BRIEF FOR THE APPELLANTS Ian A. L. Strogatz Brian P. Flaherty by wuyunyi

VIEWS: 15 PAGES: 103

									 02-9185
& 02-9187           IN THE UNITED STATES COURT OF APPEALS
                            FOR THE SECOND CIRCUIT
                                  _____________
                UNITED STATES FIDELITY AND GUARANTY COMPANY AND
                       AMERICAN HOME ASSURANCE COMPANY,
                                             Plaintiffs-Counter-Defendants - Appellants,
                                        v.
      BRASPETRO OIL SERVICES COMPANY; PETROLEO BRASILEIRO S.A. – PETROBRAS;
     BANK OF TOKYO-MITSUBISHI, LTD.; AND LONG TERM CREDIT BANK OF JAPAN, LTD.,
                                             Defendants-Counter-Claimants - Appellees.

                 ON APPEAL FROM THE UNITED STATES DISTRICT COURT
                      FOR THE SOUTHERN DISTRICT OF NEW YORK

                          BRIEF FOR THE APPELLANTS

Ian A. L. Strogatz                                          Lawrence S. Robbins
Brian P. Flaherty                                           Roy T. Englert, Jr.
Anthony R. Twardowski                                       Gary A. Orseck
WOLF, BLOCK, SCHORR AND                                     Alan E. Untereiner
SOLIS-COHEN LLP                                             Arnon D. Siegel
1650 Arch Street                                            ROBBINS, RUSSELL, ENGLERT,
Philadelphia, PA 19103                                      ORSECK & UNTEREINER LLP
(215) 977-2000                                              1801 K Street, N.W.
                                                            Suite 411
                                                            Washington, D.C. 20006
                                                            (202) 775-4500
                 CORPORATE DISCLOSURE STATEMENT
      Appellant United States Fidelity and Guaranty Company (“USF&G”) is

wholly owned by St. Paul Fire and Marine Insurance Company, which in turn is

wholly owned by The St. Paul Companies, Inc., which is publicly held. Appellant

American Home Assurance Company is wholly owned by American International

Group, Inc., which is also publicly held.

                            RULE 28.2 STATEMENT

      Judge John G. Koeltl, of the U.S. District Court for the Southern District of

New York, rendered the decisions being appealed from. The relevant opinions are

reported at 219 F. Supp. 2d 403 and 226 F. Supp. 2d 459. The final judgment is

unreported.
                                      TABLE OF CONTENTS
                                                                                                             Page

CORPORATE DISCLOSURE STATEMENT ..........................................................i

RULE 28.2 STATEMENT .........................................................................................i

TABLE OF CONTENTS.......................................................................................... ii

TABLE OF AUTHORITIES .....................................................................................v

INTRODUCTION .....................................................................................................1

STATEMENT OF JURISDICTION..........................................................................2

STATEMENT OF THE ISSUES PRESENTED FOR REVIEW .............................3

STATEMENT OF THE CASE..................................................................................4

STATEMENT OF FACTS ........................................................................................5

        A.       The Facts Underlying This Litigation ................................................... 6

                 1.       Contracting, Financing, and Bonding of the Projects................. 6

                 2.       Relevant Terms of the Performance Bonds. ............................... 7

                 3.       Relevant Terms of the Contracts ................................................ 9

                 4.       Rapid Deterioration of IVI’s Financial Condition and
                          Brasoil’s Efforts to “Rescue” the Consortia ............................. 10

                 5.       Brasoil Declares Defaults on P-19 and P-31 While
                          Directing the Consortia to Continue Work ............................... 16

                 6.       The Projects’ Completion ........................................................... 17

        B.       Proceedings Below ................................................................................ 18

                                                      - ii -
SUMMARY OF ARGUMENT ...............................................................................23

ARGUMENT ...........................................................................................................27

I.       THE STANDARD OF REVIEW ..................................................................27

II.      THE SURETIES ARE NOT LIABLE UNDER THE BONDS ....................27

         A.       Brasoil Failed to Comply With Conditions Precedent to the
                  Sureties’ Obligations ...........................................................................30

                  1.       The Consortia Were Not in Default ..........................................30

                           a.        “Exhaustion of Contract Funds” Is Not an Event of
                                     Default ............................................................................30

                           b.        In Any Event, Brasoil Did Not Exhaust the
                                     Contract Funds................................................................34

                  2.       Brasoil Did Not Terminate the Consortia’s Rights Under
                           the Contracts .............................................................................40

                  3.       Brasoil Failed to Agree to Pay the Sureties the “Balance
                           of the Contract Price”................................................................44

         B.       Brasoil’s Multiple Alterations of the Contractual Payment
                  Scheme, Effected Without the Sureties’ Consent, Discharged
                  the Sureties ..........................................................................................46

III.     THE DAMAGES AWARD SHOULD BE REVERSED .............................56

         A.       Judge Koeltl’s Award of $174,209,776 in Excess “Cost of
                  Completion” Damages Under Paragraph 6.1 of the Bonds
                  Should Be Vacated ..............................................................................57

         B.       The Award of $62,592,000 in “Liquidated Damages” Should
                  Be Reversed.........................................................................................61

                  1.       The Contracts Did Not Specify “Liquidated Damages”
                           Within the Meaning of Paragraph 6.3.......................................62


                                                         - iii -
                          a.        Under New York Law, a Purported Liquidated
                                    Damages Exaction Is Unenforceable Unless It
                                    Constitutes a Reasonable Estimate of Potential
                                    Loss.................................................................................62

                          b.        The Multas Moratorias Provisions Constitute
                                    “Penalties,” Not Enforceable Liquidated Damages,
                                    for Purposes of Paragraph 6.3.........................................64

                 2.       Any Award of Liquidated Damages Must Be Capped at
                          10% of the Contract Price .........................................................70

        C.       The Award of $36,730,905 in Attorneys’ Fees and Expenses Is
                 Erroneous.............................................................................................72

                 1.       Paragraph 6.2 of the Bonds Does Not Cover Attorneys’
                          Fees Incurred in Litigation........................................................72

                 2.       The Award of Attorneys’ Fees and Expenses Is Also
                          Invalid Because Brasoil Failed to Plead Its Entitlement to
                          Fees ...........................................................................................77

        D.       The Award of $96 Million in Prejudgment Interest Should Be
                 Reversed ..............................................................................................79

IV.     THE JUDGMENT ON THE TORTIOUS INTERFERENCE CLAIM
        SHOULD REVERSED .................................................................................86

        A.       Factual Background.............................................................................86

        B.       Judge Koeltl Wrongly Rejected the Sureties’ Tortious
                 Interference Claim...............................................................................88

CONCLUSION........................................................................................................90




                                                         - iv -
                                   TABLE OF AUTHORITIES
                                                                                                         Page

                                                   Cases


139 Fifth Ave. Corp. v. Giallelis,
      1996 WL 154108 (S.D.N.Y. 1996) ...............................................................63

Aetna Casualty & Surety Co. v. B.B.B. Constr. Corp.,
      173 F.2d 307 (2d Cir. 1949) .............................................................. 80-81, 84

Aetna Casualty & Surety Co. v. United States,
      176 N.Y.S.2d 961 (Ct. App. 1958)................................................................51

Atlantic Purchasers, Inc. v. Aircraft Sales, Inc.,
      705 F.2d 712 (4th Cir. 1983) .........................................................................77

BDO Seidman v. Hirshberg,
     690 N.Y.S.2d 854 (Ct. App. 1999)..........................................................62, 65

Becker v. Faber,
     280 N.Y. 146 (1939)......................................................................................46

Bier Pension Plan Trust v. Estate of Schneierson,
      546 N.Y.S.2d 824 (Ct. App. 1989)................................................................46

Boyajian v. United States,
      423 F.2d 1231 (Ct. Cl. 1970).........................................................................60

Carlisle Ventures, Inc. v. Banco Español de Credito,
      176 F.3d 601 (2d Cir. 1999) ..........................................................................27

City of Elmira v. Walter, Inc.,
       546 N.Y.S.2d 183 (3d Dep't 1989) ................................................................75

City of Rye v. Public Service Mut. Ins. Co.,
       358 N.Y.S.2d 391 (Ct. App. 1974)................................................................65

Coastal Power International Ltd. v. Transcontinental Capital Corp.,
     182 F.3d 163 (2d Cir. 1999),
     aff’g 10 F. Supp. 2d 345 (S.D.N.Y. 1998).........................................72, 73, 76


                                                     -v-
                                                                                                      Page(s)
Dragon Constr. Co. v. Parkway Bank & Trust,
     678 N.E.2d 55 (Ill. App. 1997)......................................................................51

Emigrant Industrial Savings Bank v. Willow Builders, Inc.,
     48 N.E.2d 293 (N.Y. 1943) ...........................................................................41

ESPN, Inc. v. Office of Comm'r of Baseball,
     76 F. Supp. 2d 383 (S.D.N.Y 1999) ........................................................ 41-42

Hartford Fire Ins. Co. v. Cheever Development Corp.,
      734 N.Y.S.2d 598 (2d Dep't 2001) .......................................................... 73-74

Highland Const. Co. v. Union Pacific Railroad,
      683 P.2d 1042 (Utah 1984)............................................................................61

Hooper Assocs. v. AGS Computers, Inc.,
     549 N.Y.S.2d 365 (Ct. App. 1989)....................................................72, 73, 74

Howard Johnson Int'l v. HBS Family, Inc.,
    1998 WL 411334 (S.D.N.Y 1988) ................................................................70

In re American Casualty Co.,
       851 F.2d 794 (6th Cir. 1988) .........................................................................77

In re O.P.M. Leasing Servs., Inc.,
       23 B.R. 104 (Bankr. S.D.N.Y. 1982) ............................................................64

In re West 56th Street Associates,
      181 B.R. 720 (S.D.N.Y. 1995) ................................................................63, 64

International Fidelity Ins. Co. v. County of Rockland,
      98 F. Supp. 2d 400 (S.D.N.Y. 2000) .......................................................74, 75

Inter-Power of New York Inc. v. Niagara Mohawk Power Corp.,
      686 N.Y.S.2d 911 (3d Dep't 1999) ................................................................41

Itar-Tass Russian News Agency v. Russian Kurier, Inc.,
      153 F.3d 82 (2d Cir. 1998) ............................................................................27



                                                    - vi -
                                                                                                      Page(s)
Jarro Building Indus. Corp. v. Schwartz,
      281 N.Y.S.2d 13 (2d Dep't 1967) ..................................................................64

Jews for Jesus, Inc. v. Jewish Community Relations Counsel,
      968 F.2d 286 (2d Cir. 1992) ..........................................................................88

L&A Contracting v. Southern Concrete Servs.,
     17 F.3d 106 (5th Cir. 1994) .....................................................................40, 55

Leasing Service Corp. v. Justice,
      673 F.2d 70 (2d Cir. 1982) ............................................................................70

Lori-Kay Golf, Inc. v. Lassner,
      472 N.Y.S.2d 612 (Ct. App. 1984)................................................................73

Maidmore Realty Co. v. Maidmore Realty Co.,
     474 F.2d 840 (3d Cir. 1973) ..........................................................................77

McKinley Assocs., LLC v. McKesson HBOC, Inc.,
     110 F. Supp. 2d 169 (W.D.N.Y. 2000)..........................................................63

Merrill Lynch Interfunding, Inc. v. Argenti,
      1998 WL 790922 (S.D.N.Y. 1998) ...............................................................79

Morse/Diesel, Inc. v. Trinity Indus.,
     875 F. Supp. 165 (S.D.N.Y. 1994), rev’d in part
     on other grounds, 67 F.3d 435 (2d Cir. 1995).......................80, 81, 82, 83, 85

Muscolino v. Keppel,
     232 N.Y.S.2d 569 (1st Dep’t 1962)...............................................................81

North American Specialty Insurance Co. v. Chichester School District,
      158 F. Supp. 2d 468 (E.D. Pa. 2001).............................................................75

Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co.,
     636 N.Y.S.2d 734 (Ct. App. 1995)................................................................30

Schlaifer Nance & Co. v. Estate of Warhol,
      119 F.3d 91 (2d Cir. 1997) ............................................................................27


                                                    - vii -
                                                                                                      Page(s)
Seabury Constr. Corp. v. Jeffrey Chain Corp.,
     289 F.3d 63 (2d Cir. 2002) ............................................................................27

SEC v. Monarch Funding Corp.,
     192 F.3d 295 (2d Cir. 1999) ..........................................................................90

St. John’s College v. Aetna Indemnity Co.,
       201 N.Y. 335 (1911).............................................................................. passim

St. Paul Fire & Marine Ins. Co. v. City of Green River,
      93 F. Supp. 2d 1170 (D. Wyo. 2000),
      aff’d mem., 2001 WL 369831 (10th Cir. 2001).............................................51

Stuyvesant Ins. Co. v. Dean Constr. Co.,
      254 F. Supp. 102 (S.D.N.Y. 1966) ................................................................80

Sunrise Plaza Assocs. v. International Summit Equities Corp.,
      622 N.Y.S.2d 596 (2d Dep’t 1995) ...............................................................81

Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc.,
      393 N.Y.S.2d 365 (Ct. App. 1977)..........................................................62, 63

Tuzzeo v. American Bonding Co. of Baltimore,
      226 N.Y. 171 (1919)................................................................................80, 83

Tynan Incinerator Co. v. International Fidelity Ins. Co.,
      499 N.Y.S.2d 118 (2d Dep’t 1986) ..............................................................80

United Indus. v. Simon-Hartley, Ltd.,
      91 F.3d 762 (5th Cir. 1996) .....................................................................77, 79

United States ex rel. Evergreen Pipeline Constr. Co. v.
      Merritt Meridian Constr. Corp.,
      95 F.3d 153 (2d Cir. 1996) ............................................................................72

United States v. Anchor Warehouses,
      92 F.2d 57 (2d Cir. 1937) ........................................................................81, 83




                                                   - viii -
                                                                                                               Page(s)
United States v. Dauray,
      215 F.3d 257 (2d Cir. 2000) ..........................................................................76

United States v. Morgan,
      51 F.3d 1105 (2d Cir. 1995) ..........................................................................65

United States v. United States Gypsum Co.,
      333 U.S. 364 (1948).......................................................................................27

Vincent v. Thompson,
      377 N.Y.S.2d 118 (2d Dep’t 1975) ...............................................................88

Walter Concrete Constr. Corp. v. Lederle Laboratories,
      2003 WL 367460 (N.Y. Feb. 20, 2003) ..................................................28, 42

Weisgram v. Marley Co.,
     528 U.S. 440 (2000).................................................................................60, 61

White Rose Food v. Saleh,
      738 N.Y.S.2d 683 (2d Dep’t 2002) ...............................................................54

                                               Statutes and Rules
28 U.S.C. § 1291........................................................................................................2

28 U.S.C. § 1330........................................................................................................2

Fed. R. Civ. P. 9(g) ............................................................................................77, 78

Fed. R. Civ. P. 50(a)(1)............................................................................................60

Fed. R. Civ. P. 52(a).................................................................................................27

Fed. R. Civ. P. 54(d) ................................................................................................78

N.Y. Gen. Oblig. Law § 7-301.................................................................................80




                                                         - ix -
                                                                                                              Page(s)
                                        Brazilian Legal Authorities
Article 9 of Decree no. 22.626 (Apr. 7, 1933)...................................................70, 71

Declaration of Paulo Cezar Aragão .......................................................30, 31, 67, 71

Declaration of Judge Nilson de Castro Dião ...........................................................71

Opinion of Justice Paulo Costa Leite.................................................................32, 33

Special Appeal No. 229.776-SP, 4th Panel (Dec. 17, 1999) ...................................71

                                                  Miscellaneous
AMERICAN INSTITUTE OF ARCHITECTS, AIA DOCUMENTS:
     AN OVERVIEW (1987).....................................................................................27

Court Decision Requires Surety Companies to Pay More Than
      $330 Million, Decision Will Have Broad Implications for
      Large Projects Worldwide, CONSTRUCTION HEADLINE NEWS
      (Oct. 1, 2002) <http://www.interfaceconsulting.com/CHN/
      SuretyCompanies_AGDCommunications.htm> .............................................2

Petrobras Wins Platform Bond Case, Award of $273 Million
      May Tighten Surety Market Still Further, BUSINESS INSURANCE
      (Sept. 2, 2002)..................................................................................................2

RESTATEMENT (2D) OF JUDGMENTS (1982) ............................................................ 89

RESTATEMENT (3D) OF SURETYSHIP AND GUARANTY (1996) ................................. 40

S. STEIN, CONSTRUCTION LAW (1986 & Supp. 2002) .............................................56

E. VAUGHN & T. VAUGHN, FUNDAMENTALS OF RISK
     AND INSURANCE (9th ed. 2003)........................................................................7

C. WRIGHT & A. MILLER, FEDERAL PRACTICE
     AND PROCEDURE (2002) ................................................................................77




                                                         -x-
                                INTRODUCTION
      These appeals arise from two construction projects commissioned by

Appellee Braspetro Oil Services Company (“Brasoil”), an instrumentality of the

Brazilian government, and awarded to two Brazilian Consortia as contractors.

Appellants USF&G and American Home Assurance Company (“the Sureties”)

issued surety bonds (“the Bonds”) guaranteeing the contractors’ performance under

the construction contracts (the “Contracts”).

      Following a bench trial, Judge John G. Koeltl found the Sureties liable on

the Bonds and awarded Brasoil (and Japanese banks that had financed one project)

$370 million in damages.         Judge Koeltl’s 165-page decision, despite its

complexities of fact, is marred by straightforward errors of law. It misapprehends

the nature of suretyship; it rewrites a standard-form performance bond in

widespread use; and, if left undisturbed, it will upset settled legal principles on

which owners, contractors, lenders, and sureties rely.

      Brasoil’s own lawyers said it best when they recently publicized the novelty

and “important ramifications” of the decision below:

      Mr. Vickery . . . said, “This decision is perhaps the most important in
      the field of surety law in several decades. The decisions that have
      guided surety law for the past several decades are dated. This decision
      by the . . . most important court for commercial claims in the world,
      will become the guiding decision for a long time to come. It will have
      important ramifications for a number of industries.”
      John Horan . . . agreed, saying, “The ground rules have been redefined
      for surety companies.”

Court Decision Requires Surety Companies to Pay More Than $330 Million,

Decision Will Have Broad Implications for Large Projects Worldwide,

CONSTRUCTION HEADLINE NEWS, Oct. 1, 2002 <http://www.interfaceconsulting.

com/CHN/SuretyCompanies_AGDCommunications.htm>.                 As    Mr.      Horan

predicted, Judge Koeltl’s decision would alter the “whole approach” of surety

companies and would “certainly affect” how sureties price bonds. Petrobras Wins

Platform Bond Case, Award of $273 Million May Tighten Surety Market Still

Further, BUSINESS INSURANCE, Sept. 2, 2002, at 30.

      Because “dated” (which is to say settled) suretyship “ground rules” under

New York law should not be “redefined” by a federal court, the judgment should

be reversed.

                      STATEMENT OF JURISDICTION

      The district court had subject-matter jurisdiction under 28 U.S.C. § 1330.

On September 30, 2002, the court entered final judgment in favor of Appellees.

Appellants timely filed notices of appeal on October 8. This Court has jurisdiction

under 28 U.S.C. § 1291.




                                       -2-
        STATEMENT OF THE ISSUES PRESENTED FOR REVIEW
      1.     Did the district court incorrectly hold the Sureties liable under the

Bonds, even though, as a matter of law, (a) the contractors did not “default” on the

Contracts, (b) Brasoil never “formally terminated” the Contracts, and (c) Brasoil

never agreed to pay the “Balance of the Contract Prices” – all express conditions

precedent to the Sureties’ obligations?

      2.     Did the district court incorrectly hold that Brasoil’s fundamental (and

conceded) amendments to the Contracts did not discharge the Sureties’ obligations

under the Bonds?

      3.     Did the district court incorrectly award Brasoil (a) “completion cost”

damages, where the award included costs that were incurred before the default

declarations – and Brasoil offered no proof of the costs incurred after those

declarations; (b) “liquidated damages” equal to 20% of the contract prices, even

though the Contracts’ “Multas Moratorias” are penalties, not liquidated damages,

and in any event Brazilian law caps such awards at 10%; (c) attorneys’ fees, even

though the Bonds lacked fee-shifting language sufficient to overcome the

American Rule; and (d) prejudgment interest, even though New York law

precludes prejudgment interest unless the surety unjustly withholds a reasonably

ascertainable and demanded sum?



                                          -3-
      4.     Did the district court incorrectly apply non-mutual collateral estoppel

in dismissing the Sureties’ tortious interference claim?

                          STATEMENT OF THE CASE

      The Sureties appeal from final judgments in these actions. In one action (the

“Declaratory Action”), the Sureties sought a declaration that they were not liable

under the Bonds. Brasoil and Bank of Tokyo-Mitsubishi and Long-Term Credit

Bank of Japan (the “Japanese Banks”) counterclaimed for amounts they

supposedly were owed. In the other action (the “Indemnity Action”), the Sureties

claimed, among other things, that Petrobras, Brasoil’s indirect parent, had

tortiously interfered with a different bond – guaranteeing payment, not

performance – issued by the Sureties in favor of Marubeni America Corporation, a

financier on one of the projects.

      Judge Koeltl tried the case between January 22 and April 10, 2002; issued

findings of fact and conclusions of law on July 25; and entered judgments for

Appellees on September 30. On one counterclaim, he awarded Brasoil and the

Japanese Banks $180,532,660 in damages (including $19,932,660 in attorneys’

fees) and $38,907,839 in prejudgment interest. On a second counterclaim by

Brasoil, he awarded $163,000,021 in damages (including $16,798,245 in attorneys’

fees) and $57,567,689 in prejudgment interest.        In the Indemnity Action, he



                                         -4-
rejected, among other claims, the Sureties’ claim for tortious interference and

entered judgment for Petrobras.

                           STATEMENT OF FACTS

       Although these appeals involve a dizzying array of transactions and events,

they ultimately turn on the meaning of an American Institute of Architects (“AIA”)

standard form performance bond only three pages long; on limited excerpts from

the underlying Contracts; on embedded issues of Brazilian law; and on settled

principles of New York suretyship law.         Appellees themselves invoked in

summation the principle of pacta sunt servanda – “contracts must be observed” –

and urged Judge Koeltl to grant Brasoil the relief it “bargained for in this

performance bond.” T4573-74/A2304.1

       Ironically, Appellees prevailed precisely because Judge Koeltl did the

opposite. He declined to enforce the clear limits prescribed by the Bonds. He

misconstrued key provisions of the Contracts between Brasoil and the Consortia.

And he awarded Appellees $370 million in damages, even though Brasoil

fundamentally altered the contractual risk that the Sureties had guaranteed in the

first place.



1
      “T___/A___” refers to transcript and appendix pages of testimony citations;
“S-___/A___” and “PB-___/A___” identify exhibit numbers and appendix pages
for appellants’ and appellees’ trial exhibits, respectively.
                                       -5-
A.    The Facts Underlying This Litigation2

      This case arises from two construction projects, called “P-19” and “P-31,” to

be used in oil and gas production. The projects were commissioned and owned by

Brasoil, but when completed were to be leased to and operated by Petrobras,

Brazil’s government-owned oil company. T3483/A2023, T3655-56/A2070-71.

      1.     Contracting, Financing, and Bonding of the Projects. Following a

competitive bidding process, Brasoil selected two consortia, led by Industrias

Verolme-Ishibras S.A. (“IVI”), as the contractors on P-19 and P-31. District Court

Findings of Fact (“FOF”) 35-39.3 On February 10, 1995, the P-19 Consortium

signed a contract for $165,532,660 (FOF 61), which provided for completion on

July 23, 1997, later extended to September 21, 1997 (FOF 93). On October 25,

1995, the P-31 Consortium signed a contract for $163,000,021 (FOF 136), which

provided for completion on January 11, 1998, later extended to April 14, 1998

(FOF 146).

      At the insistence of the projects’ financiers (T671-72/A1368, T3267/A1961,

T3523-24/A2036, T3648-49/A2069), the P-19 and P-31 bid documents required

2
       The facts relating to the tortious interference claim are set forth in Section
IV of the Argument.
3
      IVI alone, or as part of other consortia, was performing similarly sized
contracts for other Petrobras projects, including P-25, P-32, and P-34. FOF 133-
34.
                                        -6-
the winning contractor to obtain a performance bond from a surety.4 FOF 108,

131.   The financiers also selected the form of the bond (the “A312 bond”),

developed by the AIA, which was used for both projects. The Sureties issued the

P-19 Bond for $110,532,660, with Brasoil as the obligee, later adding the Japanese

Banks as co-obligees.      FOF 76.      The Sureties issued the P-31 Bond for

$163,000,021, with Brasoil alone as obligee. FOF 141.

       2.    Relevant Terms of the Performance Bonds. The A312 bond contains

12 paragraphs; Paragraphs 3, 4, and 6 are particularly important here.5

       Paragraph 3 states the conditions precedent that must be satisfied before the

surety’s obligations under the bond arise. Under Paragraph 3.1, the owner must

notify the contractor and surety that the owner is considering declaring a default

and attempt to arrange a conference (called a “3.1 meeting”) to resolve the

situation.   Under Paragraph 3.2, the owner must have “declared a Contractor

Default and formally terminated the Contractor’s right to complete the contract.”

4
       In a suretyship contract, “one party (the surety) agrees to be held responsible
to a second party (the obligee) for the obligations of a third party (the principal).”
E. VAUGHN & T. VAUGHN, FUNDAMENTALS OF RISK AND INSURANCE 608 (9th ed.
2003). In construction projects, the principal is the contractor; the obligee is the
owner of the project; and the surety, by issuing the bond, guarantees the
contractor’s performance. Id.
5
      Appended to this brief are copies of the P-19 (S-72A/A5632-39) and P-31
(S-123/A5651-5655) Bonds, along with copies of the critical pages of the
Contracts.
                                         -7-
Finally, under Paragraph 3.3, the owner must agree “to pay the Balance of the

Contract Price . . . in accordance with the terms of the Construction Contract.”

      Once the conditions precedent are satisfied, the surety has four options under

Paragraph 4:

      (1)      “Arrange for the Contractor, with consent of the Owner, to perform

and complete the Construction Contract” (¶ 4.1);

      (2)      “Undertake to perform and complete the Construction Contract itself,

through its agents or through independent contractors” (¶ 4.2);

      (3)      “Obtain bids or negotiated proposals from qualified contractors

acceptable to the Owner for a contract for performance and completion of the

Construction Contract” (¶ 4.3); or

      (4)      waive its right to take the foregoing measures, and either (a) “[a]fter

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 therefor to

the Owner,” or (b) “[d]eny liability in whole or in part and notify the Owner citing

reasons therefor” (¶ 4.4).

      Finally, Paragraph 6 limits the surety’s liability under the bond. It provides

that, “[t]o the limit of the amount of this Bond, . . . the Surety is obligated without

duplication” to cover:


                                          -8-
      (1)    “The responsibilities of the Contractor for correction of defective

work and completion of the Construction Contract” (¶ 6.1);

      (2)    “Additional legal, design professional and delay costs resulting from

the Contractor’s Default, and resulting from the actions or failure to act of the

Surety under Paragraph 4” (¶ 6.2); and

      (3)    “Liquidated damages, or if no liquidated damages are specified in the

Construction Contract, actual damages caused by delayed performance or non-

performance of the Contractor” (¶ 6.3).

      3.     Relevant Terms of the Contracts. Although the Contracts are lengthy,

three of their provisions are central to this appeal.

      First, the Contracts specify how the Consortia would get paid: Each was to

be paid monthly based on work done in the preceding month (through a process

involving Measurement Service Bulletins (“BMSs”)). FOF 90-91, 148-49.

      Second, the Contracts specified the default events by the Consortia that

would permit Brasoil to terminate them. The events included bankruptcy, certain

unjustified work interruptions, and failure to comply with “contractual clauses,

specifications, designs or time limits.”        District Court Conclusions of Law

(“COL”) 21; PB820/A14235-37, Clause 12 (P-31); PB279/A10023, A10068-69

Clause 10 & App. I, Clause 8 of the General Contractual Conditions (P-19).


                                          -9-
      Finally, the Contracts imposed “multas” – “penalties” (P-19, A10067-

68/Clause 7) or “fines” (P-31, A14232-33/Clause 9) – for a variety of Consortia

failures, including delays in performance. The delay penalties were based on a

percentage of the total contract price, imposed for each day of delay, and were in

addition to, not in lieu of, the Consortia’s other liability for “losses or damages.”

P-31, Clauses 9.5, 9.6; P-19, Clauses 7.3, 7.5.

      4.     Rapid Deterioration of IVI’s Financial Condition and Brasoil’s

Efforts to “Rescue” the Consortia. Judge Koeltl found that IVI fell behind the

curve almost immediately, when it had to pay $55 million for a platform but had

budgeted $40.75 million. FOF 113. By November 1995, barely nine months into

the P-19 project, Petrobras – which was the end user of the rigs and Brasoil’s

construction manager and decision-maker – had developed “serious concerns” that

IVI might not be able to complete the five projects it was already performing (P-

19, P-25, and P-34) or was about to start (P-31 and P-32). FOF 134. And,

according to Judge Koeltl, Petrobras’s concerns were amply warranted: the

Consortia were plagued from the start by “poor administration” (FOF 346); “lack

[of] capacity to procure equipment and materials effectively” (FOF 119); “poor

financial condition . . . [and] lack of credit and lack of negotiating leverage with

suppliers” (FOF 139, 256); “high costs resulting from labor disputes” and “job

stability agreements” (FOF 164); and poor project planning, delays in construction
                                        - 10 -
drawings and material requisitions, deficient shipyard infrastructure, and overall

inefficiency (FOF 140). Indeed, it was these very inefficiencies and others, Judge

Koeltl found, that ultimately caused enormous cost overruns for the projects.6 See

generally FOF 119, 139, 140, 164, 256, 346.

      By mid-November, IVI told Petrobras that the P-19 Consortium’s “credit

limit for working capital” was “exhausted,” and that there would be “additional

difficulties for Project management” in the future. S-127/A5656. In an effort to

cure its inefficiencies, IVI asked for a $15 million restructuring loan. That plea

posed a critical decision for Petrobras: Should Brasoil become IVI’s financier?

Although IVI predicted that, with this $15 million loan, “[t]he resulting cash flow

will be positive after March 1996.” S-136/A5662-64. Petrobras’s engineering

department, SEGEN, which was in charge of the projects, was skeptical. IVI’s

“proposal will probably not be successful,” SEGEN fretted, “since, as mentioned,

the financial problems seem to be greater than what was presented.” S-154A

¶ 8/A5691. Nevertheless, SEGEN recommended to senior management that the


6
       Although the Sureties offered substantial evidence that the cost overruns
resulted from Petrobras’s changes to the projects, Judge Koeltl did not reach that
conclusion, and we do not challenge his findings here as “clearly erroneous” under
Rule 52(a). We do note, however, that IVI was unable to present contrary proof
below, having been dismissed from the case under forum selection clauses. The
Consortia’s dispute with Brasoil on these subjects is currently being litigated in
Brazil, in Brasoil’s actions in which the Sureties are also defendants.
                                       - 11 -
loan be made, subject to various safeguards, including the condition that IVI

relinquish P-31 and P-32. FOF 165.

      Then, on January 9, 1996, IVI dropped a bombshell: it told Petrobras that the

$15 million loan would not be adequate after all and asked that the amount be

doubled; admitted that the Consortia’s inefficiencies would not be cured; and

acknowledged that, by December 1997, the Consortia would incur deficits of $61

million on P-19, P-31, and P-34. FOF 174. Rather than cut its losses (or at that

early juncture, avoid losses altogether), Brasoil decided, in the words of its own

counsel, to “take[] steps to rescue a troubled contract.” T4497/A2285. In what it

termed a “tacit” decision (S-1225A ¶ 10/A7189) – deliberately withheld from the

Sureties (T263-67/A1265-66, T3267-69/A1961) – Brasoil decided to amend the

Contracts to accelerate payment to the Consortia well beyond the $15 million

previously contemplated. S148/A5686-87. To reduce its overall risks, however,

Brasoil resolved to take these measures only if IVI was willing to transfer P-32 to

another contractor. S-165/A5762-67. The transfer was readily done, with no loss

to Brasoil, the project owner, or the P-32 surety. T255-56/A1263. Petrobras’s

Board did not, however, accept SEGEN’s recommendation that IVI also be

required to cancel P-31 (FOF 165, S-154A/A5686-87), even though SEGEN

confirmed that securing another contractor for P-31 (as for P-32) was “feasible”


                                       - 12 -
(T370-71/A1294-95) and could be accomplished at IVI’s original contract price

(and thus at no loss to Brasoil or the Sureties). T262-63/A1264-65.

      Brasoil then began to implement its newly minted plans to finance the

Consortia. Because the Contracts would have to be modified to permit Brasoil to

make advances of future contract funds (FOF 176, 178, 194; COL 36), Petrobras’s

legal department, SEJUR, was consulted. The lawyers immediately sounded the

alarm, instructing SEGEN: “Please bear in mind that we must notify and obtain the

consent of the guarantors of said contracts under analysis.”          S-3103/A9189

(emphasis added). But Brasoil did not notify the Sureties about these contractual

alterations, much less get their consent. T3268-69/A1961.

      On March 19, 1996, IVI requested further assistance, this time to finance

severance payments to laid-off workers. S-191/A5821-22. On April 25, 1996,

Petrobras directed Brasoil to amend the P-31 Contract to permit accelerated

payment of $4 million. FOF 193. As before, SEGEN submitted the proposed

amendment to SEJUR, which again advised Brasoil to notify the Sureties and

obtain their consent.    S-3104/A9191-92.       Again, the legal instruction was

disregarded.

      By May 1996, P-19 and P-31 were too far along to be moved to another

contractor. FOF 207. Yet Petrobras’s rescue plan had not worked; the Consortia’s

financial difficulties, according to Judge Koeltl, had grown dramatically worse, as
                                       - 13 -
had the projected deficits. And so – having made a “tacit decision” to enable the

Consortia to complete the projects (FOF 202) – Petrobras decided that payments

outside the Contracts would also made. Petrobras’s Board therefore authorized

$43.75 million in loans to the Consortia. Unlike the advances, the loans were not

made pursuant to contract amendments and were accompanied by promissory

notes stating that they were not covered by the Contracts’ work measurement

process.   They were repayable at 16% interest.        S-283/A5950, S-285/A5952,

S-296/A5979, S-308/A5990, S-315/A5995. Because the loans were outside the

Contracts’ payment schedules, Brasoil accounted for them in its books as “extra-

contrato.” S-1483/A7739-40, S-1487/A7761-62.

      Why did Brasoil disregard SEJUR’s legal instructions and decline to apprise

the Sureties of these contractual changes and obtain their consent? Why would

they choose to run the risk of discharging the Sureties by altering the basic terms of

the Contracts? In truth, Brasoil had, as early as December 1995, considered

notifying the Sureties of a possible default and requesting a 3.1 meeting. FOF 172;

T185/A1241, T3256/A1958, T3267-68/A1961, T252-53/A1262, T263-64/A1263.

After extensive analysis, however, Brasoil concluded that if it did not extend the

financing, and if as a result the Consortia defaulted and bond claims were asserted,

the Sureties would exercise their right to investigate and possibly replace the

contractors, which would delay receipt of the rigs by Petrobras, the end user.
                                        - 14 -
T187-188/A1242, T252-255/A1262-63, T261-62/A1264, T347-49/A1289.                And

delay would mean lost oil and gas revenue to Petrobras (though not to Brasoil).

T3266/A1961. Concluding that the Bonds were not “adequate instrument[s]” for

its purposes (T255/A1263), Petrobras instructed Brasoil (the obligee) to accelerate

the contract payments, to amend the Contracts, to extend “extra-contrato” loans,

and thereby prop up the financially-troubled operation in an effort to avoid delay at

all costs.

       Brasoil understood that this course of action – spending whatever it took to

permit the Consortia to complete the projects – carried risks. But even after they

realized the cash injections had failed, they hoped to stick the Sureties with the

final bill. As Petrobras Director Vilarinho succinctly put it: “If we were to spend

more than what the contracts established, we would have to do so, and further

down the line, we would have to find a way to be indemnified by the insurance

companies.” T185-86/A1241 (emphasis added).

       Brasoil’s cash infusions – which depleted the contract funds in which the

Sureties had an inchoate subrogation interest – did not stem the Consortia’s tide of

red ink. By December 1996, the $61 million three-project deficit predicted in

January 1996, which had grown to a $90 million deficit in May, had ballooned to a

staggering $190 million. FOF 240. Brasoil agreed to further amend the Contracts,

increasing their combined prices by $47.7 million and thereby bringing “limited
                                        - 15 -
financial relief for a short period of time.” S-372A ¶ 18/A6055. Brasoil also

approved $47 million in loans to the Consortia to meet December and January

project disbursements. Id., ¶¶ 24, 25.3.2.

      In April 1997, Brasoil – continuing its role as lender – entered into a series

of letter agreements with IVI under which it made monthly loans to IVI on the

three projects. FOF 286, S-1526A/A7765-92. Altogether, the loan letters provided

$65.5 million for P-19 and $155.8 million for P-31. When added to the May 1996

extra-contractual loans ($17.6 million for P-19; $10.2 million for P-31) and the

further loans made pursuant to the Board’s December 1996 authorization ($6.5

million for P-19; $17.5 million for P-31) (S-514A/A6524), the extra-contractual

funding provided by Brasoil to IVI through conclusion of the projects totaled

nearly $300 million on P-19 and P-31.

      5.     Brasoil Declares Defaults on P-19 and P-31 While Directing the

Consortia to Continue Work. Following 3.1 meetings with the Sureties in early

1997, Petrobras declared defaults on the two projects – purportedly. The Consortia

were in default, it said, because Brasoil had paid all of the funds due under the

Contracts, and yet the Consortia had not completed the projects. And so, in letters

dated May 12, 1997 (PB-318/A10188 for P-19), and June 16, 1997 (S-646/A6730

for P-31), addressed to the Consortia and copied to the Sureties, Petrobras stated:


                                        - 16 -
      [W]e are formally notifying you of the Consortium’s Contract default
      and loss of contract rights.

            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.

FOF 301 (emphases in original). For P-19, Petrobras reiterated its position in a

May 23 letter to the Sureties’ counsel: “[W]e have formally ‘terminated the

Contractor’s right to complete the Contract.’ We did not, however, terminate the

Contractor’s obligations under the Contract.” S-1621/A8905-07.

      When the alleged defaults were declared, P-19 was 89.9% complete (S-

1527/A7823), and P-31 was 72.4% complete (FOF 320).

      6.    The Projects’ Completion. Notwithstanding the May 12, 1997 letter

purporting to “terminate” the P-19 Consortium, Brasoil’s day-to-day relationship

with IVI did not change.    T234/A1254, T3387-88/A1995.        Brasoil continued

funding IVI, which continued performing through September 19, 1997, when a

new contractor took over. FOF 327-29.

      Nor was there any change in the relationship between Brasoil and the P-31

Consortium following the June 16, 1997 purported termination. T1691/A1611.

On December 4, 1997, Brasoil approved an additional $49.8 million to complete P-

31, and it was only then – six months after the purported P-31 termination – that


                                      - 17 -
Brasoil actually terminated the contract.             FOF 333; S-737A/A6839-52;

T712/A1378. As SEGEN’s Superintendent confirmed in an affidavit submitted to

Judge Koeltl, it was “in December 1997” that “the original [P-31] Consortium was

terminated in accordance with applicable contract provisions.”                 S-1461

¶ 18/A7624-25.

B.    Proceedings Below

      On August 18, 1997, after completing their investigation of the default

declarations and denying liability on the Bonds, the Sureties initiated two lawsuits.

In one, they sought a declaratory judgment that they had no liability to the

obligees. Brasoil and the Japanese Banks counterclaimed, alleging a breach of the

Sureties’ obligations under the Bonds. In the second suit, the Sureties sought

indemnification from the individual members of the Consortia, from others, and

from Petrobras, and also claimed that Petrobras had tortiously interfered with the

P-19 Consortium’s and Brasoil’s payment obligations to Marubeni.

      Judge Koeltl consolidated the cases, severed the Sureties’ claims against the

Consortia and others, and issued findings of fact and conclusions of law.7

      1.     Liability. Five aspects of the liability determination are relevant.



7
     Judge Koeltl held, and the parties agree, that New York law governs the
Bonds and Brazilian law governs the Contracts. COL 10.
                                        - 18 -
      First, Judge Koeltl rejected the Sureties’ argument that Brasoil’s default

termination was invalid because the Consortia were not in default on the Contracts.

COL 20-21. In his view, a default had occurred because Brasoil had “exhausted” –

funded – amounts equal to the total contract prices, and yet the Consortia had not

completed their work (even though the deadlines for completion were months

away at the point of the purported defaults).

      Second, Judge Koeltl rejected the Sureties’ argument that the contract funds

had not been exhausted at the time of the default declarations. As Brasoil’s own

accounting records confirmed, he recognized that Brasoil, had advanced funds to

the Consortia that were “outside of the contracts” (COL 38); and he acknowledged

that, according to Brasoil’s own accounting expert, the payments under the BMS

schedules (i.e., “under the contract”) did not exhaust the Contract Balances.

Nevertheless, Judge Koeltl concluded that all of the payments made to the

Consortia – both the accelerated contractual payments and the extra-contrato loans

– should count toward exhausting the contractual balances, because all of the funds

“were necessary to get the projects done.” FOF 319, 211.

      Third, Judge Koeltl rejected the Sureties’ submission that Brasoil had not

terminated the Consortia because it purported simultaneously to “terminate” the

Consortia’s “rights” and yet warn them that their “obligation to complete the

project” remained “intact.” PB-318/A-10188, S-646/A6730. While recognizing
                                        - 19 -
that Brasoil’s communication raised “some question” (FOF 309), Judge Koeltl

construed a letter by the Sureties’ counsel as a concession that the termination was

effective. FOF 310.

        Fourth, Judge Koeltl rejected (COL 26; FOF 302) the Sureties’ contention

that, precisely because there had been no exhaustion of contractual funds, Brasoil

had failed to satisfy the independent condition precedent to “agree[] to pay the

Balance of the Contract Price to the Surety” or to a substitute contractor. Bond

¶ 3.3; see also ¶ 12.1 (definition of “Balance of the Contract Price”).

        Fifth, Judge Koeltl rejected the Sureties’ contention that Brasoil had

materially altered the Contracts, substantially increasing the Sureties’ risks and

thereby discharging the Sureties’ obligations. According to the Sureties, Brasoil’s

decision to alter the Contracts to provide financing to the Consortia seriously

damaged the Sureties’ rights, dramatically increasing the costs of the project while

simultaneously depriving the Sureties of the opportunity to avoid a catastrophic

loss.   Judge Koeltl rejected these arguments because, in his view, Brasoil’s

financing “allow[ed] the Consortia to continue construction,” and thereby

“postponed the date of the Contractor Default,” thus “reliev[ing] the Sureties of

performance obligations that they otherwise would have had.” COL 37. Judge

Koeltl did not indicate how this finding – that propping up the Consortia somehow

saved the Sureties money in the end – could be squared with his conclusion that
                                        - 20 -
IVI’s hopelessly inefficient operations and structure had caused enormous cost

overruns in the projects.

      2.     Damages.        Judge Koeltl’s final judgment awarded damages and

prejudgment interest to Brasoil (and to the Japanese Banks as co-obligees on the P-

19 Bond) as follows:         (a) $174,209,776 for “excess completion costs” under

Paragraph 6.1; (b) $36,730,905 for “additional legal costs” under Paragraph 6.2;

(c) $62,592,000    for      “liquidated   damages”   under    Paragraph     6.3;   and

(d) $96,475,528 in prejudgment interest.

      a.     The largest component of the award – $174 million for “excess

completion costs” – rested on Paragraph 6.1, which, Judge Koeltl ruled, allows for

recovery only of the “costs that were incurred after the default was declared and

the Sureties refused to fulfill their obligation to either perform the remainder of the

Contract or pay the damages resulting from their failure to do so.” FOF 460

(emphasis added).     Judge Koeltl nevertheless awarded the entire amount that

Brasoil expended after it declared default – regardless of whether those

expenditures were for costs incurred on the jobs before or after the declarations of

default.

      b.     Judge Koeltl predicated his award of $36,730,905 in attorneys’ fees

on Paragraph 6.2, which provides for recovery of “[a]dditional legal, design

professional and delay costs resulting from the Contractor’s Default, and resulting
                                          - 21 -
from the actions or failure to act of the Surety under Paragraph 4.” FOF 464, 472;

COL 48. Judge Koeltl did not address the governing American Rule (under which

each party presumptively pays its own fees), and he ignored the Sureties’

contention that Brasoil had failed to plead or prove any entitlement to attorneys’

fees as an element of contractual damages.

      c.    Judge Koeltl’s award of $62,592,000 was based on Paragraph 6.3.

FOF 461, 470. In his view, enforceable “liquidated damages” within the meaning

of Paragraph 6.3 were specified in the “Multas Moratorias” provisions in the

Contracts; and he reasoned that the formula for delay penalties – “0.1% of the

lump sum Contract price for each day of unexcused delay, up to a maximum of

20% of the lump sum price” (FOF 461) – “was reasonable in view of the

substantial revenue from oil and gas production that would be lost [by Petrobras] if

the project was delayed.” FOF 462, 470. Judge Koeltl rejected the argument that

the Multas were actually a penalty – designed to deter delay, not to estimate the

potential costs of delay – and thus unenforceable under New York law. He also

rejected the argument that, if liquidated damages award were available at all, they

must be capped at 10% of the Contract price, pursuant to Brazilian law.

      d.    Finally, Judge Koeltl awarded $96,475,528 in prejudgment interest.

He rejected the argument that such interest was unavailable because the Sureties

had not “defaulted” – that is, they had not unjustly refused to pay an ascertainable
                                       - 22 -
sum that was demanded by Brasoil – a prerequisite under New York law for

awarding prejudgment interest against a surety where the bond does not authorize

it.

                          SUMMARY OF ARGUMENT
      I.     The Sureties are not liable under the Bonds. The Bonds provide that

the Sureties’ obligations arise only after certain conditions precedent are met;

Brasoil failed to comply with three of them.

      First, Brasoil improperly declared a default by the Consortia. The Contracts

listed certain events that would constitute a default on the Consortia’s part. But the

Contracts did not provide – as Judge Koeltl inexplicably concluded – that the

Consortia would be in default simply by not completing the two projects by the

time of the “exhaustion of contract funds” – i.e., by the time Brasoil had fully paid

the amounts due under the Contracts. What is more, even if such an exhaustion of

funds could put the Consortia in default, the Contract funds were not, in fact, fully

paid. Rather, as Judge Koeltl recognized, a significant portion of the monies paid

to the Consortia were paid outside the terms of the Contracts – in the form of extra-

contractual loans.   Judge Koeltl nevertheless included those extra-contractual

payments in determining that the contractual funds were exhausted. Black-letter

New York law forbids doing so.



                                        - 23 -
      Second, Brasoil did not “formally terminate” the Consortia. In the same

breath, Brasoil “terminated” the Consortia’s “rights” to work on the projects while

simultaneously demanding that the Consortia meet their “obligations” to work on

the projects.    Under New York law, such a contradictory approach is

impermissible.

      Third, Brasoil failed to agree to pay the Sureties the Balance of the Contract

Price. The Bonds define “Balance of the Contract Price” as “[t]he total amount

payable . . . under the Construction Contract . . . reduced by all valid and proper

payments made . . . under the Construction Contract.” Here again, Judge Koeltl

improperly counted extra-contractual loans toward the amounts payable under the

Contracts.

      In addition to its failure to meet the conditions precedent, Brasoil discharged

the Sureties by adversely changing the Sureties’ risks in material ways. Under

basic suretyship law, a surety is not required to cover an obligation that differs

materially from the one it originally agreed to. Here, the Contracts originally

provided for particular payment schedules that matched Brasoil’s payments and the

Consortia’s progress. To serve its own business interests, and against the advice of

its lawyers, Petrobras caused Brasoil to amend the Contracts to accelerate the

payments.    Because the Consortia’s problems dramatically raised the costs of

completing the projects, Brasoil’s decision to prop the Consortia up financially
                                       - 24 -
ultimately increased the Sureties’ obligations. The Sureties never consented to the

changes, and they were therefore discharged.

      II.   Even if the Sureties were liable under the Bonds, Judge Koeltl erred in

awarding damages.

      Judge Koeltl rightly concluded that “cost of completion” damages under the

Bonds consist only of those costs incurred – i.e., those that arise from work

performed to “complete” the project – after the declarations of default. But Judge

Koeltl awarded Brasoil every dollar it expended after it declared defaults,

regardless of when the underlying obligations to pay were incurred. Many of those

costs were, in fact, incurred before the declarations of default – in any event,

Brasoil deliberately offered no evidence that would permit an allocation of those

expenses.

      Nor should Judge Koeltl have awarded Brasoil liquidated damages. New

York law permits liquidated damages only if they reflect a reasonable

approximation of the probable loss and, accordingly, are not penalties. But the

Multas Moratorias provisions in the Contracts, which Judge Koeltl applied, were

plainly designed as penalties. Indeed, the Contracts expressly permitted Brasoil to

recover these Multas Moratorias – literally, “fines” for delinquency – over and

above its actual damages.


                                       - 25 -
      Judge Koeltl also erred in awarding attorneys’ fees. New York law (which

governs the Bonds) adopts the American Rule, under which fees presumptively are

not shifted; only “unmistakably clear” contractual language can justify a fee award.

The Bonds do not even come close to overcoming the presumption against fee

shifting; to the contrary, their plain language, construed even without the American

rule, forecloses recovery of fees.    In any event, even if the Bonds permitted

recovery of attorneys’ fees, Brasoil never pleaded, much less proved, its

entitlement to fees.

      Judge Koeltl erred, finally, in awarding prejudgment interest. New York

law permits such awards only on a surety’s “default” – that is, when, after a

contractor is terminated, a surety unjustly withholds a payment that is reasonably

ascertainable. That standard was not met here.

      III.   Judge Koeltl wrongly dismissed the Sureties’ claim in the Indemnity

Action for tortious interference. The Sureties contended that Petrobras wrongfully

prevented IVI from making payments to Marubeni from P-19 contract funds, thus

triggering a claim on a payment bond issued by the Sureties on the P-19 project.

Judge Koeltl did not disagree that Petrobras had taken this step to increase pressure

on the Sureties, but he held – partly on grounds of collateral estoppel – that there

were no contract funds left to pay on P-19.        But for multiple, independently

sufficient reasons, that application of non-mutual collateral estoppel was improper.
                                        - 26 -
                                    ARGUMENT

I.    THE STANDARD OF REVIEW
      This Court reviews findings of fact for clear error, Fed. R. Civ. P. 52(a), and

conclusions of law de novo, United States v. United States Gypsum Co., 333 U.S.

364, 395 (1948) – including interpretations of unambiguous contract provisions,

Seabury Constr. Corp. v. Jeffrey Chain Corp., 289 F.3d 63, 67 (2d Cir. 2002).

Determinations of foreign law are likewise reviewed de novo. Itar-Tass Russian

News Agency v. Russian Kurier, Inc., 153 F.3d 82, 92 (2d Cir. 1998).              In

determining foreign law, the Court may consider any relevant materials, including

those submitted on appeal. Carlisle Ventures, Inc. v. Banco Español de Credito,

176 F.3d 601, 604 (2d Cir. 1999).

II.   THE SURETIES ARE NOT LIABLE UNDER THE BONDS

      “The parties involved in this litigation are not widows or orphans.”

Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 98 (2d Cir. 1997).

Rather, they are “sophisticated business[es] engaged in major transactions” (id.),

and were represented by sophisticated counsel.         The Bonds themselves are

commercial form contracts, drafted by an architects’ trade organization with input

from owners, contractors, and sureties. AMERICAN INSTITUTE OF ARCHITECTS, AIA

DOCUMENTS: AN OVERVIEW 1 (1987). Not only did the Sureties not draft the

performance bonds that were used, they did not even select the A312 standard-

                                       - 27 -
form contract. That decision was made by the financiers of the construction

projects, including the Japanese Banks.

      In view of the widespread use of the A312 bond in the construction industry,

and the parties’ sophistication, it is essential that the Bonds be read in accordance

with all their terms, and that the terms be given effect. As the New York Court of

Appeals wrote just last week, “Surety bonds – like all contracts – are to be

construed in accordance with their terms.” Walter Concrete Constr. Corp. v.

Lederle Laboratories, 2003 WL 367460 (N.Y. Feb. 20, 2003). Brasoil’s lawyer

rightly emphasized the point in summation: This case, he argued, should turn on

the principle of pacta sunt servanda – “contracts must be observed” – and courts

must ensure that the parties receive that “which they bargained for.” T4573-

74/A2304. But that principle was not honored below. And as a result, the “ground

rules” (in the words of Appellees’ counsel) have been turned upside down.

      Nor did Judge Koeltl honor settled New York suretyship principles, most

conspicuously the landmark decision in St. John’s College v. Aetna Indemnity Co.,

201 N.Y. 335 (1911) – a “dated” (to use Appellee’s counsel’s term) but controlling

decision, which governs several cross-cutting liability issues in the case. Like IVI,

the contractor in St. John’s fell into debt, and the owner – like Brasoil – chose to

make extra-contractual payments to the contractor’s workers. When the owner

later sought to recover from the surety, two questions were presented: Did the
                                          - 28 -
extra-contractual payments discharge the surety; and could the payments outside

the contract be deducted from the contract balance?

      The Court of Appeals held first that, because the payments were extra-

contractual, they did not discharge the surety. Although the Court recognized that

“advance payments” may sometimes alter a surety’s risk – for example by

“remov[ing] from the contractor a material incentive to his completion of the

work” (id. at 341) – the extra-contractual payments in St. John’s were not “advance

payment[s] on account of the contract,” but only “voluntary payments” to

employees. Precisely for that reason, however, the Court held that those extra-

contractual payments “were made at the risk of the [owner]” and could not be

subtracted from the contract balance available to the surety. Id. at 343.

      Judge Koeltl, while recognizing the case’s vitality (e.g., COL 32), departed

fundamentally from the rule in St. John’s. He held that Brasoil’s massive extra-

contractual payments to the Consortia did count as payments under the Contracts,

thereby hastening the moment of default (as he defined default). At the same time,

Judge Koeltl held that paying those funds – and hastening the moment that the

“contractual” funds would be “exhausted” – did not materially alter the Sureties’

risk and thereby discharge them.

      One of those propositions must be false.


                                        - 29 -
      A.     Brasoil Failed to Comply With Conditions Precedent to the
             Sureties’ Obligations

      Paragraph 3 of the Bonds provides that the Sureties’ obligations – including

the obligation to pay $370 million in damages – “arise after” (1) the owner has

notified the Contractor and Surety that it is considering declaring a default and

wants to confer (¶ 3.1); (2) the Contractor has defaulted, and the owner has

declared default and “formally terminated the Contractor’s right to complete”

(¶ 3.2); and (3) the owner has agreed to pay the Surety (or another contractor) the

“Balance of the Contract Price” (¶ 3.3). Only then – “[w]hen the Owner has

satisfied the conditions of Paragraph 3” (¶ 4) – are the Sureties obliged to choose a

course of action under Paragraph 4.

      As we show below, Brasoil failed to satisfy at least three of these conditions

precedent. That is fatal to its claims. See, e.g., Oppenheimer & Co. v. Oppenheim,

Appel, Dixon & Co., 636 N.Y.S.2d 734, 736 (Ct. App. 1995).

             1.    The Consortia Were Not in Default

                   a.     “Exhaustion of Contract Funds” Is Not an Event of
                          Default
      The Bonds define “Contractor Default” in Paragraph 12 as the “[f]ailure of

the Contractor . . . to perform or otherwise to comply with the terms of the

Construction Contract.”     Relying entirely on the opinion of Paulo Aragão,

Brasoil’s expert, Judge Koeltl concluded (COL 21, 39) that Brasoil, having

                                        - 30 -
purportedly exhausted the Contracts’ funds, properly declared the Consortia in

default on May 12, 1997 (P-19) (FOF 301-02), and June 16, 1997 (P-31)

(FOF 317-18) – even though the Contracts’ completion dates were then months

away.

        But this conclusion makes no sense, as the Contracts confirm. Each contains

termination provisions, which specifically list the events of default by the

Consortia that would permit Brasoil to terminate (P-19, Clause 10, Article 8 of

General Contractual Conditions, PB279/A10023, A10068-70; P-31, Clause 12,

PB820/A14235-37. “Exhaustion of contract funds” is not an event of default. And

why would it be? Why would a circumstance within Brasoil’s control – the

“exhaustion of contract funds” – constitute a default by the Consortia?

        True, the Consortia had a “fundamental obligation” under the Contracts “to

deliver the completed platforms for the agreed prices.” COL 21 (quoting Aragão

Dec. at A2377-78). Every party to every bilateral contract agrees to fulfill its

promise in return for what’s been promised by the other party. But the district

court evidently believed that this truism meant something very different – that the

Consortia were obligated to deliver the completed platforms by the time Brasoil

had finished paying out the Contract funds, and that a failure to do so would result

in default. The Contracts, however, contain no such obligation. To the contrary,

they unambiguously provide that the Consortia were not obligated to complete
                                        - 31 -
their work on P-19 until September 21, 1997 (FOF 93, 463), and on P-31 until

April 14, 1998 (FOF 146, 469).

      Nor can a different default rule be implied under Brazilian law, because

Brazilian law does not tolerate “implied” conditions in contracts: the Consortia’s

obligations under the Contracts were not accelerated simply because Brasoil

accelerated its payment obligations. In that connection, the Sureties are submitting

the opinion of former Justice and President Justice Paulo Costa Leite of the

Superior Court of Justice, Brazil’s highest non-constitutional court. SPA103-161

Justice Leite explains that, under Brazilian law, one party’s date for performance is

not accelerated simply because the other party has chosen to accelerate its own

performance. As Justice Leite explains,

      [U]nder Brazilian law, it is not logical or lawfully acceptable, to admit
      that early payment - a situation strictly within the project owner’s will
      and always resulting from an act of liberality although it may meet a
      request by the contractor - may result, in exchange, in an obligation
      for early delivery of the work, with total disregard to the contractual
      term.

Id. SPA117. Brasoil’s decision to accelerate payments to the Consortia did not –

could not – put the Consortia in default because, as Justice Leite explains,




                                        - 32 -
exhaustion simply cannot be a default under Brazilian law. SPA 121-22. The

Sureties therefore had no obligations under the Bonds.8

      It must be said, finally, that the conception of default embraced below

contravenes basic contract principles. In Brazil, as in the United States, parties

enter into written contracts in order to spell out, as far as practicable, their

respective obligations. When a contract says, “finish the project by September 1,”

the contractor knows it will be in default if it is still working on September 2.

When a contract says, “build the house out of bricks,” the contractor knows it will

be in default if it uses straw or twigs. But what is a contractor to make of a

contract that says, by implication, “finish the job by the time the owner pays all of

the contract funds – including funds loaned to the contractor outside the contract,

but which are ‘necessary’ (according to some post hoc judicial interpretation) for

completion”? How is a contractor (or its surety) in such a circumstance expected

to know if and when a default is approaching or has occurred?



8
      There is a suggestion in Judge Koeltl’s decision, again drawn from Aragão,
that the Consortia were in default because “more money was needed for
completion” of the work. COL 21. Of course, if the Contract funds were truly
exhausted, then “more money [would be] needed” to perform whatever work
remained. But the mere fact that the Consortia may have needed to find money
elsewhere – such as from a third party lender or their own bank accounts – does
not mean that they are in default under either the Contracts or Brazilian law. Leite
Op. SPA116.
                                        - 33 -
      This case illustrates the point perfectly. At various times, Brasoil identified

several different dates as the exhaustion date for P-19, and the court was never able

to resolve the issue. The date was variously set by Brasoil as early as November

1996 (S-372A ¶ 16/A6055, S-403/A6132, T587-88/A1356) and as late as February

1997 (S-1461 ¶¶ 35, 39/A7636-39); the court concluded only that it occurred “in or

about January 1997” (FOF 303). For P-31, the date was placed by Brasoil as early

as January 1997 (S-460/A6239) and March 1997 (S-403/A6132, S-437/A6188),

and the court concluded only that it occurred “sometime in late May or early June

1997” (FOF 316). No one, not even the court with the benefit of hindsight, can tell

when “default” – so conceived – actually occurred; yet that basic legal judgment is

the very foundation of the district court’s analysis. Judge Koeltl’s conception of

default is thus as impracticable as it is wrong.

                     b.      In Any Event, Brasoil Did Not Exhaust the Contract
                             Funds
      Even if the “exhaustion of contract funds” were an event of default, Judge

Koeltl erred in concluding that Brasoil had exhausted the Contracts’ funds when it

declared defaults.        Although Brasoil had provided funds to the Consortia

outside the Contracts, significant amounts under the Contracts were yet to be paid.

      From January 1996 to December 1997, Brasoil made two distinct types of

payments to the Consortia. First, Brasoil made accelerated payments pursuant to

                                         - 34 -
Contract amendments; these payments were (because Brasoil was contractually

obligated to make them) under the Contracts. But second, Brasoil voluntarily

made a series of loans, which were memorialized in promissory notes or other loan

agreements and recorded on Brasoil’s contemporaneous ledgers separately as

extra-contrato.

      Judge Koeltl acknowledged that the loans were extra-contractual. COL 38.

He nevertheless aggregated both forms of payment – the loans outside the

Contracts, and the advances under the amended contractual payment schedules –

and treated all fundings as payments under the Contracts. Because, in Judge

Koeltl’s view, the loans “were necessary to get the projects done,” those fundings,

no less than the payments made under contractual amendments, must be counted

toward the exhaustion of funds “under the contracts.” (It is undisputed – indeed,

Brasoil’s own expert confirmed (T2860-2868/A1851-53; S-1618/A8903, S-1619/

A8904) – that, if the loans were not aggregated with the accelerated payments via

amendment, there would have been contractual balances as of the default

declaration dates.)

      Merely because funds may be used for job-related costs, however, it does

not follow that they are contractual payments, rather than extra-contractual loans.

After all, if the Consortia had borrowed money from banks instead of from Brasoil,

no one – not even Brasoil’s own expert (T3885-86/A2135) – would argue that
                                       - 35 -
these funds were provided to the Consortia “under the Contracts.” That the lender

turned out to be the owner makes no difference.

      St. John’s confirms the point. There, as here, the owner lent the contractor

money “for the express purpose of preventing an abandonment of the contract by

the[] contractors.” 201 N.Y. at 342. The payments there, in short, were “necessary

to get the projects done” (FOF 319); nevertheless, because the loans were made

outside the terms of the contract, they were not payments under the contract.

Therefore, the Court of Appeals held, the loans could not be considered “part of

the cost of the building in determining the amount for which [the surety] is liable.”

Id. at 343. The owner was not obligated to make them and, therefore, they were

“made at the risk of the [owner].” Id.

      Judge Koeltl’s decision to apply the extra-contractual loans in reducing the

Contract Balance is especially ironic, since Brasoil structured the payments as

loans precisely to ensure that those funds would not count against the Contract

Balances. As Judge Koeltl elsewhere explained, Brasoil made loans outside the

Contracts starting in May 1996 in order to prevent a default. S-1225A/A7188-91;

FOF 202. And Brasoil’s documents confirmed that, as far as it was concerned, the

loans were not to be aggregated with the Contract payments:

      •      Brasoil continued representing monthly to its P-31 lender that there

             were still substantial contract balances after June 16, 1997 – the date
                                         - 36 -
            by which Brasoil had supposedly exhausted P-31’s contract balance –

            and Petrobras’s P-31 manager confirmed that these representations

            were true, because the extra-contractual “loans” were not included in

            the calculation.      S-1276/A7349, A7360, A7367, A7374, A7381;

            T1729-30/A1622.

      •     IVI signed promissory notes stating that the loans represented

            payments that were not covered by the Contracts.           S-283/A5950,

            S-285/A5952, S-296/A5979, S-308/A5990, S-315/A5995.

      •     Brasoil’s follow-up summaries for the Contracts – prepared in 1999 –

            characterized   the    loans     as   extra-contrato   (S-1483/A7739-40,

            S-1487/A7761-62) and confirmed that Brasoil’s books continued to

            reflect a “balance not disbursed” for each Contract long after the

            default declaration dates. Id.

      Judge Koeltl stated, however, that his aggregation decision was justified by

Paragraph 7 of the Bonds, which provides that “[t]he 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.” According to Judge

Koeltl, this provision – that “unrelated” obligations cannot reduce the Balance of

the Contract Price – necessarily implies that all “related” obligations must; and,
                                       - 37 -
because the obligations to repay the loans were “related” obligations of the

Contractor, they were properly subtracted from the outstanding balance, thus

counting toward the exhaustion of contract funds. FOF 304; see also COL 39 n.4.

      Judge Koeltl’s analysis was multiply flawed. For one thing, Paragraph 7 of

the Bonds has no bearing on whether the Contract Balance (an aspect of the

Contracts, not the Bonds) was exhausted. The court imported a term from one

agreement and used it to interpret the other.

      In any event, the court read far too much into Paragraph 7. It specifies what

cannot be deducted from the Balance of the Contract Price, not what can.

A provision that “field goals shall not be counted as touchdowns” hardly means

that safeties shall be. A provision that “unrelated cases shall not be consolidated”

is hardly a command that all related cases shall be consolidated, no matter what the

relationship.

      Paragraph 12.1, in contrast, does say what can be deducted from the Balance

of the Contract Price in determining that figure.      It defines “Balance of the

Contract Price” as “[t]he total amount payable . . . under the Construction

Contract,” after certain adjustments irrelevant here have been made, “reduced by

all valid and proper payments . . . under the Construction Contract.” Something

that is not a payment “under the Construction Contract” is – by definition – not a

proper deduction. Paragraph 7, which refers to the “Balance of the Contract
                                        - 38 -
Price”, thus makes clear that this amount due the surety cannot be offset by any

side deals between owner and contractor. In that respect, Paragraph 7 embodies

the common law rule, reflected in St. John’s, that a surety’s right to the contract

balance is superior to an owner’s claims against a contractor for loans or advances

made to or on behalf of the contractor – which is true even if the owner’s loan to

the contractor benefited the surety.

      There is, finally, a basic unfairness in treating voluntary extra-contractual

loans the same as mandatory payments under the contract. Contractors in need of

funding have many financing options at their disposal. They - and their lenders -

need to know that no matter who the lender is – the owner, a bank, the surety, or

someone else – this extra-contractual funding will not deplete the Contract

Balance. But a rule of law that says to the contractor, “if you take your loan from

the owner, it will deplete the Contract Balance – and hasten default – provided a

judge later finds the loans to be ‘related to the project’ ” is a legalized bait-and-

switch. Contractors – and sureties – should not be at the mercy of such rules.

      The short of the matter is this: As of the dates it declared defaults, Brasoil

had not made all the required payments under the Contracts. Thus, even if the

exhaustion of the Contract funds were a default, the funds were never exhausted.




                                        - 39 -
             2.    Brasoil Did Not Terminate the Consortia’s Rights Under
                   the Contracts

      Paragraph 3.2 of the Bonds provides that the owner must have “declared a

Contractor Default and formally terminated the Contractor’s right to complete the

contract.”   The AIA standard bond form insists on a clear demarcation of rights

for a reason – a surety must know where the rights of the principal end and where

its own obligations begin.    A surety’s premature exercise of rights under the

performance bond may expose it to liability to the principal for tortious

interference (L&A Contracting v. Southern Concrete Servs., 17 F.3d 106, 111 (5th

Cir. 1994)), or permit the principal in a subsequent indemnification action to claim

that the surety was a volunteer (RESTATEMENT (3D)            OF   SURETYSHIP   AND

GUARANTY § 27, cmt. c (1996)). Clarity is essential.

      But Brasoil’s purported “termination” of the Consortia was anything but

clear. In letters dated May 12, 1997 (P-19), and June 16, 1997 (P-31), Brasoil

wrote to the Consortia (with copies to the Sureties) and “formally communicat[ed]

the default of the Consortium” but added:

      [D]espite 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.




                                       - 40 -
PB-318/A10188 (emphases in original); FOF 301.          Brasoil said in substance:

“We’re firing you – but you have to continue to perform as if your rights were not

terminated.”

      The Contracts expressly preclude this “tails you lose, heads we win”

approach – under which Brasoil could “terminate” yet still “obligate” the Consortia

to perform its “intact obligations.” By so doing, Brasoil effectively precluded the

Sureties from exercising their options under Paragraph 4 of the Bonds – which

included the right to replace the Consortia and complete the work with some other

contractor. Any interpretation of the “termination” requirement of Paragraph 3.2

that is incompatible with the full exercise of the Sureties’ options under Paragraph

4 cannot possibly be correct.

      The case law confirms this commonsense conclusion. As the New York

Court of Appeals has noted, “Where a contract is broken in the course of

performance, the injured party has a choice presented to him of continuing the

contract or of refusing to go on.” Emigrant Industrial Savings Bank v. Willow

Builders, Inc., 48 N.E.2d 293, 299 (N.Y. 1943). But in New York, as elsewhere,

the non-breaching party cannot have it both ways. It may “treat the entire contract

as broken and sue immediately for the breach or reject the proposed breach and

continue to treat the contract as valid.” Inter-Power of New York Inc. v. Niagara

Mohawk Power Corp., 686 N.Y.S.2d 911, 914 (3d Dep’t 1999); ESPN, Inc. v.
                                       - 41 -
Office of Comm’r of Baseball, 76 F. Supp. 2d 383, 390 (S.D.N.Y 1999) (“The

party must either terminate or continue, but not both.”). Under the A312 bond, as

New York’s Court of Appeals noted only last week, the Bond’s termination

condition precedent results in the “principal’s cessation of work.” Walter Concrete

Constr. Corp. v. Lederle Laboratories, 2003 WL 367460 (N.Y. Feb. 20, 2003)

(examining A312 form and declining to read termination condition precedent into

AIA 311 form).

      No wonder the Consortia and the Sureties were confused about which of the

two mutually exclusive statements Brasoil really meant. On P-19, for example,

IVI responded to Brasoil’s letter by saying that, if Brasoil really intended to

terminate IVI’s contract, it should say so, in which event IVI would stop working

on the project. S-602 ¶ 14/A6613. Nor as a practical matter did the purported

“terminations” actually terminate the parties’ relationship. As the P-19 Platform

Coordinator observed, “[t]here was no change whatsoever” in the day-to-day

relationship between Petrobras/Brasoil and the P-19 Consortium at the job site.

T3388/A1995. “The [P-31] contract continued to exist. The contract was not

cancelled. The companies continued to do the work, and they had the same duties

and continued to be paid.” T1691/A1611. The P-31 Consortium continued to bill

Brasoil pursuant to the Contract, Brasoil continued to make payments to the P-31

Consortium, and the Project Coordinator “was authorized to continue executing the
                                       - 42 -
contract.” T1691/A1611. Indeed, in November 1997, five months after Brasoil’s

June 16, 1997 “termination” letter for P-31, SEGEN Superintendent Alceu wrote to

Petrobras’s Board about Brasoil’s “existing contract with the Consortium” and

urged that the Consortium no longer be used “to finish the remaining work.” S-

737A ¶ 10/A6842 (emphasis added). As the same SEGEN Superintendent later

swore in an Affidavit submitted to Judge Koeltl, it was only thereafter, “in

December 1997,” that “the original [P-31] Consortium was terminated in

accordance with applicable contract provisions.” S-1461 ¶ 18/A7624-25.

      Judge Koeltl rested his contrary conclusion entirely, but inexplicably, on a

snippet from a May 30, 1997 letter by the Sureties’ counsel regarding P-19 (PB-

561/A10552-57), which Judge Koeltl viewed as a concession that “at the time [the

Sureties] regarded [Brasoil’s May 12, 1997 P-19 letter and June 16, 1997 P-31

letter] as effective termination under the performance bonds.” FOF 310. But the

letter said exactly the opposite: “Neither the law in general nor the P-19 contract in

particular gives [Brasoil] the power or right to terminate only the Contractor’s

‘right to complete,’ without simultaneously terminating all of the Contractor’s

other rights and its duties as well.” A10552 (emphasis in original). Far from

conceding the effectiveness of Brasoil’s P-19 “termination” (much less the P-31

“termination,” which had not even occurred), the letter referred to Brasoil’s

“baseless termination of rights vs. termination of obligations dichotomy..” A10553
                                        - 43 -
(emphasis added). Indeed, one of the Sureties’ stated bases for denying liability

was Brasoil’s failure to terminate the Consortia’s rights. Amended Complaint

¶¶ 26, 34, 44/A129; S-598/A6603, S-606/A6626, S-658/A6748.             But, counsel

added, in light of Brasoil’s position, the Sureties were constrained to proceed on

the “premise” that the P-19 termination was effective and – while “reserv[ing]. . .

all of their rights (and defenses)” (A10554, A10557) – would commence an

investigation.    Sureties, insurers, and countless other businesses prepare such

“reservation of rights” letters precisely to avoid conceding a particular position.

Judge Koeltl had no basis for concluding otherwise.

             3.     Brasoil Failed to Agree to Pay the Sureties the “Balance of
                    the Contract Price”
      The last of the relevant conditions precedent is in Paragraph 3.3, which

requires that Brasoil “agree[] to pay the Balance of the Contract Price to the Surety

in accordance with the terms of the Construction Contract . . . .” Paragraph 12.1 of

the Bonds defines the “Balance of the Contract Price” as “[t]he 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.” As we

have shown (supra at 34-39), the only “valid and proper payments made . . . under

the Construction Contract” (¶ 12.1) were those payments made pursuant to the

                                        - 44 -
terms of the Contracts through the BMS process, including Brasoil’s advances via

contract amendments. Brasoil’s extra-contractual loans, in contrast – as Judge

Koeltl himself concluded – were “made outside of the contracts.”          COL 38

(emphasis added).

      Judge Koeltl nonetheless held that there was no “Balance of the Contract

Price” left to pay, once the extra-contractual loans were tacked on to the payments

under the Contracts.    COL 26; see also FOF 302.         As before, he relied on

Paragraph 7 of the Bonds, which provides that “unrelated” funds may not be used

to reduce the Balance of the Contract Price.         As we noted above, however,

Paragraph 7 cannot be read to mean that all “related” payments can be used to

reduce the Balance once the figure has been determined under Paragraph 12.1.

St. John’s confirms the point.     There too, the obligee paid funds outside the

contract that were “related” to the project. But as the New York Court of Appeals

emphatically held, such extra-contractual payments are chargeable to the owner,

not the surety. 201 N.Y. at 343.

      Because Brasoil could not reduce the Balance of the Contract Price to pay

off its loans, it failed to meet the condition precedent of Paragraph 3.3. The

Sureties’ obligation to proceed was not triggered.




                                       - 45 -
      B.     Brasoil’s Multiple Alterations of the Contractual Payment
             Scheme, Effected Without the Sureties’ Consent, Discharged the
             Sureties
      Even if Brasoil satisfied all of the Bonds’ conditions precedent, the Sureties’

obligations under the Bonds were already discharged by Brasoil’s material,

alterations of the Contracts.9 “[T]he creditor and the principal debtor may not alter

the surety’s undertaking to cover a different obligation without the surety’s

consent. If they do so the surety is discharged because the parties have substituted

a new contract, to which it never agreed, for the original.” Bier Pension Plan Trust

v. Estate of Schneierson, 546 N.Y.S.2d 824, 826 (Ct. App. 1989).

      1.     Brasoil made substantial alterations to the Contracts’ detailed payment

provisions, which tied Brasoil’s monthly payments to work completed according to

a carefully defined measurement schedule. See FOF 90-91, 148-149. As Judge

Koeltl found, these contractual changes initially took the form of Amendments

One to P-19 and One and Two to P-31, which provided for advanced payments to

the Consortia under the Contracts. See FOF 178, 193. But the contractual changes

did not stop with these formal amendments. If Brasoil’s massive extra-contractual

loans to the Consortia are to be treated (as Judge Koeltl did) as having also been
9
       Becker v. Faber, 280 N.Y. 146 (1939) – still good law – holds that a surety
need not show prejudice, and that any material alteration of a contract discharges
it. Judge Koeltl disagreed. COL 31, 32. We take issue with his conclusion, but –
given the extensive evidence of prejudice to the Sureties – we proceed on the same
legal premise as Judge Koeltl.
                                        - 46 -
made “under” the Contracts -- and thus as also drawing down the Balance of the

Contract Prices -- then they too substantially altered the Contracts’ detailed

payment provisions (albeit without the formality of an actual amendment to the

Contracts). That is the clear lesson of St. John’s: if the extra-contractual payments

do reduce the contract balances, then they too effectively amend the Contracts.

      2.     Nor can there be any doubt that these changes to the contractual

payment terms were highly prejudicial to the Sureties. As we explained in greater

detail above (at 10-15), Brasoil’s decision to prop up the Consortia financially had

devastating consequences for the Sureties.       At least as early as November 1995,

Brasoil and Petrobras knew that the Consortia were in serious financial trouble.

FOF 161-75. In fact, IVI reported to Petrobras that it had run out of working

capital. Yet, at the time, the P-31 project had not even begun and P-19 was not far

along. Had Brasoil declined to funnel more money into what Judge Koeltl found

to be the Consortia’s bottomless pit, and had the Consortia been unable to secure

other financing to enable them to continue working, the contractors would have

defaulted – at a time when it was indisputably “feasible” and “relatively simple” to

transfer P-31 to another shipyard.           T370-71/A1294-95, T4346-47/A2252.

Petrobras officials themselves testified that another contractor would have

performed for IVI’s original price, and therefore at no loss to Brasoil or the

Sureties. T262-63/A1264-65. Indeed, SEGEN unanimously recommended that
                                        - 47 -
course of action. T252/A1262.10 In the words of Brasoil’s own expert, it would

also have been possible “without major difficulty” to transfer P-19 to another

contractor    (T4347/A2252),      something      Brasoil    seriously    considered.

T264/A1265.11

      But Brasoil’s voluntary infusions of cash ensured that the projects would

remain with the Consortia, and as a result the cost overruns increased

exponentially. By mid-June 1996, it was “physically very difficult to move the

vessels,” and – as Judge Koeltl recognized – the time involved in shifting the work

elsewhere would have been “prohibitive.” FOF 207. Even Brasoil’s shipyard

management expert conceded that “if someone had the right to make the decision

whether or not to transfer these projects . . . the time to have accomplished that

transfer at the least cost and with the least technical difficulty would have been in

December of 1995-January of 1996.” T4347-48/A2252.

      If Brasoil had instead simply adhered to the Contracts’ terms – and had not

altered the deal that the Sureties bonded – one of two things would have happened.
10
      The contract for the P-32 project, which USF&G had also bonded, was
quickly and easily recontracted to another shipbuilder at no loss to Brasoil or to
USF&G. T255-56/A1263.
11
      Little work had been done on P-19 by November 1995. T2468-69/A1785.
Eighty-nine percent of the contract balance for conversion work (save payments
made for the rig itself) remained unpaid. Id. Several facilities had both the
capacity and interest in December 1995 to undertake the project. T4289-
92/A2238, T4346/A2252.
                                        - 48 -
First, IVI, which had already depleted its working capital, would have ceased

operating and defaulted in short order. Second, and alternatively, IVI and the

Consortia would have obtained new funding from another source. Indeed, it is not

uncommon for a contractor to request financing from a surety. In such a case, the

surety decides, for itself, whether to finance the contractor. T1443/A1567. Under

the first scenario, the Sureties would have been able to replace the Consortia with a

contractor free from what Judge Koeltl found to be IVI’s basic inefficiencies.

Under the latter, there would have been no “exhaustion” of the Contract balances

and the “default” declared much later by Brasoil would not have occurred (or

would have been further delayed). In either case, the Sureties would not have

suffered the losses that Judge Koeltl attributed to IVI. A clearer example of

prejudice is difficult to imagine.

      Moreover, Brasoil acted deliberately in excluding the Sureties from critical

early decision-making regarding IVI’s financial problems. As it later explained

with remarkable candor, Brasoil “reached the conclusion that the performance

bond [was] not an adequate instrument for us to execute an offshore platform

contract,” since – if claims were made against the Bonds and the Sureties enforced

their rights – Petrobras “would have lost more with the lack of [oil] production

than it would’ve gained from the sureties.” T255-56/A1263. Accordingly, without

consulting the Sureties, Brasoil made the “tacit” decision to keep the Consortia on
                                        - 49 -
the job by financing it first through acceleration of payment, followed shortly

thereafter by a program of massive extra-contractual loans.12

      The continuation of IVI as contractor (and the attendant, massive cost

overruns which, Judge Koeltl found, resulted from this decision) was not the only

form of prejudice suffered by the Sureties as a consequence of Brasoil’s contract

alterations. Brasoil’s contract changes also prejudiced the Sureties in at least two

other ways, confirming the materiality of those changes.

      First, the contract payment alterations ultimately deprived the Sureties of

their choice of options under Paragraph 4 of the Bond. The financiers of P-19 and

P-31 chose an A312 bond, and they did so advisedly: It is a less expensive bond

12
       Although Judge Koeltl’s opinion contains a section entitled, “IVI and the
Petrobras Defendants Kept the Sureties Fully Informed of the Developing Crisis,”
a careful reading of the ensuing text (FOF 217-228) shows that the only
information received by the Sureties before June 16, 1996, was sparse and indirect
(and not provided by the Petrobras Defendants). Moreover, the closest thing to
notice about IVI’s problems was some correspondence received by USF&G that
focused on another project (P-34) on which IVI was a subcontractor. FOF 217-18.
And according to Judge Koeltl’s finding, by February 1, 1996, USF&G believed
that the P-34 problems had been “fully resolved.” FOF 220. Far from showing
that the Petrobras Defendants kept the Sureties fully apprised during this early,
critical time period (December 1995 to May 1996) when a change in contractor
was still feasible, the evidence demonstrates that they deliberately declined to
advise the Sureties. T263-67/A1265-66, T3267-69/A1961. Indeed, Petrobras went
so far as to send an employee to a surety industry conference to obtain guidance on
how best to deal with the Sureties. T675-76/A1369. The employee advised
Petrobras to deal with the Sureties only “SOFTLY.” S-236A/ A5873. Brasoil,
however, decided that “SOFTLY” wasn’t good enough – “tacit” was the order of
the day. T206-07, 210/A1246-47.
                                       - 50 -
precisely because it expressly provides the surety with a number of protections,

including the right to choose for itself how to respond to a Contractor Default.

Each of the options in paragraph 4 belongs to the Sureties, not the owner or

contractor – and the Sureties had the right to weigh their own interests, make their

own cost/benefit analysis and select the option that costs least.13 The Owner had

no right under the A312 bond to force a particular option on the surety or to take

actions that effectively remove options from play. But that is exactly what Brasoil

did. In the interest of avoiding delay to Petrobras at any cost, Brasoil unilaterally

chose to finance IVI and keep the Consortia on the job. By the time Brasoil chose

to declare defaults, a loss-free (much less cost-effective) switch to another

contractor was no longer a viable option. In that additional respect, the contractual

changes materially altered the risks that the Sureties had assumed under the Bonds.

      Second, Brasoil’s changes to the contractual payment provisions impaired

the Sureties’ rights in the contract balance. See Aetna Casualty & Surety Co. v.

United States, 176 N.Y.S.2d 961, 965 (Ct. App. 1958) (performing surety has

“equitable lien upon the funds by the owner” and “this lien arises upon execution

13
       See, e.g., Dragon Constr. Co. v. Parkway Bank & Trust, 678 N.E.2d 55, 58
(Ill. App. 1997) (the bonds’ performance options give the surety a “contractual
right to minimize its liability . . . by ensuring that the lowest responsible bidder
was selected to complete the job”); St. Paul Fire & Marine Ins. Co. v. City of
Green River, 93 F. Supp. 2d 1170, 1173-74 (D. Wyo. 2000), aff’d mem., 2001 WL
369831 (10th Cir. 2001).
                                        - 51 -
of the bond”). By accelerating payments to the Consortia, and then extending

“extra-contractual” loans that Judge Koeltl would later subtract from Contract

Balances, Brasoil used funds that had not been earned by the Consortia and were

earmarked for work that remained to be done to pay for overrun costs on work that

was already completed. The unavoidable result of doing so was to reduce the

Balance of the Contract Price that would be available to the Sureties in the event of

a default declaration. That too was highly prejudicial to the Sureties.

      3.     Judge Koeltl nonetheless concluded that the contractual amendments

“did not prejudice the Sureties or increase their risk.” COL 37. Indeed, Judge

Koeltl thought, the amendments actually “improved, rather than prejudiced, the

Sureties’ position” because they “allow[ed] the Consortia to continue construction,

[and thus] postponed the date of the Contractor Default and relieved the Sureties of

performance obligations that they otherwise would have had.”               Id.    But

“postpon[ing] the date” of a contractor default is often the worst option for a surety

– particularly where, as here, the existing contractor (according to Judge Koeltl) is

riddled with inefficiencies and increasingly unable to contain the spiraling costs of

the projects.   How could the Sureties have been better off deprived of the

opportunity to seek out another contractor whose costs would be far lower -- of

doing the same with P-31 as Brasoil did with P-32? In all events, that choice


                                        - 52 -
belonged to the Sureties, especially if they were expected to foot the eventual bill

that Brasoil’s unilateral actions generated.14

      The prejudicial nature of the contract-financing changes is all the more

glaring if one accepts arguendo Judge Koeltl’s rulings that default is triggered by

exhaustion of owner payments and all the extra-contractual payments counted

toward exhaustion. (Of course, if either one of those rulings is wrong, as they are,

judgment for the Sureties is required without regard to the present issue.) Under

those rulings, both the payments made through contractual amendments and the

extra-contractual payments (i) allowed an inefficient contractor to run up huge cost

overruns; (ii) triggered but limited the Sureties’ Paragraph 4 options; and (iii)

depleted the contract balances to which the Sureties were subrogated. On Judge


14
       Judge Koeltl also concluded that “in December, 1995 and January, 1996,
there was no legal basis to declare a default on the P-19 and P-31 Projects” because
the two projects were on time (“more or less”) and “there were balances owed to
the Consortia under the contracts.” FOF 172-73, 206. That conclusion, however,
misses the basic thrust of the Sureties’ argument, which is based on what would
have happened if Petrobras and Brasoil had declined to prop up the Consortia in
the first place. In any event, Judge Koeltl’s suggestion that there was no basis to
declare a default in this early time period cannot be reconciled with other findings
he made. See FOF 116 (finding that purchase of the P-19 platform occurred “on
June 29, 1995, 79 days after the delivery was supposed to have occurred under the
Contract”); FOF 201 (finding that P-31 Consortium “did not issue a purchase order
for the turret until February 2, 1996, 39 days after the deadline specified in the
Contract”); COL 21 (noting that the “events of default” under the Contracts
include “non-compliance with contract clauses, specifications, designs or
deadlines”).
                                         - 53 -
Koeltl’s legal premises – most of which are flawed, to be sure, but all of which

were applied – how could the Sureties not have been discharged?

      4.    The Sureties in no way “consented” in advance to this deprivation of

their rights. In concluding otherwise, Judge Koeltl cited Paragraph 8 of the Bonds,

which provides that “[t]he Surety hereby waives notice of any change, including

changes of time, to the Construction Contract or to related subcontracts, purchase

orders and other obligations.”    COL 41 (emphasis added).         But nothing in

Paragraph 8 can plausibly be read to constitute an advance “consent” to material

alterations in the Sureties’ risk – and no court (other than Judge Koeltl) has ever

suggested otherwise.15

      To begin with, agreeing not to receive advance notice of another party’s

conduct is obviously not the same as waiving the after-the-fact legal rights,

liabilities, and consequences triggered by such conduct. Indeed, waiving advance

notice makes all the greater sense precisely when the after-the-fact liabilities

remain in place as a check on the conduct at issue. That is the case with the A312


15
       Judge Koeltl (COL 40) cited White Rose Food v. Saleh, 738 N.Y.S.2d 683
(2d Dep’t 2002), but the four-sentence discussion in that case does not support his
holding. As the White Rose majority noted, in addition to waiving notice “the
written guarantee allow[ed] for changes to the [underlying contract].” But the
Bonds here do no such thing. True, the dissent – which is what Judge Koeltl relied
on – suggested that the majority had found a waiver implied, rather than express,
but the dissent is simply that: a dissent.
                                       - 54 -
Bond: it makes sense to waive advance notice of contract changes when the owner

is subject to the powerful discipline of losing surety protection if the changes

materially alter the risk.

       In the surety context, waiving notice is entirely consistent with not waiving

underlying discharge triggers. As Judge Koeltl himself observed, until there has

been a default by the contractor, a surety has no “obligation to propose any

solution to [the contractor’s] financial situation.” FOF 226.16 Indeed, sureties

would “face possible tort liability for meddling in the affairs of their principals” if

they intervened between contracting principals “[b]efore a declaration of default.”

L&A Contracting, 17 F.3d at 111. Paragraph 8 thus is entirely sensible – there is

no reason to “notify” a surety pre-default of changes in the contract (including

trivial and routine changes) that the surety is not obligated to address in any event.

       Even if Paragraph 8 could be interpreted not merely as “waiv[ing] notice”

but also as granting advance consent to changes made in the underlying Contract,

that would not help Brasoil in this case. As Brasoil candidly acknowledged below,

Paragraph 8 simply does not apply to amendments that are “so extensive and

material as to amount to a departure from the original contract rather than a


16
     Precisely for this reason, Judge Koeltl’s passing suggestion that the Sureties
“waived” their defenses by not “telling Petrobras to stop” financing the Consortia
(FOF 228) is mistaken.
                                         - 55 -
permissible modification of its details.”17 Pretrial Mem. of Law (quoting S. STEIN,

CONSTRUCTION LAW § 17.07[4][b][iii] (1986 & Supp. 2002) (specifically citing

AIA A312 Performance Bond, ¶ 8) (A808)). The amendments here fall into that

category. Thus, whether viewed as a waiver of advance notice or as an agreement

to contract changes, Paragraph 8 in no way impairs the Sureties’ traditional defense

of discharge from the Bonds’ obligations where the bonded contract has been

materially altered.

       The acceleration of payments, in sum, materially changed the Sureties’ risks

to their detriment. The Sureties were therefore discharged from their obligations

under the Bonds.

III.   THE DAMAGES AWARD SHOULD BE REVERSED

       Even if the liability judgments could be upheld (and they cannot), the award

of more than $370 million is unsustainable. Every one of its four components –

completion costs in excess of the Balance of the Contract Price, “liquidated

damages,” attorneys’ fees and expenses, and prejudgment interest – either is based

on an erroneous interpretation of the Bonds or is inconsistent with controlling legal

17
       Nor would it make any sense to read Paragraph 8 as granting the owner
carte blanche to make any and all material changes to the underlying contract
without affecting the surety’s obligations under the bond. If that were true, an
owner could restructure the underlying contract top to bottom – say, by tripling the
scope of the work or paying out all of the contract funds at once – and still hold the
surety to its original guarantee.
                                        - 56 -
principles.   If permitted to stand, the award will indeed have the effect of

“redefin[ing]” the “ground rules . . . for surety companies” – just as Brasoil’s

counsel predicted.

      A.      Judge Koeltl’s Award of $174,209,776 in Excess “Cost of
              Completion” Damages Under Paragraph 6.1 of the Bonds Should
              Be Vacated

      1.      Paragraph 6.1 provides that, “[a]fter the Owner has terminated the

Contractor’s right to complete,” the Surety must pay for “completion of the

Construction Contract[s].”      As Judge Koeltl correctly found, such “cost of

completion” damages are limited to Brasoil’s expenditures on excess “costs that

were incurred after the default was declared and the Sureties refused to fulfill their

obligation to either perform the remainder of the Contract or pay the damages

resulting from their failure to do so.” FOF 460 (emphasis added). Just as a debt is

“incurred” before it is paid, so too did the Consortia “incur” the costs of

performing the work on the projects before Brasoil paid those costs. Thus, only

the costs that were “incurred” after the default declarations – i.e., the costs that the

Consortia became obligated to pay to complete the contract – are covered under

Paragraph 6.1.

      It is easy to see, however, why Brasoil wanted to recover more than simply

the costs to complete the contract in this case. By the time Brasoil declared the



                                         - 57 -
defaults, most of the work was done. See S-1527/A7823 (P-19, 89.9% complete);

FOF 320 (P-31, 72.4% complete). Few costs remained to be incurred.

      So Brasoil claimed instead that it was entitled to recover the vastly larger

“cost overrun” on both projects. FOF 459. For each contract, Brasoil’s damages

expert subtracted the entire adjusted budget from the total adjusted costs and

arrived at a “total cost overrun” of $214,870,710.      T3820-21/A2117, T3825-

27/A2118; PB-1296/A14927, PB-1298/A14928. Using this swing-for-the-fences

approach, Brasoil offered no proof that would enable a factfinder to determine

which portion (if any) of those costs had been incurred – i.e., resulted from work

or equipment orders – to complete the Contracts after the declarations of default.

And in its Proposed Conclusions of Law, Brasoil urged Judge Koeltl not to

distinguish between “surety liability for completion costs incurred by Brasoil pre-

termination or post-termination.” A4915.

      2.    Judge Koeltl appropriately rejected Appellees’ theory because it

included findings on costs that had been incurred before the default declarations.

FOF 459. As Judge Koeltl explained, the Sureties’ obligations arose only after

Brasoil “declare[d] a Contractor Default” (id.), so the damages “are limited to the

costs that were incurred after the default was declared.”     FOF 460.    He also

recognized that Brasoil’s expert had identified only what Brasoil had “spent” – not

“incurred.” FOF 332, 458-459.
                                       - 58 -
         Yet Judge Koeltl then promptly ignored this crucial weakness in Brasoil’s

proof.      For P-19, Judge Koeltl awarded Appellees precisely the amount

($58 million) that their expert had described as the amount “spent” – not incurred –

after the default declaration. FOF 459. For P-31, Judge Koeltl again awarded the

amount ($116,209,776) that Brasoil “spent” from the default declaration “through

the last analyzed expenditure.” FOF 466.

         Judge Koeltl’s failure to make this critical distinction is especially puzzling

since it was Judge Koeltl himself who elicited from one of Brasoil’s key trial

witnesses (P-31 chief Justi) the key fact that a substantial portion of the funds spent

by Brasoil after the default declarations covered costs incurred by IVI before the

default declarations (T3620-21/A20621, emphasis added):

         THE COURT:         Do you know, by the way, how much was spent on work
                            that was performed [on P-31] after the June 1997
                            purported notice of default?

         THE WITNESS: . . . [T]hat number is probably higher than 100
                      million. . . . The contract value was 180 million. If the
                      final figure was 313 million, so the difference . . . must
                      have been the amount we spent after June of 1997.

         THE COURT:         But some of the money that was spent after June 1997
                            was for work that was actually performed before June
                            1997, wasn’t it?

         THE WITNESS: Yes, you’re right, especially in the case of the equipment.
                      The equipment was being paid as it was being completed.
                      That is why I don’t have the exact figure in my mind.


                                          - 59 -
      Brasoil indeed had no figures in mind. Instead of offering proof showing

what costs, if any, it had incurred after default declarations, Brasoil simply asked

for all “overruns.”

      3.     If “there is no legally sufficient evidentiary basis” for a finding for the

plaintiff, then judgment as a matter of law for the defendant is appropriate. Fed. R.

Civ. P. 50(a)(1); see Weisgram v. Marley Co., 528 U.S. 440, 443-444 (2000)

(affirming court of appeals’ entry of judgment for the defendant where “record

evidence [wa]s insufficient to justify [the] plaintiff’s verdict” and plaintiff had a

“full and fair opportunity to present the case”). Here, despite a “full and fair

opportunity” to do so, Appellees introduced no evidence from which a reasonable

fact finder could determine the costs that were incurred after the defaults were

declared. And how hard could it have been for them to have met this obligation?

All they had to do was to offer into evidence invoices or other documents showing

when the work was done to “complete” the contract (thus “incurring” the “costs”

necessary to complete the contract). Although Brasoil presumably had all of those

records at its disposal, it elected not to offer them, opting instead to introduce

evidence of the “total cost overrun” on the projects. Cf. Boyajian v. United States,

423 F.2d 1231 (Ct. Cl. 1970) (dismissing “for failure of damage proof” claim of

plaintiff who opted to rely exclusively on the “total cost” method of damages at


                                         - 60 -
trial, where “record contain[ed] no other proof [of] plaintiff’s damages”); Highland

Const. Co. v. Union Pacific Railroad, 683 P.2d 1042, 1047 (Utah 1984) (same).

      Judgment for the Sureties is particularly appropriate here, because Brasoil

was “on notice every step of the way” that its theory of damages might be rejected,

yet it “made no attempt to add or substitute other evidence” to satisfy its burden of

proof. Weisgram, 528 U.S. at 456. Even after Judge Koeltl asked Justi, point

blank, “how much was spent on work that was performed after the . . . purported

notice of default?” (T3620), Appellees elected not to put that evidence in the

record, hoping instead to hit the $214 million jackpot. Appellees are stuck with the

record they made – and that record is insufficient to award “cost of completion

damages.”

      B.     The Award of $62,592,000 in “Liquidated Damages” Should Be
             Reversed
      Paragraph 6.3 of the Bonds provides that the Sureties are obligated to pay

“[l]iquidated damages, or if no liquidated damages are specified in the

Construction Contract, actual damages caused by delayed performance or non-

performance of the Contractor.” Judge Koeltl concluded that enforceable

“liquidated damages” were indeed “specified in the Construction Contract.” In his

view, the delay “penalties” prescribed by the Contracts – termed Multas

Moratorias in the original – were a “reasonable” estimate of losses from delayed

                                        - 61 -
“oil and gas production” (FOF 470), and were therefore enforceable as liquidated

damages under New York law. Applying the contractual formula (FOF 461),

Judge Koeltl awarded Brasoil $62,592,000 on account of the Contractors’ delay.

             1.     The Contracts Did Not Specify “Liquidated Damages”
                    Within the Meaning of Paragraph 6.3
      Whether the Contracts “specify” “liquidated damages” for delay turns on an

interplay of Brazilian and New York law: Brazilian law governs the interpretation

of the contractual Multas Moratorias provisions, but New York law controls

whether those penalties, as construed under Brazilian law, constitute “liquidated

damages” under the Bonds.

                    a.    Under New York Law, a Purported Liquidated
                          Damages Exaction Is Unenforceable Unless It
                          Constitutes a Reasonable Estimate of Potential Loss
      Under New York law, “a liquidated damage provision is an estimate, made

by the parties at the time they enter into their agreement, of the extent of the injury

that would be sustained as a result of breach of the agreement.” Truck Rent-A-

Center, Inc. v. Puritan Farms 2nd, Inc., 393 N.Y.S.2d 365, 368 (Ct. App. 1977).

New York courts sustain such provisions only if the specified amount “is a

reasonable measure of the anticipated probable harm.”              BDO Seidman v.

Hirshberg, 690 N.Y.S.2d 854, 861 (Ct. App. 1999). Conversely, “[a] liquidated

damages clause which provides for an amount plainly disproportionate to actual


                                         - 62 -
damages is deemed a penalty and not enforceable because it compels performance

by the very disproportion between liquidated and actual damages.” McKinley

Assocs., LLC v. McKesson HBOC, Inc., 110 F. Supp. 2d 169, 182 (W.D.N.Y.

2000).

      New York courts take these principles seriously – when they do sustain

liquidated damages provisions, it is because the parties have made a reasonable

effort to anticipate the probable damages upon a breach. See, e.g., Truck Rent-A-

Center, 393 N.Y.S.2d at 366, 369-70 (enforcing liquidated damages only because

the measure of damages fairly took account of several economic factors bearing on

probable loss). “[I]f there is any reasonable doubt as to whether the clause imposes

a penalty, courts should construe the provision as a penalty.” 139 Fifth Ave. Corp.

v. Giallelis, 1996 WL 154108, at *4 (S.D.N.Y. 1996) (emphasis added). And a

purported liquidated damages remedy will never be enforced where the contract

permits the injured party to recover both the liquidated sum and its actual damages.

Judge Koeltl himself applied that principle in In re West 56th Street Associates,

181 B.R. 720 (S.D.N.Y. 1995). A stipulation between the parties provided that a

“penalty” of $100 per day would be payable in the event of non-performance, “in

addition to all other remedies available” to the plaintiff. Judge Koeltl noted that

the stipulation “call[ed] the payment of $100.00 per day a ‘penalty’” – which,

“while not dispositive,” shed some light on the evident purpose of the provision.
                                       - 63 -
More tellingly, the performing party was permitted to seek, not only the liquidated

amount, but also “all other remedies . . . without limitation.” Because that clause

“provided for a remedy in addition to a party’s right to recover actual damages,” it

constituted an unenforceable penalty. Id.18

                   b.    The Multas Moratorias Provisions Constitute
                         “Penalties,” Not Enforceable Liquidated Damages,
                         for Purposes of Paragraph 6.3
      For several mutually reinforcing reasons, the Contracts’ Multas Moratorias

provisions – construed under Brazilian law – do not constitute enforceable

“liquidated damages” under New York law.

      1.    The text – The relevant provisions appear in sections of the Contracts

translated in English as “Fines” [PB-279/A10022; PB-820/A14232] or “Penalties”

[PB-279/A10067]. “[W]hile not dispositive” (In re West 56th Street Associates,

181 B.R. at 729), those headings are an early warning that the sums were chosen as

deterrents, not to approximate the probable cost of delay. The penalty formula

itself confirms that the label was not misplaced. For each day of delay, the

contractors are assessed a fixed amount of .1% times the contract price. The .1%

multiplier was used for both P-19 (PB-279/A10022) and P-31 (PB-820/A14232),

even though the Contracts were different and would presumably give rise to
18
      Accord Jarro Building Indus. Corp. v. Schwartz, 281 N.Y.S.2d 13 (2d Dep’t
1967); In re O.P.M. Leasing Servs., Inc., 23 B.R. 104, 112 (Bankr. S.D.N.Y.
1982).
                                       - 64 -
different oil and gas losses if performance were delayed. And the contract price

(the multiplicand) was based, as Judge Koeltl recognized, on factors that matter to

the bidder (e.g., equipment, finance charges, labor and materials, and profit).

FOF 67-75. There is no reason why .1% of the contract price would constitute a

“reasonable measure of the anticipated probable harm” (BDO Seidman, 690

N.Y.S.2d at 861) from each day’s delay in oil and gas production (the basis for

Judge Koeltl’s ruling).

      Nor does this exaction lose its penal character simply because an additional

sum is added for each day of delay. See City of Rye v. Public Service Mut. Ins.

Co., 358 N.Y.S.2d 391, 394 (Ct. App. 1974). Civil contempt remedies work the

same way: Fines are typically aggregated for each day of non-compliance. See,

e.g., United States v. Morgan, 51 F.3d 1105, 1113 (2d Cir. 1995). But exactions

for civil contempt are designed, first and foremost, to coerce compliance with an

obligation. Under New York law, that is a “penalty,” not “liquidated damages.”

      The Multas Moratorias provisions for delay must also be construed in the

context of the entire Multas section of the Contracts. Under Clause Nine, the delay

penalties are aggregated with the Contracts’ other “fines” and “penalties,” at least

one of which – for “delay in complying with BRASOIL’s Supervisors’ demands” –

is doubled in the event of “second-time and subsequent offenses.” PB-

279/A10022, PB-820/A14232.          That is the language of deterrence, not
                                       - 65 -
compensation.     And the aggregate is capped at 20% of the contract price,

regardless of the bearing (if any) of that amount on the expected losses upon a

breach.

      Then comes the clincher: Brasoil is expressly authorized to sue for its

actual damages, over and above the liquidated exaction. The text of subsection

9.6 of the P-31 Contract could hardly be plainer:

      The penalties established in this clause do not exclude any others
      foreseen in this Contract or prescribed by Law, nor the
      CONTRACTOR’s liability for losses or damages it may cause to
      BRASOIL as a result of non-compliance with the conditions of this
      Contract.

PB-820/A14233. See also Section 7.5 of P-19’s General Contractual Conditions

(PB-279/A10068). This is precisely the kind of provision that has repeatedly

convinced New York courts to refuse to enforce penalties masquerading as

liquidated damages provisions.19

      2.     Brazilian law – It is not surprising that the Multas Moratorias

provisions are completely disconnected from the probable delay losses: under



19
       Judge Koeltl found that “[t]he liquidated damages provision was reasonable
in view of the substantial revenue from oil and gas production that would be lost if
the project was delayed.” FOF 470. See also FOF 462; COL 46. Putting to one
side the fact that Brasoil – the obligee on the Bonds – didn’t stand to lose a dime if
oil and gas production was delayed, see infra, it simply is not enough to say, in
effect, “Well, Petrobras probably lost a lot of money from delayed oil and gas
production, so a large liquidated damages award is okay, too.”
                                        - 66 -
Brazilian law, the purpose of multas is to deter breaches of contract, not to

compensate for expected damage.

      Brasoil’s foreign law expert, Aragão, acknowledged the point in his

declaration on Brazilian law. Penalty clauses, he explained, need not bear any

reasonable relationship to the expected loss. Purporting to quote Aragão, Judge

Koeltl stated that “the subject clauses in the P-19 and P-31 contracts are equivalent

to liquidated damages for delay [in American law] and are valid and enforceable.”

COL 47. But the words Judge Koeltl put in brackets did not appear in Aragão’s

declaration, and for good reason: Aragão was not opining on whether the multas

clauses at issue constituted “liquidated damages” provisions under American law;

he was opining on whether they constituted liquidated damages under Brazilian

law. His answer was “yes” because, he claimed, what the Brazilian Civil Code

calls “penalties” are “now consider[ed] . . . the functional equivalent of liquidated

damages, the parties’ advance agreement on losses.” Aragão Dec. at A2418.

Significantly, however, Aragão never suggested that penalty clauses in Brazil are

designed to effect a reasonable approximation of the probable loss. Indeed, he said

the opposite – as he put it, if penalty clauses were not excessive compared to the

actual loss, “it would be useless for parties to put such clauses in their

agreements.” Id. at A2417.


                                        - 67 -
      Aragão’s concession is both dispositive and correct: Penalty clauses in

Brazil (although not in New York) need not approximate the probable loss because

that simply is not their function. Their purpose is to deter breaches of contract.

      3.     Brasoil could not have sustained delay losses in any event – The in

terrorem purpose of the Multas Moratorias clauses is especially striking in the

present case, because Brasoil – the obligee under the Bonds – did not and could

not suffer any losses on account of delayed oil and gas production. Petrobras – not

Brasoil – was the end user of the P-19 and P-31 platforms. Upon receipt of the

completed P-31 platform, Brasoil sold it, and through a series of leasing and

chartering transactions Petrobras became the platform’s lessee and end user.

FOF 337, 340. It was Petrobras – not Brasoil – that was to use the completed

vessels to produce oil and gas for Brazil. Petrobras therefore was the only entity

that could lose revenues from delayed oil and gas production. For P-19, as well,

Petrobras, not Brasoil, became the platform’s end user. Id.

      But the Bonds impose performance obligations in favor of Brasoil, the

Bonds’ obligee. See ¶ 7 (“No right of action shall accrue on this Bond to any

person or entity other than the Owner”).         The Sureties owe no performance

obligation to Petrobras, any more than they do to the scores of vendors, potential

oil and gas purchasers, and myriad other entities that might have stood to lose

money if the projects were not finished on time.
                                        - 68 -
      That Brasoil could not and did not suffer any delay damages was no secret to

Judge Koeltl, who correctly found that it was Petrobras that would be harmed by a

delay in production. See, e.g., FOF 269, 314. Judge Koeltl nevertheless imposed

an enormous penalty in favor of Brasoil in the guise of “liquidated damages,” even

though Brasoil conceded that it suffered no actual delay damages at all (T4572-

4573/A2304 (emphasis added)):

      THE COURT:         In determining what the damages are when the owner of
                         the project is Brasoil, how do I get from section six to the
                         losses to Petrobras from lost oil?

      MR. VICKERY: Well, of course, there is a separation, there is no doubt
                   about it. Liquidated damages replace actual damages.
                   You can ignore all the oil cost . . . . The client was
                   ultimately Petrobras. We’re not seeking anyway all the
                   lost oil production . . . . Whatever damages Brasoil may
                   have sustained, the parties agree that the penalty for late
                   completion was this one 10th of one percent a day [up to]
                   20 percent. It’s the whole point of having the, of course
                   liquidated damage clause, you don’t look at the – it’s one
                   cent or 100 million dollars. It makes no difference.

      THE COURT:         That, of course, turns on the Brazilian question about
                         whether that’s a liquidated damages clause. If it weren’t
                         a liquidated damages clause for some reason, under
                         Brazilian law, how would the lost oil to Petrobras be a
                         measure of damages?
      MR. VICKERY: We’ve never claimed lost oil from Petrobras. Much to
                   my regret I’ve not been able to find a theory to do that,
                   but.

      THE COURT:         So is it, the issue, the issue comes down to the liquidated
                         damages provision, because all of the other evidence
                         about the amount of oil lost or the amount of revenues
                                       - 69 -
                          that could’ve been made on the oil are not damages under
                          that contract, so it’s liquidated damages or nothing . . . .

      MR. VICKERY: . . . [W]e have not introduced evidence in actual damages
                   of Brasoil, or for that matter for Petrobras. So, you
                   know, we have to ride with the liquidated damages
                   clause.

Because Brasoil could never suffer any delay damages in connection with

Petrobras’s delayed production of oil and gas, the Multas Moratorias provisions

are not a “reasonable . . . estimate” of Brasoil’s actual damages. Leasing Service

Corp. v. Justice, 673 F.2d 70, 71 (2d Cir. 1982).

      There is, in short, “reasonable doubt” (to say the least) about the Multas

Moratorias clauses, and thus they must be treated as penalties, not enforceable

liquidated damages. Howard Johnson Int’l v. HBS Family, Inc., 1998 WL 411334,

at *5 (S.D.N.Y 1988). And, because the Contracts do not “specif[y]” liquidated

damages, Brasoil was entitled to recover only such “actual damages” as it proved

at trial. Bonds ¶ 6.3. As counsel conceded, however, Brasoil did not (indeed,

could not) introduce evidence of any actual damages it suffered because of the

Consortia’s delay. The “liquidated damages” award should therefore be set aside.

             2.    Any Award of Liquidated Damages Must Be Capped at
                   10% of the Contract Price
      Article 9 of Brazil’s Usury Law provides: “A penalty clause in excess of

10% (ten percent) of the value of the debt is not valid.” In 1999, Brazil’s Superior

Court of Justice, its highest court on non-constitutional issues, ruled that the 10%
                                        - 70 -
limitation is applicable to all contracts, not just loan agreements (as some Brazilian

courts had once thought). Special Appeal No. 229.776-SP, 4th Panel (Dec. 17.

1999), Exhibit 21 to Dião Decl. (A4234).

      Having concluded (improperly) that Brasoil was entitled to recover its

liquidated damages under the Multas Moratorias provisions, Judge Koeltl should

have capped those awards at 10%. Dião Decl. at A4110-14. Instead, he adopted

Aragão’s opinion that the 10% cap does not apply to the Contracts, stating that the

“great weight of reasoned authority in Brazil is that the usury law . . . is . . . limited

to loan agreements.” COL 47. Judge Koeltl did not even acknowledge the most

recent – and contrary – pronouncement by Brazil’s highest court on the subject.

And the “great weight” of “reasoned authority” he invoked consists of decades-old

decisions of Brazil’s then-highest court on such non-constitutional matters, whose

jurisdiction was transferred to the Superior Court of Justice in 1988.

T4783/A5297; T4796/A5300.

      Brazilian appellate court decisions, while not “binding” under stare decisis,

nonetheless serve as “an orientation . . . as to how the Superior Court of Justice is

deciding a specific issue.”       T4733-34/A5278-79.        That Court’s most recent

decision on the 10% cap issue provided just such an “orientation.” Yet Judge

Koeltl gave no reason for deferring instead to Aragão’s opinion, which relied on

decisions rendered decades ago by Brazil’s then-highest court.             It is as if a
                                          - 71 -
Brazilian court, attempting to discern the current American law on substantive due

process, cast its lot with Lochner v. New York, rather than West Coast Hotel v.

Parrish.

      If there were to be Brazilian-style “liquidated damages” in this case – and

for the reasons we have stated, there should not be – they should be capped at 10%

of the contract prices.

      C.     The Award of $36,730,905 in Attorneys’ Fees and Expenses Is
             Erroneous

             1.     Paragraph 6.2 of the Bonds Does Not Cover Attorneys’ Fees
                    Incurred in Litigation
      1.     New York law adopts the American Rule, under which “the cost of

attorneys’ fees is not ordinarily shifted onto the losing party.” United States ex rel.

Evergreen Pipeline Constr. Co. v. Merritt Meridian Constr. Corp., 95 F.3d 153,

171 (2d Cir. 1996). Only contractual language that is “unmistakably clear” can

overcome that presumption.        Hooper Assocs. v. AGS Computers, Inc., 549

N.Y.S.2d 365, 367 (Ct. App. 1989). And courts take that rule seriously. In

Coastal Power International Ltd. v. Transcontinental Capital Corp., 182 F.3d 163

(2d Cir. 1999), aff’g 10 F. Supp. 2d 345 (S.D.N.Y. 1998), for example, the

prevailing plaintiff sought to recover its attorneys fees under a contractual

provision that entitled it to indemnification for “any and all Claims it shall incur or

suffer, which arise, result from or relate to any breach of . . . any of its . . .

                                         - 72 -
covenants.” 10 F. Supp. 2d at 370. The court acknowledged that “[t]he language

of the agreement certainly is susceptible of” the plaintiff’s interpretation because

“[t]he word ‘Claim’ is defined so broadly as to include attorneys’ fees incurred by

it.”   Id. at 371.   “But,” the court concluded, “the clear message of Hooper

Associates is that this is not enough. There is no language clearly evidencing an

intention that the loser in a suit for breach of the [contract] was intended to pay the

winner’s attorneys’ fees.” Id. Affirming “[f]or substantially the reasons stated by

the district court,” this Court added that “[i]t is particularly important under New

York law . . . that in contracts of this magnitude the language of the agreement be

‘unmistakably clear’ regarding whether the parties to the agreement intend

provisions of attorneys’ fees to apply to disputes among themselves.” 182 F.3d at

165 (citing Hooper).

       Because New York courts apply the American Rule so stringently, they

construe contracts to provide for fee shifting only when the operative language can

mean nothing else. In Lori-Kay Golf, Inc. v. Lassner, 472 N.Y.S.2d 612 (Ct. App.

1984), for example, the Court of Appeals enforced a fee-shifting provision in favor

of a surety because the “express terms of the th[e] agreement” provided that, “if

any suit is brought on the bond” against the surety, the principal must “repay the

[surety] counsel fees . . . to which the Company may be put in defense of such

suit.” Id. at 614 (emphasis added). Similarly, in Hartford Fire Ins. Co. v. Cheever
                                         - 73 -
Development Corp., 734 N.Y.S.2d 598 (2d Dep’t 2001), a bond expressly provided

for the recovery of “attorney’s fees” that the plaintiff sustained “in enforcing any

of the provisions of this agreement.” Id. at 599. The plaintiff was entitled to

attorneys’ fees only because the “unambiguous language” of the agreement could

bear no other reading. Id. at 600 (citing Hooper).

      2.     Judge Koeltl awarded fees under Paragraph 6.2 of the Bonds, which

requires the Sureties to pay “[a]dditional legal, design professional and delay costs

resulting from the Contractor’s Default, and resulting from the actions or failure to

act of the Surety under Paragraph 4.” Far from “unmistakably” providing for fee

shifting in the event of a suit, Paragraph 6.2 speaks to a fundamentally different

category of contract damages – those “additional” costs likely to result from the

Contractor’s default or the Surety’s derelictions. As a court construing the same

standard-form AIA Bond explained, Paragraph 6.2 covers “incidental damages

actually sustained as a result of the termination” of the contractor. International

Fidelity Ins. Co. v. County of Rockland, 98 F. Supp. 2d 400, 413 (S.D.N.Y. 2000)

(emphasis added). These incidental or “consequential” damages include items

such as (i) “additional sums paid to architects to supervise the completing

contractor”; (ii) “sums paid for legal services related to the contractor’s default”;

(iii) “sums paid to procure a bond for the faithful performance of the completion


                                        - 74 -
contract”; and (iv) “additional engineering and legal costs incurred to rebid the

contract as [a] result of contractor’s breach.” Id. at 414 (citing cases).20

      Such “additional incidental expenses” do not include attorneys’ fees incurred

in litigation – a point made clear in City of Elmira v. Walter, Inc., 546 N.Y.S.2d

183 (3d Dep’t 1989), which was cited in International Fidelity. In Elmira, the

surety argued that an award improperly included $42,219.92 in “counsel fees,”

which, it argued, are not normally recoverable under a performance bond. The

Appellate Division emphatically agreed that “counsel fees are not available as an

item of damage in the absence of statutory or contractual authority.” The court

sustained the award only because the damages awarded by the jury were not

“counsel fees” at all, but rather were “legal expenses . . . incurred to rebid the

contract. As such they are recoverable expenditures ‘directly occasioned and made

necessary by’ the breach.” Id. at 185 (emphasis added).

      3.     To permit an award of attorneys’ fees occasioned by litigation would

also give the term “legal costs” a scope vastly different from the surrounding terms

in Paragraph 6.2. The remainder of the paragraph obligates the Surety to pay other

20
       North American Specialty Insurance Co. v. Chichester School District, 158
F. Supp. 2d 468 (E.D. Pa. 2001), cannot be read to hold otherwise. Although the
magistrate there awarded fees resulting from the dispute over the bonds itself, he
did so without discussion. For good reason: the point was never litigated by the
parties, and the surety never even argued that Paragraph 6.2 “legal . . . costs” do
not include such fees.
                                         - 75 -
“additional” costs arising from the Contractor’s default and the Surety’s actions or

failures.   After a default/termination, the Owner may need additional “design

work,” so Paragraph 6.2 covers “additional design costs.” The Owner may need to

cover the delay caused by the breach, so Paragraph 6.2 covers “additional delay

costs.” And the Owner may need to rebid or negotiate completion contracts,

necessitating preparation of a variety of legal instruments – hence the reference to

“additional legal costs.” But fees and expenses incurred in litigating a Surety’s

defenses are fundamentally different from such “additional legal costs.” To say

that “additional legal costs” nevertheless covers counsel fees and expenses in

litigation violates the rule of construction that “the meaning of doubtful terms or

phrases may be determined by reference to their relationship with other associated

words or phrases (noscitur a sociis).” United States v. Dauray, 215 F.3d 257, 262

(2d Cir. 2000).

       4.    In short, Brasoil did not and cannot show that Paragraph 6.2 provides

– with “unmistakab[le]” clarity – for counsel fees and expenses. Even if Paragraph

6.2 were “susceptible” to such a reading (Coastal Power Int’l, 10 F. Supp. 2d at

364) – and under ordinary contract principles, it is not – Brasoil cannot bear the

heavy burden imposed by the American Rule and New York law.




                                       - 76 -
             2.    The Award of Attorneys’ Fees and Expenses Is Also Invalid
                   Because Brasoil Failed to Plead Its Entitlement to Fees

      Even if Paragraph 6.2 reversed the American Rule in “unmistakably clear”

terms, the award of attorneys’ fees and expenses would be invalid nonetheless.

A party’s claim for attorneys’ fees under a contract – just like any other breach-of-

contract claim – must be pleaded at or before trial.        Judge Koeltl, however,

awarded Brasoil $36.7 million in attorneys’ fees on a contract claim that was never

even mentioned at trial. That was error.

      1.     “[C]laims for attorney fees are items of special damage which must be

specifically pleaded under Federal Rule of Civil Procedure 9(g).”         Maidmore

Realty Co. v. Maidmore Realty Co., 474 F.2d 840, 843 (3d Cir. 1973) (affirming

rejection of fee claim because it was not pleaded). The “purpose of requiring that

special damages be specifically pleaded is to protect [the] defendant against being

surprised at trial by the extent and character of plaintiff’s claim.” 5 C. WRIGHT &

A. MILLER, FEDERAL PRACTICE & PROCEDURE, § 1310, at 701; see also United

Indus. v. Simon-Hartley, Ltd., 91 F.3d 762, 764 (5th Cir. 1996) (affirming denial of

fees because they were not “specifically pleaded under [Rule] 9(g)” and thus were

“waive[d]”); Atlantic Purchasers, Inc. v. Aircraft Sales, Inc., 705 F.2d 712, 716 n.4

(4th Cir. 1983) (same); In re American Casualty Co., 851 F.2d 794, 802 (6th Cir.

1988) (same).

                                        - 77 -
      2.       During the five years preceding trial, Brasoil never once claimed that

it was entitled to attorneys’ fees as contract damages under the Bonds. Brasoil did

not plead that theory in its counterclaims; it made no mention of such a claim in its

extensive pre-trial submissions; and it offered no proof at trial to establish either

the Sureties’ liability for Brasoil’s attorneys’ fees or the amount of such fees.21

Not until its Proposed Conclusions of Law, submitted after the trial, did Brasoil

announce that it was seeking recovery of its “legal fees in this action” under

Paragraph 6.2 of the Bonds. A4976 ¶ 124F.

      In his July 25 findings and conclusions, Judge Koeltl directed the parties to

“submit proposed final judgments.”        Brasoil then produced reams of material

purporting to establish the amount of its attorneys’ fees and expenses.         Over

objection (A5330-45, A5471-5509), Judge Koeltl awarded Brasoil $36,730,905 in

attorneys’ fees and numerous other costs. That award was impermissible under

Rule 9(g).22


21
        As a consequence, the Sureties had no opportunity to offer evidence at trial
tending to show that Paragraph 6.2 has nothing to do with attorneys’ fees for
litigation.
22
       Fed. R. Civ. P. 54(d) was amended in 1993 to codify a limited exception –
not applicable here – to the pleading requirement of Rule 9(g). Claims for
“attorneys’ fees and related nontaxable expenses” may be made by post-trial
motion, “unless the substantive law governing the action provides for the recovery
of such fees as an element of damages to be proved at trial.” Rule 54(d)(2)(A). As
the Advisory Committee Notes explain, this post-trial motion procedure applies to
                                         - 78 -
      For this additional reason, the award of attorneys’ fees and related costs

should be vacated.

      D.    The Award of $96 Million in Prejudgment Interest Should Be
            Reversed
      Judge Koeltl ruled that the Sureties’ “prejudgment interest obligation arose”

on July 11, 1997 for the P-19 Bond (fifteen days after Brasoil supplied written

notice under Bond ¶ 5) and on August 18, 1997 for the P-31 Bond (the date the

Sureties denied liability and filed the Declaratory Action). SPA96, COL 51-52.

At the same time, he recognized that “no damages had accrued at th[e] time” the

obligation to pay prejudgment interest arose, and that the two underlying

components of damages for which prejudgment interest would be awarded – “cost

of completion” damages under Paragraph 6.1 and “liquidated damages” under

Paragraph 6.3 – continued to grow through 1998. SPA96.23 As we explain below,


requests for fees brought “under governing law incident to the award of fees” (such
as a claim for fees under the Civil Rights Laws). It does not “apply to fees
recoverable as an element of damages, as when sought under the terms of a
contract; such damages typically are to be claimed in a pleading and may involve
issues to be resolved by a jury.” Id. (emphasis added). Accord Simon-Hartley,
Ltd., 91 F.3d at 766 n.7; Merrill Lynch Interfunding, Inc. v. Argenti, 1998 WL
790922, at *1 (S.D.N.Y. 1998).
23
      Judge Koeltl calculated that the “completion cost” damages ran until
April 30, 1998, for P-19 and until November 30, 1998, for P-31. SPA96-97, FOF
459, 468. He also concluded that “liquidated damages” ran from September 21,
1997 for P-19 and from May 24, 1998, for P-31. SPA96-97, FOF 463, 469. Judge
Koeltl then calculated prejudgment interest based on the “chronological midpoint”
between the early dates on which the Sureties’ obligation for prejudgment interest
                                       - 79 -
the award of prejudgment interest under these circumstances was flatly

inconsistent with New York law.

      1.     Under N.Y. Gen. Oblig. Law § 7-301, a surety is liable solely for “the

amount specified in the undertaking, except that interest in addition to this amount

shall be awarded from the time of default by the surety” (emphasis added).

“[D]efault” in this specialized context is a term of art under New York law and is

narrowly defined. A surety does not default merely because the principal has

defaulted on the underlying contract (Tynan Incinerator Co. v. International

Fidelity Ins. Co., 499 N.Y.S.2d 118, 120 (2d Dep’t 1986); Stuyvesant Ins. Co. v.

Dean Constr. Co., 254 F. Supp. 102, 113 (S.D.N.Y. 1966)), or because the surety

contests its liability under the bond but loses (Morse/Diesel, Inc. v. Trinity Indus.,

875 F. Supp. 165 (S.D.N.Y. 1994), rev’d in part on other grounds, 67 F.3d 435 (2d

Cir. 1995)). Instead, a surety is in “default” under Section 7-301 only when: (1) it

has been “notified of a default by the principal”; (2) the amount of its obligation

“may be ascertained with reasonable certainty as of a fixed day”; and (3) it “could

have safely paid” a specific sum to satisfy its liability, but “then unjustly withholds

it.” Tuzzeo v. American Bonding Co. of Baltimore, 226 N.Y. 171, 178 (1919); see

Aetna Casualty & Surety Co. v. B.B.B. Constr. Corp., 173 F.2d 307, 309 (2d Cir.


supposedly “arose” and the dates on which completion costs and liquidated
damages ceased to accrue. SPA96-97.
                                         - 80 -
1949) (“In this state a surety on a bond . . . is chargeable with interest, not from the

default of the principal, but from the time when he could have safely paid the same

providing he then unjustly withholds it.”).24

      Morse/Diesel illustrates the point. Aetna issued a performance bond on

behalf of Trinity Industries, a subcontractor, with Morse/Diesel as obligee. Trinity

defaulted, and the court entered a $26 million judgment against Aetna.              875

F. Supp. at 168.    The court refused, however, to award prejudgment interest

because “no default by Aetna ha[d] been shown.” Id. at 176. “[U]nder New York

law,” the court explained, “a surety is not considered in default until it has been

notified of a default by its principal and unjustly withholds payment due under its

bond.” Id. at 176-177. Morse/Diesel, however, had not provided “notice” of a

“default” because it “never unequivocally terminated [the] principal’s contract and

demanded payment on the bond,” but instead “allowed Trinity to continue working

on the project and provided Trinity with notice that Trinity’s delays were causing


24
        Accord Sunrise Plaza Assocs. v. International Summit Equities Corp., 622
N.Y.S.2d 596, 597 (2d Dep’t 1995) (surety was not obligated for prejudgment
interest because its liability was not fixed until the “final determination of
liability”); Muscolino v. Keppel, 232 N.Y.S.2d 569, 570 (1st Dep’t 1962)
(prejudgment interest did not accrue until arbitration panel determined the amount
of the surety’s liability, before which “there was no determination of the amount
due, nor any way of fixing the amount of liability which was, to a large extent,
dependent on after-occurring events”); United States v. Anchor Warehouses, 92
F.2d 57, 59 (2d Cir. 1937).
                                         - 81 -
additional unspecified expense, for which Morse/Diesel would hold Trinity

accountable.” Id. at 177.25 Nor did the obligee show a wrongful refusal to pay an

ascertainable sum. The plaintiff “failed to establish a date . . . when Aetna was

aware of, and wrongfully ignored, a mature obligation to pay.” Id. And because

Morse/Diesel’s “notice to Aetna neither demanded payment nor set forth any

specific amount due, Aetna did not act unreasonably in not remitting any funds.”

Id. (emphasis added).

      2.        As in Morse/Diesel, the Sureties did not “default” on the Bonds in this

case, and the award of prejudgment interest was therefore improper.

      First, as explained above, Brasoil “never unequivocally terminated its

principal’s contract.” Morse/Diesel, 875 F. Supp. at 177. To the contrary, Brasoil

specifically ordered the Consortia in May and June 1997 to complete their contract

“obligation” and to continue working. PB-318/A10188, S-646/A6730 (emphasis

in original).     And Brasoil made certain that the Sureties understood that the

Consortia remained obligated to finish the work. S-1621/A8905.




25
       It dawned on Aetna only too late – fully 12 years after filing its answer –
that the absence of a clear termination by the obligee might have constituted (as it
does here) a failure to meet a condition precedent under the bond. Because of the
delay in raising the issue, the district court declined to reach that defense. 1996
WL 343070.
                                          - 82 -
      Second, the Sureties could not have defaulted on the Bonds in July and

August of 1997 because the amount of their purported obligation to pay

“completion costs” (or “liquidated damages” for delay) could not possibly have

been “ascertained with reasonable certainty” at that time. Tuzzeo, 226 N.Y. at 178.

Because Brasoil insisted that the Consortia remained obligated to finish the

projects, and because Brasoil continued to provide throughout 1997 and well into

1998 the enormous funding it now claims as damages, Brasoil did not demand a

“specific amount due” (Morse/Diesel, 875 F. Supp. at 177) – or any amount.26

Instead, in its June 26, 1997 letter (S-663/A6759) (see COL 51), Brasoil demanded

only that “the Surety perform its obligations under the [P-19] bond no later than 15

days after the date of this letter. . . ” without specifying what those obligations

might be, much less specifying or demanding a dollar amount that the Sureties

could have “safely paid.” And Brasoil made no demand of any kind with respect

to the P-31 Bond. COL 52.

      Nor did Brasoil demand the payment of a particular sum at any time after

the supposed July and August 1997 default dates (COL 51-52). Even after the

commencement of this litigation, Brasoil’s counterclaims – filed in June 1999, long

after Brasoil’s supposed “cost of completion” and “liquidated damages” had been

26
       See Anchor Warehouses, 92 F.2d at 59 (“The [surety] was not in default
until demand and wrongful refusal to pay.”).
                                       - 83 -
sustained – still did not request any specific amount of damages under the Bonds;

and the “total cost overrun” damages calculation later prepared by Brasoil’s

accounting expert – first provided to the Sureties in May 2001 – was subsequently

revised by Brasoil’s expert (T3811/A2114, T3864/A2128), and then reduced by

millions of dollars by Judge Koeltl.       Since Brasoil itself never managed to

calculate or demand the “specific amount due,” it cannot be said that the Sureties

could “have safely paid” the amount of their obligation but “unjustly withh[e]ld[]

it.” Aetna Casualty, 173 F.2d at 309.

      Indeed, it is hard to see how Brasoil could have made a demand for – or the

Sureties could have proffered – a payment that was “ascertained with reasonable

certainty” in July or August 1997, since the amount of the “completion costs” (and

“liquidated damages” for delay) was at that point unknowable. According to Judge

Koeltl’s own findings, the “completion costs” on P-31, for example, continued to

mount until November 30, 1998. How could the Sureties have known the size of

those damages on August 18, 1997, when (according to Judge Koeltl) they

“defaulted” and thus their obligation to pay prejudgment interest “arose”? And

how could the Sureties have known in May or June 1997 what the “liquidated

damages” for delay would be?

      As if that were not enough, certain features of the Contracts and how they

were administered made it difficult, if not impossible, for Brasoil or the Sureties to
                                        - 84 -
quantify an amount due on the Bonds “with reasonable certainty” before the

completion of the trial. For example, the P-19 Contract contained a component for

the offshore work (Schedule B) that “was flexible” in price “in that it was based on

the actual quantities” of labor “incurred to complete the work.” FOF 88. Without

knowing how much labor was involved in the offshore phase of P-19, it simply

was not possible to ascertain with reasonable certainty what amount in completion

costs should be tendered. In addition, not until the district court’s July 25, 2002

decision was a determination made as to the “true value of changes” to P-19 that

“were never negotiated and remained unrecognized at the conclusion of the

project.” FOF 357, 457. Yet without knowing that figure, it was not possible to

calculate the precise amount of “completion costs.”        For these reasons, the

prejudgment interest award should be set aside.27



27
       Judge Koeltl awarded prejudgment interest on P-31 because the Sureties
“necessarily denied liability . . . by filing the current action.” COL 52. But New
York law is emphatic that a surety does not “default” under Section 7-301 merely
by contesting liability under a bond. Morse/Diesel, 875 F. Supp. at 176-77. As
for P-19, Judge Koeltl never addressed whether the Sureties “unjustly” withheld a
specific sum that they “could have safely paid.” Instead, he noted (COL 51) that
Brasoil sent the Sureties a letter on June 26, 1997, demanding that they “perform
[their] obligations” under P-19, and that Paragraph 5 of the Bond provides that the
Sureties “shall be deemed in default” fifteen days after receiving such notice, thus
entitling Brasoil “to enforce any remedy available” to it. COL 50. But even if, by
providing such notice, Brasoil satisfied a Bond provision permitting it then to
“enforce any remedy” it might have, that provision does not – cannot – modify the
New York standard for prejudgment interest and thus does not absolve Brasoil of
                                       - 85 -
IV.   THE JUDGMENT ON THE TORTIOUS INTERFERENCE CLAIM
      SHOULD BE REVERSED

      A.    Factual Background
      1.    In addition to the performance bond, the Sureties issued a payment

bond on a $38 million financing for P-19 provided by Marubeni. FOF 114-15,

435-37, S-7002/A9397-99, S-7004/A9426-61.           To secure the financing, IVI

assigned to Marubeni up to $52,500,000 of its P-19 receivables. S-1095/A7034-

43. Brasoil and Petrobras specifically approved this arrangement and permitted the

initial stream of receivables to be applied to Marubeni’s account; but beginning on

May 30, 1997, Petrobras refused to permit any further application of the

receivables and refused to permit IVI to pay Marubeni with its own funds. FOF

440; S-1689/A6829-30, T1930-31/A1687.           It is uncontradicted that Petrobras

hoped, by taking these actions, to engineer an IVI default and a claim against the

Sureties under the Marubeni Bond, thus putting additional pressure on the Sureties.

S-543/A6546-55,     S-563/A6585-90;     T325/A1280,      T998-99/A1454,    T1001-

02/A1455, T1356-57/A1544.

      Prompted by Petrobras’s actions, Marubeni declared IVI in default and sued

the Sureties in New York state court. In their defense, the Sureties contended that

Marubeni had conspired with Petrobras to engineer a wrongful claim under the

its obligation to meet New York’s preconditions for enforcing the remedy of
prejudgment interest.
                                       - 86 -
payment bond. In support of their conspiracy defense on Marubeni’s motion for

summary judgment, the Sureties pointed to an April 23, 1997 memorandum,

which, the Sureties contended, demonstrated that Marubeni and Petrobras had

“colluded” to engineer IVI’s default. S-543/A6546-55.

      The state court rejected this “collusion” defense on alternative grounds and

entered summary judgment for Marubeni. First, it said, the evidence “indicated”

that “the IVI receivables were already exhausted by the date of the alleged

conspiracy.” Second, the court explained, Marubeni had already decided to make a

claim under the payment bond a month before the alleged conspiracy in April

1997. In light of both considerations, the court concluded that Marubeni and

Petrobras could not have colluded. Marubeni America Corp. v. USF&G, No.

604801/97, slip op. (N.Y. Sup. Ct. Jan. 7, 2000), aff’d, 721 N.Y.S.2d 6 (1st Dep’t),

leave denied, 754 N.E.2d 199 (N.Y. 2001).

      2.     It was against this backdrop that Judge Koeltl addressed the Sureties’

claim in the Indemnity Action that Petrobras committed tortious interference by

preventing IVI and Brasoil from making further payments to Marubeni. Judge

Koeltl rejected the claim, holding that there were no further P-19 funds available,

and resting the conclusion in part on his decision in the Declaratory Action that the

P-19 contract balance was exhausted. He also stated, however, that “the Sureties


                                        - 87 -
have already litigated . . . and lost” the exhaustion question, and therefore the

Sureties were “collaterally estopped from re-litigating” it. FOF 450.

      B.     Judge Koeltl Wrongly             Rejected    the    Sureties’    Tortious
             Interference Claim
      Under New York law, a defendant is liable for intentionally interfering with

a contract without justification.     Jews for Jesus, Inc. v. Jewish Community

Relations Counsel, 968 F.2d 286, 292 (2d Cir. 1992). To the extent Judge Koeltl

rested his rejection of this claim on his conclusion – in the Declaratory Action –

that the P-19 funds had been exhausted, we have explained (at 34-39) why his

ruling cannot be sustained. And the doctrine of collateral estoppel cannot save the

ruling either.

      Under New York law, collateral estoppel applies to a particular issue only if

it (i) is identical to the issue in the present case; (ii) was actually litigated in the

first case; (iii) was essential to the determination in the first case; and (iv) was the

“‘ultimate’ or ‘material’” issue in both the first case and the present case. Vincent

v. Thompson, 377 N.Y.S.2d 118 (2d Dep’t 1975). Judge Koeltl did not suggest,

nor could he, how any of these criteria – much less all of them – were satisfied.

For one thing, the “issue” in the state court proceeding bore only the faintest

connection to the issue below. Whereas the state court addressed the P-19 contract

balance only insofar as it reflected the presence of “collusion” between the parties,

                                         - 88 -
in the Indemnity Action the existence of a contract balance bore on whether

Petrobras had in fact restrained IVI and Brasoil from keeping their commitments to

Marubeni. The issues are fundamentally different.

       What is more, the question whether there was a P-19 contract balance was

not “essential to the determination” in the state court proceeding. The state court

identified two independent reasons for rejecting the collusion defense – and the

second had nothing to do with whether there was a balance remaining in the P-19

contract. See RESTATEMENT (2D) OF JUDGMENTS § 27 ILLUSTRATION 15 (1982).

       Nor did the Sureties have a full and fair opportunity in state court to litigate

the exhaustion question. To the contrary, the state court denied the Sureties’

requests for discovery of Petrobras and IVI, the only two entities that could

provide relevant competent evidence.          S-6803/A9285-9313, S-6813/A9356-59.

That   discovery    –   which    ultimately       revealed   such   facts   as   Brasoil’s

contemporaneous accounting treatment of its loans as extra-contrato – took place

only in the Declaratory Action thereafter.

       It was pointless, finally, to apply collateral estoppel in the Indemnity Action.

In the Declaratory Action, the P-19 balance issue was subject to discovery,

extensively litigated, and decided (albeit incorrectly) on the merits. Indeed, Judge

Koeltl rested his no-contract-balance holding in the Indemnity Action in part on his

finding in the Declaratory Action. Under these circumstances there was no earthly
                                         - 89 -
reason to invoke collateral estoppel, even if it were otherwise applicable. After all,

“[w]hen the efficiency rationale for collateral estoppel fails, . . . courts have

understandably declined to apply the doctrine.” SEC v. Monarch Funding Corp.,

192 F.3d 295, 304 (2d Cir. 1999).

      Accordingly, because collateral estoppel does not apply and because, as

shown above, the Contract funds were not exhausted, the judgment on the tortious

interference claim should be reversed.

                                  CONCLUSION

      The judgment should be reversed.

Dated: February 24, 2003                          Respectfully submitted,




Ian A. L. Strogatz                                Lawrence S. Robbins
Brian P. Flaherty                                 Roy T. Englert, Jr.
Anthony R. Twardowski                             Gary A. Orseck
WOLF, BLOCK, SCHORR AND                           Alan E. Untereiner
SOLIS-COHEN LLP                                   Arnon D. Siegel
1650 Arch Street                                  ROBBINS, RUSSELL, ENGLERT,
Philadelphia, PA 19103                            ORSECK & UNTEREINER LLP
(215) 977-2000                                    1801 K Street, N.W., Suite 411
                                                  Washington, D.C. 20006
                                                  (202) 775-4500




                                         - 90 -
                          CERTIFICATE OF SERVICE
      I hereby certify that on February 24, 2003, I caused two copies of the

foregoing Brief for the Appellant to be served by placing the same in the United

States Mails, first class postage prepaid, addressed to each of:

                          Howard L. Vickery, Esquire
                       CAMERON & HORNBOSTEL, LLP
                       866 United Nations Plaza, Suite 249
                            New York, NY 10017

                             John R. Horan, Esquire
                         FOX HORAN & CAMERINI LLP
                                825 Third Ave.
                             New York, NY 10022

                          Lisa C. Cohen, Esquire
                   SCHINDLER, COHEN & HOCHMAN LLP
                        One Liberty Plaza, 35th Floor
                        New York, NY 10006-1404

and caused a true and correct copy of the following documents to be served upon

each of the counsel listed above by hand delivery:

             1) Special Appendix;
             2) Joint Appendix (consisting of a separately bound table of contents
                and volumes I through XIII) and,
             3) Notice of Appearance


                                              ____________________________________
                                              Jacob C. Cohn
                      CERTIFICATE OF COMPLIANCE
      I hereby certify that the foregoing Brief for the Appellants complies with the

Order of the Clerk dated November 21, 2002, which permits Appellants to file an

opening brief of up to 21,000 words. The brief contains 20,953 words, calculated

by the Microsoft Word2000 word processing system used to prepare the brief,

exclusive of the cover; the corporate disclosure statement; the Rule 28.2 statement;

the table of contents; the table of authorities; the certificate of service; and this

certificate of compliance.



                                             ____________________________________
                                             Ian A. L. Strogatz

								
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