Samsung Heavy Industries claimed $290 million for defective LNG liquid cargo tanks

The Korea’s Samsung Heavy Industries has received an arbitration award requiring it to pay KRW 378 billion (about $290 million/about RMB 2,079 million) in damages to shipowners SK Shipping, SHIKC1 and SHIKC2, special purpose companies, for defects in the liquid cargo tanks of the 174,000 m3 large-scale liquefied natural gas (LNG) carriers, the SK Serenity and the SK Spica.

Samsung Heavy Industries announced on December 18 the results of an arbitration award with SK Shipping Special Purpose Vehicle SHIKC1 and SHIKC2 on damages for defects in the liquid cargo tanks of LNG carriers, according to a report by the Korean media. Samsung Heavy Industries said that the London Court of Arbitration in the United Kingdom ruled on 15th local time that Samsung Heavy Industries should compensate the shipowner of the two LNG carriers for the loss of the value of the vessels of about US$290 million due to the defects in the liquid cargo tanks of the LNG carriers which were not fully repaired within a reasonable period of time for repairs.

Besides, the London Court of Arbitration held that Samsung Heavy Industries was not responsible for the damage caused by SK Shipping’s inability to operate the LNG carrier properly due to defects such as gas leakage, cracks, and icing on the outer walls of the hull.

SK Shipping and Samsung Heavy Industries entered into a contract for the construction of the above two LNG carriers equipped with Korea-type LNG liquid cargo tank technology (“KC-1”) in 2015 and delivered the vessels in February and March 2018, respectively.

The two newbuildings suffered from gas leakage, cracks, and icing on the outer walls of the tanks while in operation and were returned to the shipyard for repairs.SK Shipping claimed that it had suffered damages such as a reduction in the value of the vessels and loss of unavailability to operate due to delays in repairing the defects in the tanks and proceeded to an arbitration trial in London.

It is understood that the Korean type KC-1 liquid cargo tank is designed by Korea Gas Corporation (KOGAS). The project was listed as a national priority in 2004 to ensure the market competitiveness of the Korean shipbuilding industry. Due to the defective design, Samsung Heavy Industries, SK Shipping and KOGAS began litigation over the design, construction and operation of the LNG carrier in 2019.

Over a three year period, the 46th Civil Division of the Seoul Central District Court in South Korea ruled in October 2023 that KOGAS should pay KRW115.4 billion (approximately RMB628 million) to SK Shipping and KRW72.6 billion (approximately RMB395 million) to Samsung Heavy Industries as compensation; and rejected KOGAS’s claims and found that there was a defect in its design.

This means that SK Shipping will receive almost the full amount of its KRW115.8 billion (approximately Rs. 630 million) claim. If confirmed, this would be the largest amount of damages ever filed by a Korean company against a public organization.

In November, KOGAS filed an appeal against the case, so the ruling has not yet been finalized. But sources said the case could set a precedent for disputes over national projects led by South Korea’s public agencies. A source at KOGAS said, “We have always maintained that we should not be held fully responsible for this, but the court ruled that the company needed to take full responsibility because it completed the basic design and led the development. This could set a precedent for similar disputes in the future.”

In response to SK Shipping’s high-priced claim, a Samsung Heavy Industries official said, “According to the results of the first trial verdict of the 46th Civil Division of the Seoul Central District Court in South Korea, the icing problem that occurred on the LNG carriers was found to be the full responsibility of KOGAS, which developed the KC-1 Liquid Cargo Tank technology. The Company plans to recover damages by claiming compensation from KOGAS, while it will continue multilateral discussions with SK Shipping and KOGAS to resolve the dispute.”

Yangzijiang Shipbuilding

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