Arbitration Involving Lng Terminal And Storage Tank Defects
Arbitration in LNG Terminal and Storage Tank Defects
Liquefied Natural Gas (LNG) terminals and associated storage tanks are critical infrastructure requiring precision engineering and strict adherence to international standards (API, ASME, NFPA, etc.). Defects in these facilities can lead to safety hazards, operational downtime, environmental damage, and financial losses. Arbitration often becomes the preferred dispute resolution mechanism due to:
Complex technical nature – Experts in engineering, safety, and construction are often needed.
High-value claims – Costs associated with LNG projects are substantial.
Cross-border parties – Many projects involve international contractors, engineers, and suppliers.
Time sensitivity – Minimizing disruption to energy supply is critical.
Typical Disputes Leading to Arbitration
Defective storage tank welding or material failure.
Improper insulation leading to boil-off gas loss or tank cooling inefficiency.
Cracks in LNG containment membranes.
Defects in piping, valves, or vapor recovery systems.
Failure to meet design or performance specifications.
Delays caused by defective equipment impacting terminal commissioning.
Case Law Examples
1. Qatar Liquefied Gas v. Technip (Hypothetical Reference)
Facts: The contractor was responsible for constructing LNG storage tanks. Cracks developed in the tank lining during commissioning.
Issue: Whether the contractor was liable for defects discovered post-handover.
Arbitration Outcome: The tribunal held the contractor liable due to breach of contract and inadequate quality assurance during tank welding. Damages were awarded for repair costs and production loss.
Significance: Emphasizes the contractor’s duty to follow international standards (API 620, 625) for cryogenic storage.
2. ExxonMobil v. Saipem (Hypothetical Reference)
Facts: LNG terminal’s secondary containment system failed during hydrostatic testing.
Issue: Determination of responsibility between engineering, procurement, and construction (EPC) contractor vs. design consultant.
Arbitration Outcome: Shared liability assigned; EPC contractor paid for physical repairs, design consultant paid for engineering redesign costs.
Significance: Highlights joint liability where design and construction defects overlap.
3. RasGas v. Hyundai Engineering (Hypothetical Reference)
Facts: Defective insulation on LNG storage tanks caused thermal inefficiency and higher boil-off gas rates.
Issue: Contractor claimed compliance with the approved design; owner claimed defect in workmanship.
Arbitration Outcome: Tribunal awarded damages to the owner; contractor’s compliance with design drawings did not absolve them from ensuring performance standards.
Significance: Reinforces performance guarantees over mere adherence to design drawings.
4. Shell LNG v. CB&I (Hypothetical Reference)
Facts: LNG tank membrane leakage detected after first operational year.
Issue: Liability for leakage and impact on terminal operation.
Arbitration Outcome: CB&I found liable; cost of membrane replacement and operational losses compensated.
Significance: Shows the importance of long-term performance warranties and testing under cryogenic conditions.
5. Petronas LNG v. Samsung Engineering (Hypothetical Reference)
Facts: Delay in tank construction due to substandard materials; resulted in delayed terminal commissioning.
Issue: Determination of liquidated damages and whether delay excused by contractor.
Arbitration Outcome: Tribunal enforced liquidated damages clause; contractor liable for delay costs.
Significance: Demonstrates the enforceability of contractual delay and defect clauses in high-value LNG projects.
6. Chevron v. KBR (Hypothetical Reference)
Facts: Defective LNG storage tank roof structure discovered after storm damage.
Issue: Whether structural defect pre-existed or was caused by natural events.
Arbitration Outcome: Tribunal relied on expert forensic analysis; contractor found partially liable for structural deficiencies, shared damages with insurance coverage.
Significance: Highlights role of expert evidence and forensic engineering in arbitration over large-scale LNG infrastructure.
Key Takeaways in LNG Arbitration
Technical Expertise: Arbitrators often appoint independent technical experts for tank design, welding quality, cryogenic insulation, and operational testing.
Performance Guarantees: Mere compliance with drawings is insufficient; functional performance standards carry weight in disputes.
Risk Allocation: EPC contracts often include detailed defect liability and insurance clauses; tribunals strictly enforce these.
Evidence Documentation: Inspection reports, non-destructive testing records, and commissioning logs are critical.
Cross-Border Implications: Many disputes involve international parties, making arbitration preferable to litigation.
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