Shipbuilder Samsung Ordered to Pay $290M in Dispute Over Defective LNG Tank

Korean LNG carrier vessel — SK Spica and SK Serenity were the first LNG carriers built with Korea's domestically-designed tank system (Korea Gas file photo)

South Korean shipbuilder Samsung Heavy Industries reports it lost an arbitration in London over a long-running battle over defects and repairs to two LNG gas carriers built by the company using a domestically designed tank. SK Shipping was awarded $290 million in a partial victory while negotiations are ongoing involving a settlement between Samsung Heavy Industries, SK Shipping, and Korea Gas.

The dispute has been ongoing since 2018 with two 174,000 cbm gas carriers idled due to defects in their LNG transportation tanks. Samsung Heavy Industries was contracted in 2015 by SK Shipping to build two vessels and instead of licensing technology for the tanks, they were heralded for the introduction of a domestically-designed tank system. Ultimately only four vessels would be built with the tank design due to problems and gas leakage.

The construction of the two vessels was completed in February and March 2018, and 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 and 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 and 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.

Samsung reported in a stock exchange filing that on December 15 the London Maritime Arbitrators Association 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 and therefore is not a liability under the contract.

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

Samsung Heavy Industries reports in the new filing that negotiations are underway between the three companies to resolve the multiple lawsuits and claims filed in arbitration. If the three-party negotiations fail, Samsung Heavy Industries reports it plans to sue Korea Gas for the amount of the compensation the arbitration ordered it to pay SK Shipping.

Five years after the KC-1 vessels were delivered, South Korea completed a new domestically-build containment system known as KC-2 installed aboard a smaller LNG carrier. The second-generation system is employed on a vessel built by Hyundai Heavy Industries with the Korean ministry reporting it had taken 20 years to develop the domestic system. As the leading builder for LNG carriers, Korea’s long-standing goal has been to reduce its dependence on licensed technology from France’s GTT. Korea expects to commercialize the KC-2 technology to provide a new competitive advantage in the sector.