-31 Contracts in December, 1995.

{Id.

at 508-09, 3532-33.) Petrobras/Brasoil had no legal basis to terminate the contracts unilaterally because the contracts were on time and there were balances owed to the Consortia under the contracts.

{Id.

at 3256.) David Fischel testified candidly that he would not agree that the Consortium" would give up the P-31 Contract.

{Id.

at 1040.) If Petro-bras/Brasoil had sought to terminate the P-31 contract at that point, the P-31 Consortium would have brought a lawsuit.

{Id.

at 191-92.) Indeed, the Sureties concede that “it is not clear that in December

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1995 or January 1996, Brasoil had a clear legal right to declare a default and terminate the contracts of one or both of the Consortia.” (Sureties’ Proposed Findings of Fact ¶ 31(b).)

174. On or about January 9, 1996, IVI provided Brasoil with a cash flow schedule indicating that by December, 1997 the Consortia would incur a loss of approximately $61 million in connection with the P-19, P-31, and P-34 Projects. (S-157; Tr. at 3536-37.) Mr. Aleeu recommended to a Petrobras director that Petrobras agree to changes to the EAPs for the three Projects in order to provide the Consortia with approximately $32 million in payments that would otherwise not be due until a later date. (S-157 ¶ 7.) The changes in the EAPs of the three contracts would recognize the additional $14.25 million spent by the Consortia for the

Treasure Stawinner,

provide a payment in connection with the turret order for the

Vidal de Negreiros,

and return a retention on the P-34 Project.

(Id.)

175. On January 29, 1996, the heads of Petrobras’s engineering and financial departments sent an internal memorandum informing the Diretoria of the Consortia’s cash flow problems and its projected deficit of $60 million by October 1997. (S — 165 ¶ 6.2.) The memorandum recommended that the EAPs of the three projects be adjusted to ease the Consortia’s cash flow problems and that blocked accounts be instituted to control the application of funds.

(Id.

¶¶ 14.1-14.4; Tr. at 3256.)

Changes to the EAP and the Establishment of Blocked Accounts in the First Amendments

176. On February 12, 1996 Brasoil and the P-31 Consortium executed Amendment One to the P-31 Contract, which revised the P-31 EAP so that the Consortium would receive larger payments when the purchase orders were placed for the turret and turbocompressors. The payments for documentation were also in- . creased from two to four percent of the schedule A price. In addition, Amendment One established the system of blocked accounts (“contas vinculadas”) for payment of project expenses. (PB-820 at 1510-25.)

177. David Fischel testified that the first amendment to the P-31 Contract required the Consortium to perform the Contract at the original price and in accordance with the original terms. (Tr. at 1033.) P-31 Amendment One only changed the Contract by altering the EAP schedule and establishing the blocked accounts. All the other conditions of the P-19 contract remained unchanged. (PB-820 at 1515 § 9.1.)

178. On March 1, 1996, Brasoil and the P-19 Consortium entered into Amendment One to the P-19 Contract, which revised the P-19 EAP to increase the payment to the P-19 Consortium for the purchase and delivery of the existing vessel from 25% to 35% of the Contract value; reduced the amounts to be paid for construction and assembly, sea trials and start-up assistance; and established a blocked account system. (PB-71.)

179. Although it was not necessary to do so, Petrobras’s P-19 project manager, David Schmidt, asked the P-19 Consortium’s project manager, Mr. Pires, to send a copy of Amendment No. 1 to the P-19 Contract to the Sureties. (Tr. at 3376.) When the Consortium did not respond in a timely fashion, Mr. Schmidt asked again.

(Id.)

On or shortly after April 16,1996, Mr. Schmidt received a copy of a'letter indicating that the Consortium had sent the amendment to Tudor Marsh & MacLen-nan, the Brazilian arm of its broker Marsh

&

MacLennan, and asked Tudor Marsh & MacLennan to forward the amendment to the Sureties. (PB-78.)

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180. The first amendment to the P-19 and P-31 Contracts made it clear that the establishment of blocked accounts for the projects did not represent a commitment by Brasoil as to the final cost of the performance of the Contracts, but only a means of monitoring the expenditure of funds earned by the Consortia. (PB-71 at 4 § 17.1.12; PB-820 at 1514 § 23.1.12.)

181. IVI had previously used blocked accounts for its naval contracts. (Tr. at 510-511.)

182. Blocked accounts with joint signatory powers are commonly used by Sureties in connection with troubled projects. (Tr. at 1387, 3797.)

183. The blocked account system that the Petrobras Defendants agreed on with the Consortia worked as follows. IVI would submit bank payment orders (“OPBs”) to Petrobras for approval with supporting documentation five days prior to the time the funds were needed. Petro-bras would then determine whether the costs were contract related and, if so, approve the expenditures. The Petrobras Defendants only had the right to remove items which were not within the scope of the three Contracts (the P-19, P-31 and P-34 Contracts). (PB-71 at 2-4; PB-820 at 1512-14.)

184. If there were a surplus remaining in the P-19 blocked account after the P-19 Contract was completed and the instrument of final receipt signed, the balance of the P-19 blocked account would be transferred to the P-31 blocked account. (PB-71 at 2 § 17.1.2.) At the end of the P-31 Project, any balance left in the P-31 blocked account would be released to the P-31 Consortium. (PB-820 at 1512 § 23.1.2.)

185. On April 2, 1996, the parties agreed on a “Procedure for Release of Funds from the [Blocked] Account[s]” (“the Procedure”). (PB-76.) The Procedure specified that positive balances from one blocked account could be used to pay expenses of the other two projects, but that the transfer from the original account would have to be restored as soon as there was a positive balance in the blocked account of the project receiving the transfer.

(Id.

§ 2(ii)-(iii).)

186. IVI, not Petrobras, decided whether to use the balance in one of the blocked accounts to pay the expenses for another project. (Tr. at 3699-3700.)

187. There was no improper commingling of project funds. Each project had its own set of blocked accounts, an internal account and a domestic account. Careful records were kept of the expenditures on each project.

(Id.

at 3844-46, 3850-51.)

188. The P-19 blocked accounts had received approximately $5 million net from the P-31 Project as of May 12, 1997, the date the default w^as declared on the P-19 Contract. (Tr. at 3846, 3850.)

189. Approximately $6 million had been transferred out of the P-31 account to the P-19 and P-34 accounts as of June 16, 1997. The account balance for the P-31 Project, however, had been replenished by various other transfers so that, on a cost basis, Brasoil had paid in excess of the adjusted contract balance of the P-31 Contract by June 16, 1997, when a default was declared on that contract. (PB-1302; Tr. at 3846, 3850, 3859-60.)

190. Frederick Hamilton, the damages expert for the Petrobras Defendants, confirmed that the adjusted contract balance of the P-31 Contract had been exhausted on a cost basis prior to the June 16, 1997 default. (Tr. at 3859-60; PB-1302.)

191. Until April, 1997, the funds in the blocked accounts represented the proceeds of progress payments made pursuant to the BMS system to the Consortia. The money in the accounts had been earned by the Consortia and belonged to the Consor-

*433

tía. (Tr. at 1744,1746, 3617.) Without the blocked accounts, the Consortia would have been free to use the BMS payments for any purpose whether or not related to the Brasoil contracts.

(Id.

at 417-18.)

192. The Procedure also provided for the establishment of rotating funds (“rota-tivos”) for each Contract to be used to pay petty cash expenses. The Consortia was obligated to submit proof of the expenditures made from the rotating fund during the prior month before Brasoil would replenish the funds in the rotating account. The Petrobras Defendants kept careful track of the expenditures made through the rotating accounts.

(Id.

at 1696-99, 3212-13.)

193. On April 25, 1996 Brasoil and the P-31 Consortium entered into Amendment Two to the P-31 Contract, which adjusted the P-31 EAP to provide approximately $4 million in immediate funds so that the Verolme Shipyard could pay severance payments to laid-off workers. (PB-820 at 1541-45.)

194. ’While the revisions to the P-31 EAP in Amendments One and Two resulted in greater cash flow to the P-31 Consortium early in the project, the advances began to be recaptured through progress payments that were lower than the original EAP beginning with BMS 9 in May, 1996. (Tr. at 2371; PB-1423 at 6; PB-1302.)

195. On March 20, 1996, Carlos Mauri-co, the Vice President of Sade Vigesa and the offshore director for the Consortia, wrote Petrobras director Vilarinho to explain the factors that were influencing the development of the P-19 conversion. (S-193.) He admitted that the project was “extremely chaotic” from its outset through July, 1995. He pointed out that in that beginning period, management time was spent obtaining the performance bond, financing the purchase of the

Treasure Stawinner,

and purchasing major equipment. After replanning the project in September, 1995 to take into account changes to the basic design agreed to with the Petrobras Defendants, IVI entered its “most tense and chaotic” phase in November, 1995. IVI, the lead member of the P-19 Consortium, experienced strikes, paralysis, internal problems, impairments in the shipbuilding contracts, lack of credit and working capital which took IVI to “production stagnation”: no planning, purchases, or construction took place, with direct consequences for the P-19 Project. Nevertheless, Mauricio indicated that the Consortium was proceeding on a timetable that retained the same final deadline for delivery of the platform.

(Id.)

196. Mr. Mauricio complained that IVI was subjected to negative news articles causing great insecurity within Petrobras, and with suppliers, credit institutions, and subcontractors — “in fact, the entire community” with which the project management had to deal. Mr. Mauricio also admitted that the management of IVI had been preoccupied dealing with the company’s global problems, detracting from dealing with solutions of matters specific to P-19.

(Id.)

He stated that the Consortium felt that it was important for Petrobras to show that it was involved in the project and that “[i]t is a difficult mission, but it is possible provided that the Consortium and Petrobras act, and are seen as, a single entity.”

(Id.)

197. For purposes of its theory that Petrobras was really a partner of the Consortia, the Sureties place great weight on Mr. Mauricio’s statement regarding Petro-bras and the Consortium acting as a single entity. However, this plea by a representative of the P-19 Consortium, which acknowledges the problems that the Consortium had and looks for assistance, does not show that Petrobras was in partnership with the Consortium. In fact, the full

*434

context of the relations among the parties shows that Petrobras was not a partner of the Consortium. Petrobras was acting as a supervisor for Brasoil pursuant to its agreement with Brasoil and the Consortium was the construction contractor on the project. Moreover, this plea by Carlos Mauricio is inconsistent with another theory of the Sureties, namely that Petrobras was in fact dominating the Consortium. Mr. Mauricio’s March, 1996 letter shows that well into the P-19 Project, the representative of the P-19 Consortium was asking for the assistance of Petrobras — a request that would be pointless if Petrobras were already dominating the Consortium.

Comfort Letters and Direct Payments for Equipment

198. At the urging of suppliers who, concerned about IVI and Sade’s financial condition, were demanding letters of credit and other financial guarantees, the Petro-bras Defendants issued so-called “comfort letters” to suppliers beginning in or about March, 1996. (Tr. at 1612; S-291 at U2444.) The comfort letters took various forms. The early comfort letters merely informed the suppliers that Brasoil and the Consortia had established blocked accounts for funds paid to the Consortia and that Brasoil would ensure that suppliers were paid from the blocked accounts. Later, Brasoil promised specific suppliers that it would pay for designated equipment if the Consortia’s members sought bankruptcy protection or failed to pay for the equipment after it had been delivered.

{See, e.g.,

S-344.)

199. The Comfort Letters did not increase the Sureties’ risk. They served to obtain shipment of equipment for the projects, furthering their progress and reducing the amount that the Sureties might be called upon to pay or perform if a default were declared under the Contracts.

200. Section 3.44 of the P-31 Contract required the Consortium to place the purchase order for the turret system and tur-bocompressors within sixty days from October 25, 1995, the date of commencement of service. (PB-820 at 500 § 3.44; Tr. at 2998.) The deadline for the placement of these orders was therefore December 25, 1995.

201. The P-31 Consortium did not have the internal resources to pay for the

Vidal

turret and turbocompressors and was unable to arrange outside financing. (Tr. at 3554-55; S-291 at U2445.) The Consortium did not issue a purchase order for the turret until February 2,1996, 39 days after the deadline specified in the Contract. (Tr. at 4166-67.)

202. On May 16, 1996, Mr. Quintella, the deputy head of SEGEN, sent a memo to Mr. Vilarinho informing him that the measures taken to support the P-19 and P-31 Consortia through the changes to the EAPs were not sufficient and that the Consortia would not achieve the financial stability required for the normal development of the projects. (S-247.) He also reported that the Consortia were unable to find external financing for the equipment and that IVI had been unable to implement its plan to reduce its workforce. In as much as a tacit decision had been made to continue with the Consortia, solutions had to be found for their financial problems. The only way to continue the projects was to make payment in advance of the progress payments. Mr. Quintella recommended that Petrobras make direct payments to major equipment suppliers in the amount of $43,750,000, with these advances to be deducted from future progress payments beginning in December. The payments would permit work to continue and would provide time for a solution to be found to the financial problems fac

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ing the Contracts. (Tr. at 3258-59, 3265; S-247.)

203. Mr. Quintella advised the Direto-ria that the projected overrun on the three contracts had escalated from $60 million, when the prior amendments were signed, to approximately $89 million. These estimates were provided by the Consortia. (S-247 ¶ 17; Tr. at 3271, 3548; S-291 at 2446.)

204. Mr. Quintella indicated that one possible solution for the overrun was for IVI and its partners to assume .it as a debt. (S-247 ¶ 18.) Mr. Quintella also recommended that the Sureties be consulted and asked to provide their suggestions. (Tr. at 3262; S-247 ¶ 18.1.)

205. On May 23, 1996, the Diretoria approved the recommendations set forth in Mr. Quintella’s May 16, 1996 memorandum to Mr. Vilarinho. (Tr. at 541-42; S-256A.) The Petrobras Diretoria did not take any final decision with respect to the continuation of the projects with the Consortia. (Tr. at 205, 207.)

206. Petrobras/Brasoil could not unilaterally terminate the contracts under Law 8.666 because the projects were more or less on schedule and there remained a balance yet to be paid on the contracts. If Petrobras/Brasoil had tried to terminate the contracts, the Consortia would have been able to obtain injunctions from’ a Brazilian court to stop construction.

(Id.

at 3265-66.)

207. In May, 1996, continuing with the Consortia was the cheapest alternative available to complete the projects.

(Id.

at 205.) There was no other yard in Brazil that had the facilities to convert P-19 and P-31.

(Id.

at 4292-93.) Similarly, there were no other companies in Brazil that could be brought in to complete the Projects even assuming that IVI would permit the continued use of its yards.

(Id.

at 4359-60.) The time involved in moving the Projects to any other yards in the world

that could have completed the Projects, even if they could be hired to complete the work, would have been prohibitive.

(Id.

at 4292-4301.) It would also have been physically very difficult to move the vessels in view of their state of disassembly;

(Id.

at 4304-06.)

208. The decision to make the $43.75 million in direct payments deferred the point where the Consortia would incur a net cash flow deficit from May, 1996 to June, 1997, notwithstanding the fact that the Consortia would have to repay the advances from the BMS payments beginning in December, 1996. (Tr. at 3548-49; S-291 at U2446, U2448.)

209. During the period from July, 1996 to February, 1997, Brasoil made direct payments totaling $25,265,499 for the P-31 turret, turbocompressors, and other equipment. (S-514A at 3.)

210. During the period from June, 1996 to January, 1997, Brasoil made direct payments of $17,660,500 for the P-19 vessel, turbo compressors, turbogenerators and other equipment.

(Id.)

211. The Consortia requested the direct payments for P-19 and P-31 -in a series of letters co-signed by Carlos Mauricio and Paulo Marinho

(see, e.g:,

S-283; S — 285; S-296; S-308; S-315; S-379; S-407; S-416; S^470.) These letters are captioned “advance and direct payment” and they refer to the number of the contract. The letters further provide that the advances and direct payments were being made without a BMS invoice, and that, together with interest, the payments would be discounted from future BMS' payments beginning with the December, 1996 BMS payment. All of the direct payments were specifically designated for equipment required to complete the Projects. Thus, all the-direct payments and advances are related to and are valid and proper payments under the P-19 and/or P-31 Contracts.

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212. The provisions of the letters are consistent with Mr. Vilarinho’s testimony that the Board decided to make the direct payments to suppliers in the approximate amount of $43 million and to debit these payments from the contract value. (Tr. at 3265.) Similarly, Mr. Quintella testified that the direct payments were made from the contract balances but independently of the monthly contract measurements.

(Id.

at 543.)

213. David Fischel and the Consortia also considered the direct payments made by Brasoil to be valid charges against the respective contract balances. In a letter dated February 18, 1997 to Mr. Alceu, Dr. Fischel stated that the contract balances were exhausted. (S — 455.) The contract balances would only have been exhausted at that point if the direct payments were considered deductions from the contract balances.

214. Brasoil was the source of all the direct and advance payments (with the exception of $11.8 million in direct payments made by Petrobras for P-19). (Tr. at 1781, 1783, 3750-51, 3768, 3804-05.) Brasoil, in turn, borrowed the funds for the direct and advance payments from Pe-trobras.

(Id.

at 3751.) The inter-company indebtedness was reflected on the books and records of both Brasoil and Petrobras in a “mutuo” account. Interest was charged on the balances in the mutuo accounts in accordance with Brazilian law. The audited financial statements of Brasoil showed the inter company transaction.

(Id.

at 3748-3750, 3758.) Petrobras could require Brasoil to repay the balance of the mutuo account on demand. The $11.8 million direct payment made by Petrobras was recorded as a debit to Brasoil on the mutuo account between Brasoil and Petro-bras.

(Id.

at 3804.)

215. The direct payments are appropriately considered payments pursuant to the contracts that reduced the amounts otherwise owed to the Consortia under the contracts. All of the direct payments and advances were made pursuant to documents that reflected that they were payments for the contracts and would be deducted from future amounts owned under the contracts.

216. The financial situation of the Consortia continued to worsen. In December, 1996 the Consortia requested, and the Pe-trobras Diretoria approved, a further advance of $15 million for essential equipment for P-31 and $16 million for P-19. (S-370 ¶ 24.) The payments were made to acquire equipment that was essential to the completion of the Projects.

(Id.

¶¶ 13, 21.) In addition, the Diretoria decided to suspend the discounting of the direct payments from the December BMS payments until Petrobras analyzed the alternatives that might permit the contracts to continue and a formal position was obtained from the Sureties. (S-370 ¶¶ 25.2, 25.3.3.)

IVI and the Petrobras Defendants Kept the Sureties Fully Informed of the Developing Crisis

217. In the early part of 1996, USF

&

G became aware of certain financial problems that IVI was encountering because of information that USF & G received in connection with the P-34 Project. Astano SA (“Astano”) was the contractor and PVI was a subcontractor on that Project. USF & G, on behalf of IVI as principal, had issued a performance bond for the P-34 Project in favor of Astano as obligee. (JS ¶ 283.) On December 14, 1995, Astano complained to IVI about the delays to the P-34 Project caused by strikes and threatened to start the process that would lead to a claim on the performance bond issued by USF & G. (PB-407.) USF & G was also sent a copy of this letter, and was thereby notified about IVI’s problems with strikes, its difficulties in completing its

*437

work, and the possibility that a claim would be made on the P-34 bond.

(Id.)

218. In a January 11, 1996 memorandum following a telephone conference among Eduardo Sattamini of IVI, Messrs. Buono and Bazaar of USF & G, and James Holland of Marsh McLennan, USF & G demanded financial information on all of IVI’s on-going projects and payments to suppliers, including advances from Petro-bras. (PB-56.) While the focus of this memorandum was plainly on the P-34 Project, it is clear that by mid-January, 1996, the Sureties were aware of IVI’s financial difficulties.

219. Moreover, Nelson Tanure informed Mr. Buono on or about February 1, 1996 that Petrobras had agreed to make additional funds available to IVI and that all future progress payments would be deposited in blocked accounts to ensure payment of subcontractors and suppliers. (S-167.) USF & G was also informed that IVI had agreed to give up the P-32 contract.

(Id.)

It is plain that USF & G was aware of the financial difficulties IVI was having and its efforts to minimize that knowledge now are not credible.

(See, e.g.,

Tr. at 1386-87.)

220. In an e-mail dated February 1, 1996 to Scott Williams, Mr. Buono noted that “all future progress payments will be disbursed by Petrobras into an escrow account for the purpose of paying subcontractors and suppliers.” (S — 167.) Mr. Williams forwarded Mr. Buono’s e-mail to Gary Wilson, the head of USF & G’s claims department, with the comment: “The IVI situation is fully resolved and we do not anticipate any further issues with the Ishibras contract.” He saw no reason for Mr. Wilson to attend a meeting with Mr. Tanure in mid-February.

(Id.)

221. On May 28, 1996, the Sureties met in New York with Carlos Mauricio of IVI and Ronald Carvalho da Silva, a director of a related company, to discuss all the Bra-soil contracts and IVI’s financial situation. (PB-410.) The Sureties were informed, among other things, that Petrobras was making direct payments for equipment and was making payments to Marubeni.

(Id.)

They were also informed that IVI was consulting Banco Fator, a Brazilian investment bank, with regard to a possible restructuring or reorganization.

(Id.)

Messrs. Mauricio and da Silva were optimistic that the restructuring of IVI would be successful and that all on-going contracts would be “successfully completed with no claims made by Petrobras against the Sureties.”

(Id.

at 3.) IVI agreed to keep the Sureties updated monthly, or as needed. Mr. Bazaar observed in closing that “USF & G will monitor this on-going situation closely.”

(Id.)

222. In a separate memorandum of this same meeting, the Sureties noted that IVI had been suffering financial difficulties since October 1995 and had approached Petrobras for assistance in finding a solution that would allow IVI to continue work on the projects rather than being forced into bankruptcy. (PB-20.) It was noted that blocked accounts had been put into place to regulate the flow of funds for the P-19, P-31 and P-34 projects, and that Petrobras was making direct payments to offshore suppliers to ensure timely payments. This was viewed as a “positive sign” because it would encourage continued progress of the on-going work. It is significant that there is no contemporary evidence that the Sureties viewed the actions of Petrobras in assisting IVI to meet the Consortia’s contractual commitments by, among means, making advances and establishing blocked accounts as inconsistent with any obligations under the Performance Bonds.

223. By May, 1996, both the Sureties and the Petrobras Defendants began to strategize how they could preserve their

*438

rights against each other. There was extensive discussion at Petrobras about how best to approach the Sureties. (S-236A; S-239A; S — 241; S-242A.) It was in the Sureties’ interest not to interfere with the continued performance of the Contracts. The more work that was accomplished on the Projects, the less that remained to be bonded. It was in the Petrobras Defendants’ interest to assure that the Sureties were put on notice of difficulties with the Contracts to assist in making any future claims. (S-237A.)

224. On June 5, 1996, Astano notified USF & G that it was calling a 3.1 Meeting under the P-34 performance bond, which it was required to do before declaring a contract default and triggering USF

&

G’s obligation under that bond. (S-268.) Asta-no suggested that the Meeting be held in Brazil on June 25-26.

(Id.)

225. On June 16, 1996, Mr. Quintella wrote to USF & G, asking to meet with representatives of USF & G when they were in Brazil for the Astano 3.1 Meeting. (S-275.)

226. On July 18, 1996, Petrobras gave a full and complete briefing to USF

&

G concerning the condition of the projects and the Consortia’s financial problems. (S-291.) The Sureties were asked to propose solutions that would enable the projects to be completed. (Tr. at 1052-53; 3556-57.) While Petrobras emphasizes this request, there is no explanation why the Sureties had any obligation to propose any solution to IVI’s financial situation before any default had been declared on the Bonds and the obligations of the Sureties invoked under the Bonds. While it might have been in the Sureties’ financial interest to see that the contracts could be performed without the need to call on the Performance Bonds, there is no explanation why they had any legal obligation to do so.

227. During one of the July 18, 1996 meetings, Petrobras gave USF & G full details concerning the direct payments Pe-trobras was making to equipment suppliers and IVI’s financial projection that the projects would result in an $89 million cost overrun. Mr. Wilson eventually testified that USF & G was fully informed about the direct payments and did not object to them or tell Petrobras to stop making them. (S-291; Tr. at 1444^47.) David Fished testified credibly that following his July 1996 meeting with Mr. Wilson, he kept Mr. Wilson informed of the deficit projections on the projects and the reasons for them. (Tr. at 1049.)

228. Beginning after the July, 1996 meeting and continuing through December, 1996, Petrobras and the Sureties, with the Sureties being assisted by IVI, exchanged a series of self-serving, posturing letters as to whether the Sureties would come up with any solution to the problems of the Consortia.

(See, e.g.,

S — 314; S-1268; S — 319; S-335; S-363.) However, the Sureties avoided telling Petrobras to stop making direct payments to equipment suppliers or that such payments were in violation of any contracts. By doing so, the Sureties were able to see that the performance of the Contracts continued despite IVI’s financial difficulties and any day of reckoning under the Bonds was postponed. The Sureties thus waived any objections to the direct payments and advances of which they had been informed.

Critical Problems at the end of 1996 and the Beginning of 1997

229. With the assistance of Mustang, its United States procurement agent, the P-19 Consortium negotiated very favorable terms with its U.S. vendors based on the existence of the credit facility insured by the Exim Bank. (PB-1018 at 4.) The vendors agreed to accept initial payments

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of 0-15% of the price of the equipment with the balance of 85-100% due upon delivery.

(Id.)

Under the PBS for the P-19 Contract, Brasoil paid the P-19 Consortium 20% of the EAP value of imported equipment when the purchase order was placed and an additional 30% when the drawings were certified. The remaining value of the equipment was to be paid when the equipment was delivered from the manufacturer (20%) and at the job site (30%). Thus, the P-19 Consortium received a float on U.S. equipment which should have been set aside for future payment of the equipment. (PB-279 at 595.)

230. Due to their failure to lock in prices, the unrealistic estimates in the bids, and the rise in demand for process equipment in 1995-1997, the Consortia were forced to contract for process equipment at prices far higher than budgeted for in the bid. (Tr. at 4078-88.) Moreover, the prices the Consortia had to pay for equipment greatly exceeded the payments they would receive as specified in the EAP. The EAP payments were calculated on the basis of a percentage of the Contract price, not the prices actually paid for equipment in the marketplace. (PB-279 at 589, 592-96; PB-820 at 882-83, 885-88.)

231. On or about March 29, 1996, Pe-trobras provided IVI a comfort letter relating to equipment for the P-31 Project which was to be purchased by Mustang. (S-203.) The letter, which was addressed to Carlos Mauricio and signed by Antonio Justi of Petrobras, provided that if IVI did not pay for the equipment through the blocked accounts, Petrobras would make good on the commitments and deduct the amounts from the Consortium’s credits. Mr. Justi testified that this letter was meant to reassure Mustang that Petrobras would allow the Consortia to withdraw funds from the blocked accounts to pay Mustang purchase orders provided there were a balance left in the contract. (Tr. at 3682-83, 3689-92.)

232. Felix Covington, a vice president of Mustang, testified that he did not know whether the March 29, 1996 comfort letter had been shared with suppliers.

(Id.

at 4250.) He also could not recall the circumstances under which the letter was issued.

(Id.)

Mustang and IVI subsequently entered into a supply agreement for the P-31 Project in April, 1996.

(Id.

at 4250-51.) Mr. Covington admitted that Mustang would have signed the P-31 supply agreement without the comfort letter.

(Id.

at 4251.)

233. A financial crisis was inevitable as soon as the delivery dates for the process equipment became due beginning in or about October, 1996. The payments due for the equipment would far exceed the BMS payments under the PBS. The Consortia had already spent the float received from Brasoil under the EAP on other project expenses such as their excessive labor costs.

234. In or about October, 1996, IVI refused to sign any more CIBC promissory notes for the purchase of equipment. Nelson Tanure himself made the decision not to sign the CIBC promissory notes.

(Id.

at 516,1082-83,1551, 3559-61.)

235. On October 25, 1996, Mr. Coving-ton wrote to Mr. Mauricio to express Mustang’s “serious” concern about “the deteriorating financial condition” of IVI and its failure to make payments to suppliers. (PB-865.) He warned that if the Exim Bank were to withdraw its support, IVI would face a payment crisis and contractual disputes. Vendors would demand letters of credit, raise prices, and delay shipments. Mr. Covington also observed that some $50 million in shipments were pending and that “prompt action is imperative.” He suggested that IVI request that Petro-bras sign a guaranty of IVI’s obligations to

*440

avoid interruptions in the shipment of equipment.

236. On November 18, 1996, Mr. Mauricio responded to Mr. Covington. (S-346.) Mr. Mauricio admitted that the Consortium had suffered financial reverses and indicated that it was unwilling to sign any further promissory notes at that time.

(Id.)

237. The refusal of the Consortia to sign further CIBC promissory notes resulted in lengthy delays in the delivery of equipment and an escalation of the costs to complete the projects. (Tr. at 3613, 3361-63, 4109-12.)

238. The Petrobras Defendants did not accept Mr. Covington’s proposal that they provide a general guaranty of IVI’s obligations under the CIBC credit facility guaranteed by Exim Bank (Tr. at 1551, 4238), although they did issue comfort letters to individual vendors for specific equipment (S-344). In the comfort letters Petrobras agreed to pay the vendors if IVI filed for bankruptcy or failed to make payment after the equipment was delivered. (S-344.) Despite the comfort letters, the vendors would not release the equipment for shipment until they were paid in full. (Tr. at 4245; PB-226.)

239. On November 25, 1996, Mr. Cov-ington notified IVI that Mustang would not ship equipment until the P-19 and P-31 Consortia found a method of paying for the equipment as a replacement for the CIBC promissory notes. (PB-791.)

240. On December 8, 1996 Carlos Mauricio and David Fischel met with Petrobras management. They informed Petrobras that the projected cost overrun for the projects had increased to $189 million from the $90 million estimate in May. (S-370 ¶ 15.) They also presented a reorganization plan IVI had developed with Banco Fator. According to the Banco Fator plan, IVI was to be split into two companies, one of which would be responsible for maritime port terminals and the other for offshore construction.

(Id.

¶ 14; Tr. at 3270.)

2

241. During a subsequent meeting in December, 1996, Mr. Vilarinho was informed that IVI was negotiating with Mar-itima, possibly regarding a restructuring of IVI or a transfer of the offshore contracts. (Tr. at 3272.)

242. At a meeting on December 19, 1996, the Diretoria approved SEGEN’s recommendation to enter into contractual amendments to pay for change orders. (S-372A.) The Diretoria also approved contract extensions for the P-19 and P-31 Projects of 60 and 93 days respectively.

(Id.

at 6.) SEGEN’s submission advised the Diretoria that the contract balance in the P-19 Contract had been exhausted and that the P-31 Contract balance was expected to run out in March, 1997.

(Id.

at 5.) The Diretoria decided to analyze the alternatives for completing the Contracts, including convening a 3.1 Meeting under the Bonds to obtain the formal position of the Sureties.

(Id.

at 6 ¶ 25.2; Tr. at 3279.)

243. The amendments to the contract balances approved by the Diretoria in December 1996 represented the result of arm’s length negotiations between the Consortia and Brasoil over the scope and value of the changes to the P-19 and P-31 Projects. (Tr. at 3548; S-291 at U2448.) Amendment Two to the P-19 Contract was

*441

in the amount of $10,477,856.97. (S-445A.) Amendment Three to the P-31 Contract was in the amount of $16,968,846.48. (S-446A.) Both Amendments were signed on February 3, 1997, effective as of December 19, 1996. (S-445A; S^446A.) Both Amendments provided that the parties ratified all other aspects of the respective contracts.

(Id.)

244. In December, 1996, the Petrobras Board also approved direct payments in the amount of $16 million for the P-19 Contract and $15 million for the P-31 Contract which were requested by the Consortia to pay for essential equipment for the Projects that would not be covered by the progress payments due in January and February. (JS ¶ 261.) The purpose of these advances was to keep the Projects moving for the short term and create sufficient time to formulate a definite strategy to resolve the problems caused by the cost overruns. (Tr. at 3582-84.) The Consortia’s letters requesting the direct payments acknowledged that the amounts advanced were to be deducted from future progress payments due to the Consortia. (S — 379; S-407; PB-159.)

245. On December 30, 1996, Guilherme Pires informed Petrobras that IVI would sign the promissory notes required to release the equipment ready for shipment, provided that Brasoil issued specific comfort letters for the equipment. (PB-153.)

246. Petrobras provided the requested comfort letters. IVI, however, refused to deliver the signed promissory notes required for the release of the equipment. (Tr. at 1081-83, 3560-61.)

247. On or about January 6, 1997, CIBC suspended the credit facility, citing a serious material adverse change in IVI’s financial condition. (PB-481.) Vital equipment remained in Houston awaiting shipment. (Tr. at 4109-10.) As Mr. Justi testified, this moment, caused by IVI’s refusal to sign the promissory notes, was “the worst moment we had in the contracts.” (Tr. at 3561.)

248. On January 9, 1997, David Fischel and Carlos Mauricio signed a letter acknowledging receipt of $16 million as an advance for the P-19 Project and agreeing to repay that amount through a discount from a future progress payment. (PB-159.) The advance was used to pay Maru-beni and for essential equipment.

(Id.)

249. On January 21, 1997, CIBC made it clear to Petrobras that the Petrobras Defendants would not be asked to assume liability for the promissory notes already issued by IVI under the Exim Bank guaranteed credit facility. (PB-476.)

250. After December 20, 1996, when the Diretoria decided to defer discounting the direct payments from the P-19 BMS payments, SEGEN charged the direct payments for internal administrative purposes against the unexpended balance of the P-31 contract while a solution was sought to the IVI financial crisis. (Tr. at 3580-85.) On March 21, 1997, the Consortia requested that Petrobras and Brasoil charge the P-19 and P-34 direct payments against the unused P-31 balance. (S-491.)

251. SEGEN’s decision to debit the P-19 direct payments from the P-31 contract balance did not have any effect whatsoever on the delivery of the process equipment waiting for payment in Houston. Petro-bras had not decided what to do to liberate the equipment. The Consortia were responsible for purchasing the equipment under the contracts, but were trying to shift that liability to Petrobras.

252. The practice of charging the P-19 and P-34 direct payments against the P-31 balance was formalized in a letter agreement dated April 4, 1997. (S-514A.) This arrangement was discarded in favor of new blocked accounts as of April 23, 1997. (Tr. at 3583-85; S-1526A.)

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Discussions between Petrobras, the Sureties, and the Consortia Regarding the Financial Problems of the Consortia and the Sureties’ Obligations under the Bpnds

253. On December 27, 1996, Mr. Quin-tella invited the Sureties to a meeting to discuss an objective solution to be applied in the event Brasoil declared a Contractor Default. (PB-352.) Mr. Quintella cited the continuous deterioration of the Contracts with the Consortia and the failure of the Sureties to provide any positive proposal to solve these problems. He also cited the delays in shipping equipment caused by the Consortia’s refusal to sign the CIBC promissory notes.

254. On December 30; 1996, Gary'Wilson wrote to Mr. Quintella explaining that USF

&

G had been informed by the Consortia within the last thirty days that direct discussion with Petrobras had been positive and resulted in contract amendments. Mr. Wilson also reported, somewhat surprisingly, that USF

& G

was advised that the contracts “were progressing satisfactorily and on schedule.” (S — 383.) Mr. Wilson nevertheless agreed to attend a meeting.

255. Mr. Quintella sent Mr. Wilson a letter dated January 6, 1997 with financial information regarding the status of the projects (PB^485.) The attachments included a chart entitled “contract deficits.”

(Id.

at 4.) The chart showed the amounts in excess of the original contract prices that the Consortia estimated would be necessary to complete the P-19, P-31, and P-34 Projects (totaling $189 million) in the far right hand column and the amount of the recently approved amendments (totaling $47.7 million) in the far left hand column. The middle column was entitled “claims.” This middle column reflected the mathematical difference between the amounts approved for payment and the Consortia’s estimated deficits at completion (a total of $141 million.) The heading of the middle column did not mean that Petrobras or Brasoil recognized that the Consortia had claims that were unresolved after the December, 1996 meetings. (Tr. at 3631-32.) °

256. The contract deficits, after taking into account changes in scope that had been recognized in the contract amendments that had been approved in December, 1996, included overruns caused by the drastic underbidding of the P-19 and P-31 Projects by the Consortia; the Consortia’s increased costs due to their poor financial condition; the overheated nature of the market; the condition of the

real;

and the poor administration of the projects by the Consortia.

257. It would be unreasonable to find, as the Sureties urge

(see

Sureties’ Proposed Findings of Fact at ¶ 77(b)) that the contract deficits of $141 million were all claims for change order requests by the Consortia that • were still pending. Mr. Wilson’ testimony in support of that proposition was not credible. Beginning at least in January, 1997, the Consortia and the Sureties did, indeed, attempt to attribute all of the cost overruns on the projects to changes in the projects’ scope allegedly caused by Petrobras, and argued that Bra-soil therefore could not make any claim under the P-19 and P-31 Bonds because the contracts were not really in default and Brasoil had not paid all of the money that it owed to the Consortia as required by the terms of the Bonds. These arguments, however, are not credible in view of the fact that the Consortia had failed to document on an ongoing basis during the course of the contracts the alleged changes in scope that justified increases in the contractual cost of the projects. The huge increases in the contract prices sought by the Consortia in the face of the imminent depletion of the contract balances and the

*443

possible declarations of default are simply efforts to avoid the Consortia’s responsibility for the cost overruns.

258. On or about January 8, 1997, representatives of Petrobras and Brasoil met with the Sureties to discuss a solution to the financial problems of the Consortia. The Sureties were assisted by American counsel. (Tr. at 1195-96; 1199-1200; 3561-62.) The Sureties informed Petro-bras that they could not and would not take any action until the Consortia were formally declared in default. (Tr. at 1198-99; 8562-64.) Upon the declaration of a default, work on the projects would have to stop for several months while the Sureties “investigated.”

(Id.)

259. On the following day, another meeting was held among the Petrobras Defendants, the Consortia, the Sureties and their counsel. (Tr. at 1208-09, 3562-63.) The Sureties said that they could not begin their investigation prior to termination of the contracts and refused to advise Petrobras whether the performance bonds were valid. (Tr. at 3562-64.) It is plain that the Sureties were attempting to delay any action on the Bonds. By emphasizing the length and difficulty of any investigation and the need to declare a default on the Bonds before triggering the Sureties’ obligations on the Bonds, the .Sureties were emphasizing the disruption that would be occasioned by any invocation of the Bonds.

260. On January 10, 1997, Petrobras sent formal notices to the Sureties requesting 3.1 Meetings under the P-19 and P-31 Bonds. (PB-358; PB-359; PB-479; PB-480.) By letter dated January 14, 1997, USF & G’s American counsel referred to the meetings earlier in January as 3.1 Meetings and advised Brasoil that the formal notices given by Brasoil on January 10 were an unnecessary redundancy. (PB-360.)

261. Meanwhile the Sureties began to prepare their defenses. On January 14, 1997, American counsel for USF & G wrote to Nelson Tanure. (PB-514.) After reminding Mr. Tanure of the indemnification obligations of IVI and Sade, USF & G’s counsel charged that Mr. Tanure, in his individual and corporate capacities, controlled those entities and was interfering with the Consortia’s contracts with Brasoil, exposing Mr. Tanure to substantial personal liability.

(Id.;

Tr. at 1218.)

262. USF & G’s American counsel also wrote to IVI, Sade and Sequip Partieipa-góes SA

3

(“Sequip”) reminding them of their obligations pursuant to the indemnity agreement they had signed. (PB-477.)

263. Paragraph 8 of the February 17, 1995 indemnity agreement by and among IVI, Sade Vigesa, and Sequip, on the one hand, and the Sureties, on the other, granted the Sureties the right to inspect the books, records, and accounts of the principals and indemnitors at any time and until such time as the Sureties’ liability under any bond was terminated. (PB-592; Tr. at 1415-16.)

264. The Consortia granted the Sureties free access to project records prior to the declarations of default and the Sureties were fully informed concerning the reasons why the projects were over budget and behind schedule. (Tr. at 513, 1049, 1419, 1436-37; 1440-41; 1502-03; PB-407; S — 167; PB-410; S-291.) The Sureties had all the information reasonably required to make an immediate decision on which of the four options under ¶ 4 of the performance bonds to elect once Brasoil declared a formal default.

(Id.)

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265. The Sureties had full and complete access to the books and records of the Consortia no later than January 1997, approximately six weeks after the negotiation of the change orders to the P-19 and P-31 Project. (Tr. at 1502-03.) They could have insisted at that time that the Consortia correct any record-keeping deficiency with respect to change orders and job costs. They also had the opportunity to review the exhaustive backup documentation that the Consortia submitted to Pe-trobras during the negotiations of the change orders.

266. On January 29, 1997, Mr. Alceu wrote a memorandum to the Diretoria describing the attempt to reach an agreement with the Sureties on a resolution of the problems caused by the imminent exhaustion of the contract funds and on how to continue work on the projects. (PB-362.) Mr. Alceu stated that the Sureties had advised Petrobras that work would have to stop on the projects for an undetermined amount of time in excess of two months. Thus, a claim against the performance bonds was not considered a viable alternative.

(Id.

¶ 12.) Mr. Alceu also informed the Board of the suspension of the CIBC line of credit and delays in shipping equipment.

(Id.

¶ 22.) According to Mr. Alceu’s memorandum, Brasoil had two alternatives going forward: first, the assignment of the P-19, P-31, and P-34 Contracts to a new company, or second, adoption of contract amendments that would allow the Consortia to continue working on the projects. The latter was deemed to be an unsatisfactory alternative because the Consortia had already proven incapable of fulfilling their contractual obligations and their financial conditions could worsen.

(Id.

¶ 15.) Mr. Alceu alluded to IVI’s existing plan to transfer the Contracts to Marítima, a process that would take a few months to be finalized.

(Id.

¶ 16.) Mr. Alceu closed by informing the Diretoria that SEGEN would monitor the contract balances and the negotiations between IVI and Marítima.

(Id.

¶¶ 25.1, 25.2.)

267. In January, 1997, it was not practical to move the P-19 and the P-31 to another yard or to bring in a replacement contractor. (Tr. at 4306-07.) According to IVI’s figures, P-19 was approximately 84.26% complete and the engineering was 88% complete.

(Id.

at 4306.) It would have been prohibitively expensive and difficult to redirect all the process and other equipment to another yard and to make P-19 ready for transit.

(Id.)

According to IVI’s figures, P-31 was approximately 55% complete and the engineering was 75% complete.

(Id.

at 4306-07.) There were still openings in the P-31 hull.

(Id.

at 4307.) The direct cost of moving either P-19 and P-31 to a foreign yard alone would have been between $5 million and $12 million.

(Id.

at 4307-09.)

268. Following the January, 1997 meetings, the Sureties continued to attempt to discourage Brasoil from declaring a default on the bonds by emphasizing that they were entitled to stop work on the projects while they conducted “an investigation,” that the Sureties could not make inquiries to determine whether the bonds were in effect and/or whether they wished to take over the projects until Brasoil had formally terminated the contracts with the Consortia, and that Brasoil would jeopardize its ability to obtain bonding for its future projects if it declared a default. (S-436; S — 513; PB-363A at 9-10; PB-463; Tr. at 1301.) The Sureties mad,e it clear that they expected any “investigation” would last for at least three and possibly as long as six months. (PB-363A at 10; Tr. at 3562;

see also

Tr. at 1336-38, 1349-53.) The Sureties actively encouraged Brasoil to seek a “global solution” rather than declaring IVI in default. (S-436; PB-463.)

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269. The consequences of stopping work on the projects for a period of three months or more would have been catastrophic even if the projects remained at the same shipyards, and would have escalated the eventual cost of completion.

(Id.

at 3563-64.) Among other things, the work force would be demobilized and scattered, and suppliers could increase prices.

(Id.

at 3563-64, 4311.) Moreover, as the Sureties were fully aware, time was of the essence and Petrobras would lose millions of dollars each day in lost oil and gas revenues while the projects were halted.

(Id.

at 1484, 3563-64; PB-915 at 4 ¶ 4.)

270. Despite their position in this litigation that they were prejudiced by the failure of Brasoil to declare a default on the P-19 and P-31 Contracts in December, 1995, the Sureties warned the Petrobras Defendants in January, 1997 and February, 1997 that the Consortia were not in default under the contracts, and that the Consortia had substantial claims that would replenish the contract balances.

(See, e.g.,

S^36; PB-463; S-462.)

271. On February 3, 1997 Petrobras director Orlando Galváo Filho appointed a working group to study Petrobras’ options regarding the P-19, P-31, and P-34 Projects. The working group, which was headed by Emma Rocha of SEFIN, was to report back within thirty days. (PB-468.)

272. On February 6,1997, the Sureties, IVI, and Quintella signed a handwritten agreement in principle whereby IVI’s offshore contracts would be assigned to Marí-tima. (S^448; Tr. at 1235-38.) The agreement was contingent upon Marítima and IVI reaching an agreement among themselves with respect to the assignment of the contracts and/or the transfer of ownership of IVI to Marítima. (S-448; Tr. at 1235-36, 1238.) The agreement in principle was never presented to or approved by the Diretoria of Petrobras or Brasoil. (Tr. at 1251-52.)

273. On February 6, 1997, Marítima submitted its terms and conditions to Pe-trobras for the assignment of the Consortia’s contracts. (S-449.) Marítima indicated that it would only take on the Contracts on a cost plus basis (with Maritima’s margin being 10% of the amounts disbursed by Brasoil for the completion of the Contracts).

(Id.

at 3, 7.) Marítima would use the facilities of IVI to complete the Contract and retain the same management.

(Id.

at 4-5.)

274. Nelson Tanure testified that Mari-tima’s terms and conditions were unacceptable to IVI. (Tr. at 469-70.) David Fis-chel testified that he advised Mr. Vilarinho to reject the Marítima proposal “because the projects would end up being a lot more expensive and would transform the lump sum contracts into cost plus contracts and include a 10 percent administrative fee or management fee, and I thought that Director Vilarinho should not approve that proposal.” (Tr. at 958-59.) In addition, Law 8.666 prohibited Petrobras from entering into cost plus contracts. (Tr. at 3278.)

275. Mr. Vilarinho was understandably upset by the Marítima proposal and rejected it. (Tr. at 1251-52.) The assignment would have resulted in increased costs to Brasoil and would have resulted in an illegal contract being substituted for a favorable contract that Brasoil had obtained as a result of competitive bidding. While the Sureties incorrectly view Mr. Vilarinho’s decision as evidence supporting their oft-expressed theory that a “secret decision” was reached in December 1995 and January 1996, it is plain that the rejection of the Marítima proposal was the only reasonable option available to Mr. Vilarinho at the time.

276. On February 14, 1997, Mr. Cov-ington of Mustang wrote to IVI about the equipment that was waiting in Houston for

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shipment due to the Consortia’s failure to make payment. (PB-1018 at 4.) Mr. Cov-ington pointed out that suppliers had quoted favorable prices and terms, and had not insisted on letters of credit, based on the Exim Bank guaranty. He warned that the creditors were taking aggressive positions and that non-payment was threatening the completion of equipment.

277. On February 18, 1997, Dr. Fischel wrote to Petrobras, stating that “[i]n view of the exhaustion of funds under the [P-19 and P-31 Contracts], as reiterated to you on several occasions but not as yet negotiated, we hereby request that Petrobras continue to transfer the necessary funds through the [blocked] accounts so that we may continue the work.” (S — 456.) Dr. Fis-chel also asked Petrobras to assume IVPs obligations under the CIBC/Exim Bank financing scheme and to enter into a new addendum to complete the Contract.

(Id.)

To the extent that the costs of the project exceeded the adjusted contract amounts, Dr. Fischel indicated the Consortia’s willingness to propose a method of reimbursing Petrobras.

(Id.)

278. On February 27, 1997, Dr. Fischel asked Petrobras to advance $8,779,340.07 to Mustang in order to release equipment waiting to be shipped from Houston. (S-470.)

279. On March 6 the Petrobras working group headed by Emma Rocha submitted its report to Mr. Galváo. (PB-363A.) The report noted that an IVI bankruptcy would embroil the platforms in cumbersome bankruptcy proceedings with the attendant delays and uncertainties.

(Id.

at 8;

see also

Tr. at 3591-92.) However, the working group recommended that the proposal by Marítima to take over the projects be rejected because of the terms proposed and possible problems with the structure of the transaction. (PB-363A at 11.) The group also noted that, according to the Sureties, calling on the performance bonds could result in a six month long “investigation,” which would cause additional repercussions.

(Id.

at 9-10.) Finally, the group recognized that it was not feasible to transfer the projects to any other contractor in the country.

(Id.

at 13.) Therefore, the working group recommended that up to $172 million in direct funding be provided through new blocked accounts to allow the Consortia to complete the P-19, P-31 and P-34 Contracts, with such funding to be formalized by contract addenda or formal instruments of acknowledgment of debt.

(Id.

at 15; Tr. at 3595-97.)

280. On March 24, 1997, IVI informed Joel Renno, the President of Petrobras, that the negotiations with Marítima had failed. (PB-198.) Nelson Tanure attributed this to unacceptable demands by Marítima. (Tr. at 469^471, 507.) Mr. Ta-nure personally made the decision to terminate the negotiations with Marítima.

(Id.)

281. On or about April 4, 1997, David Fischel countersigned a letter acknowledging that Brasoil had advanced $66,112,254.55 in direct payments for equipment and that such payments would be deducted from progress payments due for P-31 after February, 1997 (BMS 19). (S-514A.) The $66,112,254.55 included $42,332,914.48 in direct payments authorized by the Diretoria in May 1996 for P-19, P-31, and P-34, $15,000,000 spent on P-31 in December 1996 and January 1997, and $8,779,340.07 paid to Mustang for the release of the equipment waiting on the docks in Houston.

(Id.

at 3.)

282. The April 4,1997 letter agreement superseded the earlier requests from the Consortia that the direct payments for P-19 and P-34 made in 1996 be deducted from the respective contract balances beginning in December, 1996.

(See, e.g.,

S-283; S — 308; S-416.)

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283. On April 11, 1997, Mr. Justi and Paulo Marcio Mauro sent letters to the Consortia and the Sureties inviting them to 3.1 Meetings regarding the P-19 and P-31 Projects. (PB-454.)

284. On April 14, 1997, Petrobras director Galváo wrote to the Bank of Tokyo-Mitsubishi and Marubeni Corp. seeking permission to declare a default under the P-19 Bond. (PB-436, Tr. at 3606.) Mr. Galváo also sought the permission of Nis-sho Iwai Europe PLC to declare a default under the P-31 Bond. (Tr. at 3606.)

285. On or about April 22, 1997, the relevant parties attended additional 3.1 Meetings regarding the P-19 and P-31 Projects.

(Id.

at 1314-15,1332-33.)

Additional Funds to Continue Work on the Projects

286. On April 23, 1997, Brasoil and the Consortia entered into the first of seven letter agreements (dated April 23, May 6, May 9, July 1, September 18, December 8, and December 9, 1997) whereby Brasoil made funds available for the completion of the P-19, P-31, and P-34 Contracts. (S-1526A.) In the April 23, 1997 letter Bra-soil first noted that the contract balances were exhausted, and advanced $52.6 million for expenses required to complete the projects, with $28 million of that to be used to restore funds to the P-31 Contract for the direct payments that had been made to purchase equipment for P-19 and P-34, but charged against the P-31 balance.

(Id.;

Tr. at 3611.) Under the terms of the letter agreement, the Consortia acknowledged the advance and agreed to repay the funds upon terms to be agreed upon at the end of the job. (S-1526A.) The agreement provided that any and all “pleitos” from the Consortia “deemed owed by Pe-trobras/Brasoil, shall be the object of a settlement of accounts concerning the amount of the allocation ... after the removal of the units from the shipyards” and the Consortia must reimburse Petro-bras/Brasoil the balance owed from the allocations. The agreement also provided that the amounts advanced would be deposited into new blocked accounts with withdrawals being exclusively for the use of the Contracts. The agreement noted, as did subsequent agreements, that it “does not entail a novation of any of the rights or obligations assumed by the parties, nor of the guarantees (performance bonds).” The initial agreements in the series also noted that Brasoil was considering declarations of Contractor default, and later agreements acknowledged that such defaults had been declared.

287. The April 23, 1997 letter agreement superseded the April 4, 1997 letter agreement’s system for accounting for direct payments and advances.

288. The direct payments pursuant to the letter agreements enabled the Consortia to continue work on the projects. The payments made to the Consortia outside the BMS system did not diminish the Consortia’s incentive to complete the projects.

289. The letter agreements refer to “pleitos” that the Consortia would be free to present when the settlement of accounts occurred. “Pleito” literally means “plea,” although it is often translated as “claim.” (Tr. at 3618-19;

see also

Tr. at 653.) “Pleitos” refers to requests by the contractor for additional sums due to unforeseen hardships that have complicated the work, such as a change in exchange rates. (Tr. at 3618-19.) “Pleitos” are generally distinct from formal contractual changes backed up by a change order.

(Id.)

The owner has full discretion to accept or reject pleitos.

(Id.

at 3619.)

290. Dr. Fischel acknowledged that there were factors other than change orders that increased the cost of the project such as the state of the Brazilian

real

and the increased costs of construction materi-

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ais. (S-432 ¶ (c).) Dr. Fischel testified candidly that these were the kinds of costs he would seek to share with Petrobras out of fairness in any final settlement of accounts, but that Petrobras was not obligated to pay for them. (Tr. at 1079-81,1090.)

291. The April 23,1997 letter expressly stated that it was not a novation of the original Contracts. (S-1526A at 1.) Dr. Fischel testified that he understood the letter did not change any of the duties and responsibilities of the parties under the contracts. (Tr. at 1088.) This letter and its • successors did not alter the price or compensation arrangements of the conversion contracts. Brasoil expressly stated that it was considering declaring contractor defaults under the performance bonds. Thus, there was no commitment to keep the Consortia on the job through the completion of the contracts. There was also no commitment on the part of Brasoil to advance additional funds in subsequent months or to provide funding for any particular expenses. The Sureties were advised of the April 23, 1997 letter because Dr. Fischel discussed the letter with the Sureties’ American counsel. (Tr. at 1091.)

292. The parties established new blocked accounts for the funds made available by Brasoil pursuant to the letter agreements.

{Id.

at 3616-18.) Unlike the funds in the old blocked accounts, the funds in the new blocked accounts had not been earned by the Consortia and remained the property of Brasoil.

{Id.)

Thus, after April 23, 1997, the funds advanced by Brasoil to complete the project were not progress payments, but rather payments for project expenses, using Bra-soil funds. Brasoil also made direct payments to suppliers independent of the new blocked accounts.

{Id.

at 3803-04.)

293. Of the $52.6 million advance provided by Brasoil pursuant to the April 23, 1997 letter agreement, $28.2 million was used to purchase essential equipment for the P-31 Project and $17.6 million was used to purchase essential equipment for the P-19 Project.

{Id.

at 3609; PB^44 at 7-8.) The remainder was used for P-34 expenses. (PB-444 at 9.)

294. The Sureties rely on an April 11, 1997 memo from Marcio Eiras Moraes, the Superintendent of SEFIN, which refers to the $52 million advance as corresponding to “Change Orders” and “other charges that would be agreed upon by the end of the project....” (S — 3117.) The Sureties argue that this shows that these advances were increases in the scope of the project. However, Marcio Eiras had responsibility for finance rather than engineering and there was simply no testimony from him at trial, even through his deposition, as to the meaning of this statement. Justi testified credibly that the $52.6 million in advance payments approved by the Diretoria had nothing to do with change orders and that any contrary statement was absurd. (Tr. at 3710, 3732.) The advance was, instead, for the purpose of purchasing specified equipment.

{Id.

at 3729-32.)

295. Although the BMS system was continued through the end of May, the payments earned by the P-31 Consortium under the EAP fell far short of the amounts required to pay for equipment and other payments required to complete P-31. At the end of April 1997, the Consortium estimated that $82.5 million would be required for P-31 during the months of March, April and May 1997. Eighty percent of this amount was for equipment and materials. (PB-204; Tr. at 2362.) If Bra-soil had continued with the payment scheme under the EAP schedule, progress on P-31 would have come to a virtual stop because the Consortium had no means to pay for essential equipment and materials. (S-495A.)

296. The Petrobras Defendants did not enter into a blanket commitment to fund

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all of the Consortia’s costs until completion of the projects. The Diretoria proceeded on a step by step basis. (Tr. at 3627.) The Petrobras Defendants selected what they wished to pay for from the lists submitted by the Consortia. (Id. at 969-971.)

297. On May 6 and May 9, 1997, the Consortia signed letter agreements acknowledging that Brasoil would advance an additional $74.32 million for expenses necessary to complete the P-19 and P-31 projects. (S-1526A at 5, 9.)

298. Meanwhile, the Sureties were attempting to marshal evidence to resist claims on the performance bonds. On May 8, 1997, a Brazilian lawyer working for the Sureties wrote to Mr. Tanure seeking permission for American lawyers to review files at the Caju shipyard. The lawyer wrote that “we expect, with the assistance of Dr. Fischel, Carlos Mauricio and Luciano Pereira, to gather, from the extensive correspondence exchanged with Petrobras, documents that, among other things, will evidence and support the thesis that Petrobras has effectively taken over the jobs in jeopardy of the Contractor’s autonomy.” (PB-366.)

299. The system whereby Brasoil made direct payments of expenses had been in effect for less than three weeks when, on May 12, 1997, Brasoil formally declared the P-19 Consortium to be in default under the P-19 Contract.

300. The direct payment regime was in effect for approximately eight weeks for P-31, which was declared in default on June 16,1997. A total of $43.44 million was spent to cover necessary P-31 job expenses for April and May. (PB-429 ¶ 4.) The Sureties were not prejudiced by these expenditures outside the BMS system because the payments were used to complete the P-31 Project and would have been necessary in any case.

Declarations of Default

301. On May 12, 1997, the Petrobras Defendants sent letters to the P-19 Consortium and to the Sureties declaring a default under the P-19 Contract and terminating the P-19 Consortium’s right to complete the project. (PB-318; S-582.) The Petrobras Defendants informed the P-19 Consortium that the total contract price ($165,832,060 plus the agreed contract amendment that had increased the amount of the contract to $176,010,516.97) had already been disbursed but the Consortium had not fully met its obligations under the Contract. “Thus, in accordance with the terms of Article Eight of the General Contract Conditions (Appendix I of the Contract), we are formally notifying you of the Consortium’s Contract default and loss of contract rights.” The notification went on to state: “However, despite cancellation of the Consortium’s

right,

we point out that your

obligation

to complete the project remains

intact,

and will be the subject of new financial arrangements between Brasoil and the Consortium, until subsequent deliberation has been concluded.” (PB-318 (emphasis in original).) In their notice to the Sureties, the Petrobras Defendants stated: “Pursuant to paragraph 3.3 of the Performance Bond..., Petrobras/Brasoil agrees to pay the balance of the Contract Price to the sureties. Unfortunately, there is no balance remaining.” (S-582.)

302. The notice sent by Petrobras plainly declared a default on the P-19 Contract and terminated the P-19 Consortium’s right to complete the contract. It also stated that there were no sums due under the Contract. Thus, the Petrobras Defendants provided sufficient notification to comply with its obligations under ¶ 3 of the P-19 Bond. They had called a meeting under ¶ 3.1. They had “declared a Contractor Default and formally terminated

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the Contractor’s right to complete the Contract,” pursuant to ¶ 3.2 of the Bond. They also satisfied ¶ 3.3 of the Bond which required that the Owner agree to pay “the Balance of the Contract Price,” because there were no further funds that were required to be paid under the P-19 Contract.

303. The “Balance of the Contract Price” is-defined in the Bond to mean “The total amount payable by the Owner to the Contractor under the Construction Contract after all proper adjustments have been made, ... reduced by all valid and proper payments made to or on behalf of the Contractor under the Construction Contract.” (S-72A ¶ 12.1.) Brasoil’s cumulative payments on P-19 exceeded the adjusted contract balance of the P-19 Contract in or about January 1997. (Tr. at 3861; PB-1301.)

304. While the Sureties argue that the “Balance of the Contract Price” could not be reduced by any payments that were not in accordance with the BMS schedule, the Bonds do not define the “Balance of the Contract Price” so narrowly that it is limited to payments that are made in accordance with the specific payment schedule in the Construction Contract. Indeed, ¶ 7 of the Bonds provides: “The Surety shall not be liable to the Owner or others for obligations of the Contractor that are

unrelated

to the Construction Contract, and the Balance of the Contract Price shall not be reduced or set off on account of any such unrelated obligations.” (Emphasis added.) In other words, the Bonds exclude a reduction in the Balance of the Contract Price for expenditures unrelated to the Contract, but there is no similar exclusion for expenditures related to the Contract that are not made in strict compliance with the payment schedule in the contract. Moreover, in ¶ 8 of the Bonds, the Sureties waived “notice of any change, including changes of time, to the Construction Contract or to related subcontracts, purchase orders, and other obligations.”

305. Brasoil spent approximately $55.6 million over the BMS schedule on P-19 prior to the declaration of default. Of this amount approximately 69% was spent on equipment and materials, 17% was spent on labor and 15% on other cost categories such as “as new” material and equipment, consumables, rentals, classification, and maneuvering. All of the money was spent on valid project costs. (Tr. at 3860.)

306. The four month delay in declaring a default from January, 1997, when the P-19 funds were exhausted, to May 12, 1997 was reasonable under the circumstances. Brasoil and Petrobras were under no obligation to declare a default at the earliest possible moment. Moreover, the Sureties plainly attempted to discourage any declaration of default. In any event, in view of the efforts to find a “global solution” and the time required to determine how to proceed, the delay in declaring a default was reasonable.

307. The Sureties elected to conduct an investigation of the P-19 Bond, thereby waiving, in accordance with ¶ 4.4 of the Bond, their rights to perform and complete, arrange for completion or obtain a new contractor under ¶¶ 4.1-4.3 of the Bond. (S-72A.)

308. The Sureties have argued that the May 12, 1997 declaration of default was not effective because it was not a clear default and because it did not plainly terminate the Consortium’s “right to complete the contract.” That is not a fair statement of the facts or the terms of the documents. The Petrobras Defendants plainly stated that they were declaring a default, and the declaration occurred under circumstances, including the fact that two 3.1 Meetings had occurred, that would have made it clear that the Petrobras De

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fendants were declaring a default if any uncertainty did exist.

309. In their May 12, 1997 declaration, the Petrobras Defendants did claim that the P-19 Consortium’s “obligation to complete the project remains intact.” There is some question whether, after the Petro-bras Defendants terminated the Consortium’s rights under the P-19 Contract, the Consortium really continued to have obligations under the Contract. But the fact that the Petrobras Defendants may have been mistaken regarding the Consortium’s obligations does not detract from their clear indication that they were terminating the Consortium’s rights. Moreover, if the Consortium did not continue to perform, any contractual damages against the Consortium would be increased and continuing to perform under the contract would mitigate damages. Thus, in the circumstances of this case, there continued to be an obligation to perform to mitigate damages.

310. While the Sureties now dispute whether there really was a termination of the P-19 Contract, at the time they regarded the May 12, 1997 letter with respect to the P-19 Contract and the June 16, 1997 letter with respect to the P-31 Contract as effective termination under the performance bonds. (Tr. at 1316-17, 1348-49.) As the Sureties’ American counsel wrote in a lengthy May 30, 1997 letter to Petrobras’ counsel: “The Contractor regards Petrobras’ May 12th termination to be as Petrobras has stated: a termination of the P-19 Contract pursuant to [§ 8 of the General Contractual Conditions]. The Sureties are proceeding on the same premise. Thus, the P-19 contract no longer exists; all that remains at this point are the competing claims of the Owner and Contractor for breach of that contract; and a contention by the Owner that the Sureties’ bond obligation has now been triggered.” (PB-561 at 2.)

311. There was some self-serving correspondence by the P-19 Consortium at the time which attempted to express a rejection of the default.

(See, e.g.,

S-602 at 4-7.) But Petrobras was clear in stating that it had declared a default. As Mr. Alceu wrote to David Fischel on May 21, 1997: “As you know, said notification, issued in accordance with paragraph 3.2 of the Performance Bond, declares the Contractor in default due to failure to complete the Contract under the price established in the contract and in view of its failure to comply with the contractual schedule. As expressly acknowledged in your letter, the Contract funds have been depleted without the project being completed.” (S — 605.)

312. The Sureties only made a token effort to explore the possibility of taking over the Contract. They did not seriously pursue the option of bringing in a replacement contractor. Indeed, in May-June, 1997, it would have made no sense to transfer the platforms to another yard or to bring in a replacement contractor. (Tr. at 4285-86, 4293-4301; S-1527 at 34.) Moreover, the Sureties had known since July, 1996 that moving the projects was nearly impossible. As Mr. Bazaar’s July 24, 1996 notes ask: “[w]here could Petro-bras move the jobs at this late stage since IVI has the only 2 Brazilian shipyards to complete the job[s]”? (PB-915 at 4.)

313. The Sureties did not set about conducting any good faith investigation of their options under the Performance Bonds but rather continued their efforts to prepare for litigation and to develop litigation positions while characterizing their activities as “investigation.” (S — 606; PB-366; Tr. at 1346-1353.) On May 16, 1997, American counsel for the Sureties wrote to Petrobras emphasizing the scope of the allegedly necessary investigation, warning Brasoil not to take any action in connec

*452

tion with the P-19 Project that might jeopardize the Sureties rights to complete the project, and stating that any expenditures on the Project would not be considered as valid by the Sureties. (PB-367.) On May 22, 1997, the Sureties’ American counsel sent Petrobras a “First Document Request” with two and a half pages of definitions and instructions seeking 48 categories of documents including “[a]ll documents which refer or relate to Project P-19”. (S-606 at 8-14.) The document request was similar in all respects to a document request made under Rule 34 of the Federal Rules of Civil Procedure. (Tr. at 1350-51.) The Sureties included an investigation schedule indicating that their investigation of the P-19 claim alone would extend past August 1. (S-606 at 15.)

314. Time was of the essence in the P-19 Contract. (PB-279 at 267 § 6.1.) The Sureties were aware that each day of delay cost Petrobras substantial lost revenue as a result of lost production. (PB-915 at 4 ¶ 4; Tr. at 1484.)

315. Since the Sureties declined to take over the P-19 Project, Brasoil was left to mitigate its damages by completing the project. The original Contract with the Consortium had been terminated. Brasoil initially used the Consortium to complete the P-19 Project by paying necessary expenses without any allowance for profit. This was the least expensive way to complete the project because Brasoil would have to allow a profit to any replacement contractor.

316. The total costs incurred by Brasoil for P-31 exceeded the adjusted contract balance sometime in late May or early June 1997. (Tr. at 3859-60; PB-1302.)

317. On June 16, 1997, the Petrobras Defendants declared the P-31 Consortium to be in default and demanded that the Sureties perform under the bond. (S-646.) The notification was similar to that for the P-19 Project. It noted that the entire contractual amount as amended ($179,968,887.48) had already been exhausted but “the Consortium did not fulfill its obligations, as defined in the First Clause of the contractual instrument in question. Therefore, in agreement with the General Contractual Conditions..., we are formally communicating to you lack of fulfillment (Contract default) of the Consortium and the loss of the rights of the contract.”

(Id.)

The notice contained the same paragraph reminding the Consortium that in spite of the loss of the Consortium’s rights under the contract, their obligation to complete the work remained intact. (Compare PB-318 at 3 with S-646 at 4.) In the notice to the Sureties, the Pe-trobras Defendants advised the Sureties that a “notice of Contractor Default” was enclosed and informed the Sureties that it agreed to pay the balance of the contract price pursuant to ¶ 3.3 of the Bond, but that no balance remained. (S-646 at 1.)

318.For the reasons explained above with respect to the P-19 Bond and the default declaration on the P-19 Project, Brasoil properly declared a default, terminated the P-31 Contract and fulfilled its requirements under ¶ 3 of the P-31 Bond. The adjusted contract balance on the P-31 Contract was exhausted, and there was no “Balance of the Contract Price” to be tendered to the Sureties under the P-31 Bond because Brasoil had paid more than the adjusted contract price to the P-31 Consortium for expenses that were proper under the P-31 Contract prior to the declaration of default. (Tr. at 3857-60; PB-1302.) Specifically, Brasoil spent $61.6 million on P-31 in excess of the BMS payments prior to the default date. (Tr. at 3858.) 81% of the $61.6 million was spent on equipment for P-31, 9% was spent on labor, and the balance on other essential project costs such as equipment rental and overhead.

(Id.)

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319. The Sureties argue that amounts paid outside the BMS system should not properly be considered as payments pursuant to the P-19 and P-31 Contracts, so the respective Consortia were not actually in default because more funds were owed to them. However, the advance payments allowed the projects to proceed, reduced the risk of the Sureties by furthering the completion of the respective projects on the most expeditious and efficient basis, and reduced the amount of work that the Sureties would have otherwise been responsible to perform or pay for. The Sureties place great reliance on testimony by Frederick Hamilton, the accounting expert for the Petrobras Defendants, which candidly pointed out that there was a difference between the amounts expended in accordance with the BMS schedules for the P-19 and P-31 Projects and the total amounts that were expended, and that the amounts that had been expended under the BMS schedules had not exhausted the adjusted contract price at the times the defaults were declared on the P-19 and P-31 Contracts. (PB-1301; PB-1302; Tr. at 3858, 3860.) However, at trial, Mr. Hamilton testified very credibly that all of the payments — both the BMS payments and the additional direct payments and advances — were valid payments that were necessary to get the projects done. (Tr. at 3897.) As a matter of fact, the payments were proper payments under the Contracts even though the schedule of the payments was accelerated from that otherwise provided in the BMS schedule.

320. According to the monthly report prepared by the P-31 Consortium, the P-31 Project was 72.4% completed when Bra-soil declared the default on June 16, 1997. (PB-661 at 2917.) The completion of the project would have been delayed for an inordinate period if the P-31 Consortium had been removed from the job in mid-June. Moreover, there were no assurances that a replacement contractor would have been permitted to use IVI’s facilities, which were the only yards in Brazil capable of undertaking projects of this scope. (Tr. at 4293.)

321. Not long after the declarations of default, the Consortia lost the senior management team that had been brought in from the Montreal Group to manage the Brasoil projects. David Fischel resigned as president of IVI in June, 1997. (JS ¶ 277.) In July, 1997 Dr. Fischel became the president of Empresa Brasiliera de Engenharia S.A. (“EBE”), a Brazilian engineering company. (Tr. at 897.) Guil-herme Pires, the project manager of P-19, resigned from Sade Vigesa in June, 1997, shortly after the declaration of default. (JS ¶ 84.) Carlos Mauricio, the director of offshore services for IVI and a vice president of Sade Vigesa, left the companies in or around September, 1997.

(Id.

¶ 80; Tr. at 1938-39.)

322. P-19 was moved from the Ver-olme Shipyard in Angra dos Reis to the Maua shipyard in Niteroi on August 17, 1997. (Tr. at 3237; JS ¶ 272.)

323. On June 26, 1997, counsel for Bra-soil wrote to counsel for the Sureties formally demanding, pursuant to ¶ 5 of the P-19 Bond, that the Sureties perform

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