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BP Business Economic Loss Claim Appeal 2016-2149: Spill Related Contract Cancellation Affirmed

The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms.

BP appeals the amount of Claimant’s BEL award.
The award in this matter was based on a Spill-Related Cancellation – in this instance, a Canceled Contract. The Claimant satisfied the causation requirements for
Spill-Related Cancellations. At issue in this appeal is the amount of compensation awarded to Claimant.
The amount of compensation in Spill-Related Cancellations is governed by Exhibit 4E, Section C. Part 2 of Section C sets forth two methods for determining lost profit associated with a Canceled Contract:
1. “If . . . the Canceled Contract . . . documentation either specifies costs to be
incurred by the claimant, or specifies a profit margin in connection with the
Canceled Contract . . . or . . . the claimant is otherwise able to provide a specific
estimate of the profit expected from the Canceled Contract . . . based on specific
accounting for prior events . . . , the claimant’s lost profits associated with the
Canceled Contract . . . shall be determined according to [Section C, Part 2(a)].”
2. “Otherwise, the claimant’s lost profits associated with the Canceled Contract . . .
shall be determined according to [Section C, Part 2(b)].
Part 2(a)’s method uses data either set forth in the Canceled Contract or
provided by the claimant. Part 2(b)’s method looks at the variable margin for a
claimant’s business for the period May through December 2009.
In the instant appeal, the Settlement Program utilized Part 2(a)’s method. Utilizing Part 2(a) resulted in a profit margin for the Claimant of approximately 94%.
BP argues that Claimant failed to satisfy the criteria required for utilizing Part 2(a). Hence, BP argues, Part 2(b)’s method should have been used, which according to BP
would have resulted in a significantly lower award for Claimant. [Per BP, the Claimant’s variable margin for the period May through December 2009 was
approximately 53%.]
The task for this Panel is to determine whether or not Claimant satisfied the criteria necessary for the Program to utilize Part 2(a)’s method. As noted above, in order for a claimant to utilize Part 2(a), the claimant must show either that “the Canceled Contract . . . documentation either specifies costs to be incurred by the claimant, or specifies a profit margin in connection with the Canceled Contract” or the claimant must “provide a specific estimate of the profit expected from the Canceled Contract . . . based on specific accounting for prior (contracts).”
In the instant appeal, the Claimant was unable to rely upon prior contracts which were “comparable in terms of type, size and revenue.” Section C, Part 2. Instead, Claimant submitted to the Program a list of costs which Claimant contends would have been associated with the Canceled Contract.
BP argues that submitting a list does not satisfy Part 2(a)’s criteria. BP contends that because the Claimant-generated list of associated costs is not listed in the actual Canceled Contract, the Claimant-generated list cannot qualify as “Canceled Contract . . . documentation.” In support of its position, BP cites another Panel decision which appears to support BP:
“No matter how detailed [Claimant’s] explanation of how it estimated
what its labor and material costs would have been had it performed the
. . . job, and no matter how thorough the reviewing accountant was in
applying those estimates, the BEL award cannot be upheld if it didn’t
confirm to the mandates of Section C.2. That Section is clear that if the
Canceled Contract in question doesn’t specify the costs to be incurred or
the profit anticipated . . . the SP must employ the process set forth in
[Part 2(b)].”
The Panel in the aforementioned decision appears to hold that a list of estimated costs that is not contained in the Canceled Contract itself does not satisfy the criteria set forth in Part 2(a). However, the District Court in another similar appeal appears to reach a contrary result:
“The issue presented, however, is whether the claimant presented the
necessary documentation concerning how the lost profits were to be
calculated. . . . BP argues that the costs to be incurred must be specified
in the contract itself. The Settlement Program and the Appeal Panel
took a broader view – that such costs may be specified in some
‘documentation’ outside of the actual contract itself. BP’s
interpretation would render the term ‘documentation’ essentially
meaningless. The inclusion of the term ‘documentation’ most
reasonably indicates that some piece of paper besides the actual
contract itself may be considered.”
Appeal Panel Decision 2016-693.
This Panel considers itself bound by the above District Court opinion. Hence, this Panel’s task is limited to determining whether or not the “piece of paper” submitted by Claimant in support of its estimate of costs associated with the Canceled Contract is sufficient to invoke the method set forth in Part 2(a), which favors Claimant, rather than the method set forth in Part 2(b), which favors BP.
Claimant’s list of estimated costs which it contends would have been incurred had the contract in question not been canceled is set forth in a letter to the Program
dated July 2, 2013. That letter set forth the personnel costs that would have been associated with the performance of the Canceled Contract. BP finds this letter insufficient in several respects. First, there is no indication that these cost projections were created contemporaneously with the signing, or even termination of, the Canceled Contract. Second, there is no reference to prior contracts as support for the cost projections for the Canceled Contract. Third, Claimant’s projected variable profit margin from the Canceled Contract is 94%, while Claimant’s variable profit margin for May through December was only 53% (per BP).
Claimant’s response is that the Canceled Contract differed from Claimant’s normal types of engagements in that the sole owner/officer/engineer was to perform the majority of the work. Because officer compensation is excluded from expense calculations, costs related to the Canceled Contract were expected to be
minimal. Claimant further points out that a portion of the contract in question was completed and invoiced in 2009. According to the Claimant, the expenses for the
time period during which this previous work was performed is in line with the projected costs for the canceled portion of the contract.
This Panel is concerned with the 94% versus 53% variable profit margin issue. That said, this Panel finds that the “documentation” regarding projected costs is minimally sufficient enough to invoke the methodology set forth in Section C, Part 2(a). In light of the above, Claimant’s Final Proposal is adopted. [It should be noted
that Claimant’s Final Proposal reduced the expected variable margin profit by about 8%, which resulted in a slightly lower figure than the Program’s pre-RPT award.]

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