The Impact of COVID-19 Pandemic Response on Chartering and Offshore Service Contracts

Comments by Diogo Nolasco, Partner at LP Law

The COVID-19 pandemic has undoubtedly affected a wide range of economic sectors. Offshore companies that have entered into chartering and service contracts with oil companies—particularly with Petrobras—have not been exempt from its impacts.

Since mid-last year, these companies have been dealing with the effects of restrictions imposed by the COVID-19 pandemic and are seeking solutions to avoid financial losses due to additional costs not originally contemplated in chartering and service contracts, especially those signed with Petrobras.

In many cases, Petrobras has gone beyond the rules issued by ANVISA, ANTAQ, and local state and municipal governments, by imposing measures that exceeded the already stringent protocols aimed at minimizing the spread of COVID-19.

As a result, unforeseen additional costs have arisen under these contracts, such as:

1. Expenses with rapid testing for all employees prior to boarding;

2. Hiring of nurses to perform testing and issue reports;

3. Staffing of nurses and nursing technicians at the supplier’s base to support remote daily monitoring of crew members in quarantine;

4. Costs with private transportation for all embarking personnel, including compliance with capacity limitations as required by Petrobras;

5. Provision of special PPE (e.g., masks, gloves), as well as consumables like hand sanitizer, disinfectants, thermometers, etc.;

6. Sanitation and disinfection of facilities and vessels;

7. Quarantine and replacement of employees who tested positive.

Due to these unbudgeted expenses, suppliers have started to seek contractual rebalancing—initially through administrative channels—arguing that Petrobras, while benefiting from continued performance, has thus far neither borne any portion of these costs nor formally addressed the matter.

A superficial review of the relevant chartering and service contracts might suggest early termination based on unforeseen and extraordinary events (force majeure), such as the pandemic-related restrictions and their resulting costs.

However, termination is not in the interest of either party. Offshore service providers have made substantial investments and long-term planning to meet contractual obligations, and Petrobras has no desire to interrupt essential services that are strategic to its operations.

Initial negotiations suggest that the way forward lies in executing contract amendments that allocate these unforeseen and additional costs more fairly between the contracting parties.

That said, Petrobras has initially required contractors to justify and provide evidence of economic imbalance due to these additional costs.

In many instances, these costs may not appear significant when compared to the overall contract value. However, with over a year and a half of ongoing pandemic conditions—and no clear end in sight due to emerging variants and the possible need for additional vaccine doses—the cumulative burden has become substantial.

Some suppliers are already estimating that additional pandemic-related expenses may represent up to 16% of the total contract value, all borne unilaterally by the contracted parties.

This initial impasse in negotiations with Petrobras is a growing concern for service providers. It is, in our view, a matter of urgency that should ideally be resolved through administrative discussions.

Should administrative resolution fail, the only remaining alternative for suppliers may be to seek judicial relief in order to avoid bearing the full burden of these exceptional costs.

A detailed analysis of each specific contract will be critical in assessing the likelihood of success in any potential legal action.

In any case, the proper application of the legal principles of "unforeseeability" (imprevisão) and "excessive burden" (onerosidade excessiva), which are well-established under Brazilian civil law and referenced in Petrobras contracts, seems to provide a solid legal foundation for claims aimed at redressing the extraordinary and unforeseeable financial impacts caused by the COVID-19 pandemic on Petrobras’s contracted service providers.

Our firm recently gave an interview to Estadão on this topic, which was widely covered by major media outlets, including CNN Brasil.

👉 Click here to read the interview.