Shipbuilder Samsung ordered to pay $290m in dispute over defective LNG tank

South Korea-based shipbuilder Samsung Heavy Industries has said that it has lost an arbitration in London over a long-running dispute relating to defects and repairs to two LNG gas carriers built by the company. The vessels used a domestically designed tank.

Samsung reported in a stock exchange filing that on December 15th that the London Maritime Arbitrators Association had ruled in favor of SK Shipping. SK had been seeking damages both for the loss in value of the two vessels as well as lost operation of the vessels because they have not been repaired and remain out of service. The arbitrators agreed that the repairs had not been completed in a reasonable amount of time. However, they found that the loss of operations for the vessels was included in indirect damages. Therefore it was not  a liability under the contract.

SK Shipping was awarded $290m in what was seen as a partial victory. Negotiations continued involving a settlement between Samsung Heavy Industries, SK Shipping, and Korea Gas.

The dispute started in 2018 when two 174,000 cbm gas carriers had to be idled because of defects in their LNG transportation tanks. Samsung Heavy Industries had been contracted in 2015 by SK Shipping to build two vessels. Instead of licensing technology for the tanks, Samsung Heavy Industries decided to use a domestically-designed tank system. It id not prove to be a success. Ultimately only four vessels would be built with the domestic tank design, which suffered from several problems and gas leakage.

The construction of the two vessels under dispute was completed in February and March 2018. Shortly after commissioning them, SK discovered defects in the tanks. The vessels developed a phenomenon known as “cold spots” where cold air inside the LNG cargo tank is transferred to the outer wall of the cargo tank. It causes the temperature of the wall to fall below the allowable temperature design.

The design for the tank known as KC-1 was developed by Korea Gas Corporation. According to Samsung the company applied land cargo hold technology. The problems with the tanks caused both vessels to be laid up while Samsung attempted repairs. It also became the subject of lawsuits between the companies. In the arbitration it was found that the cold spots were a defect that had to be repaired within a reasonable period of time, which was set at 34 months.

The London decision came two months after a court in Korea found that, as the technology developer and provider of the two vessels, Korea Gas was fully responsible. In that decision, Samsung Heavy Industries was awarded nearly $56m for the cost of the repairs, while SK Shipping was awarded nearly $89m for the non-operation of the vessels.

Samsung Heavy Industries reported in its latest filing that negotiations were underway between the three companies to resolve the multiple lawsuits and claims filed in arbitration. If the three-party negotiations fail, Samsung Heavy Industries said that it planned to sue Korea Gas for the amount of the compensation the arbitration ordered it to pay SK Shipping.