The legal dispute over the first-generation KC-1 LNG cargo containment system (CCS) (“KC-1”) is not yet over, as shipbuilder Samsung Heavy Industries has filed a lawsuit against LNG tank designer Korea Gas Corporation (KOGAS).
Shipbuilder pays damages, designer sued for “buy-in”
South Korean shipbuilder Samsung Heavy Industries recently said that due to the design defects of two 174,000 m3 liquefied natural gas (LNG) carriers equipped with KC-1 LNG cargo containment system and not fully repaired within a reasonable period. Samsung has paid 378 billion won (about $290 million) to the shipowner SK Shipping in accordance with the arbitration award of the London Maritime Arbitrators Association (LMAA).
However, since Samsung Heavy believes that the responsibility for the dispute “lies solely with KOGAS,” it decided to file a lawsuit against KOGAS and seek about $290 million in damages to recover the compensation paid to SK Shipping.
The two LNG carriers involved in the dispute are the SK Serenity and the SK Spica, which SK Shipping and Samsung Heavy Industries signed a construction contract in 2015 and delivered in February and March 2018, respectively.
During the period from delivery in 2018 to October 2022, the two new LNG carriers have suffered from problems such as gas leakage, cracks, and icing on the outer walls of the tanks, and have been returned to the shipyard for four repairs at a cost of approximately KRW 100 billion. SK Shipping filed a lawsuit for damages against Samsung Heavy Industries in London, claiming that the company has suffered damages such as a decline in the value of the LNG carriers and loss of operation due to the delayed repair of the defective cargo tank.
In December 2023, the London Maritime Arbitrators Association ruled that Samsung Heavy Industries was liable to compensate SK Shipping for approximately US$290 million for defects in the liquid cargo tanks of LNG carriers built by Samsung Heavy Industries that were not fully repaired within a reasonable repair period. However, the tribunal also held that Samsung Heavy Industries was not liable for the losses incurred by SK Line due to the inability of SK Line to operate normally because of the defects in the LNG carriers, such as gas leakage, cracks, and icing on the outer walls of the tanks.
Shipowners claim over 100 billion won, KOGAS design defects confirmed
In addition, SK Shipping has filed the same lawsuit in South Korea, claiming that KOGAS, which was responsible for the design of the KC-1 LNG cargo containment system, is also liable and claiming non-operational damages of KRW 115.8 billion ( about $853 billion) from it.Samsung Heavy Industries, SK Shipping and KOGAS began litigation in 2019 over the design, construction and operation of LNG carriers.
After years of controversy, the 46th Civil Division of the Seoul Central District Court ruled in October 2023 that KOGAS should pay 115.4 billion won (about $85 million) to SK Shipping and 72.6 billion won (about $53.48 million) to Samsung Heavy Industries. And dismissed KOGAS ‘claims and found that its design was defective.
Korean media reported that Samsung Heavy Industries and KOGAS had previously discussed the acquisition of two LNG carriers with defective liquid cargo tanks, but failed to reach an agreement due to differences of opinion. According to a shipbuilding insider familiar with the matter, during the negotiations between the two sides, KOGAS insisted on sharing the losses with Samsung Heavy Industries, including non-operational losses that had already occurred. However, Samsung Heavy Industries argued that sharing the losses was unreasonable.
A Samsung Heavy Industries official said, “The arbitration award is for damages for the decline in the value of the LNG carriers due to the defective KC-1 LNG liquid cargo tanks. The Korean court has recognized KOGAS as 100% responsible, so the company is fully confident of recovering the full amount claimed.”
Two ‘problem’ LNG carriers face scrapping as ports refuse to berth them
With regard to the latest movements of the SK Serenity and the SK Spica, the Korean media reported that the two LNG carriers had recently arrived in Labuan, a federal territory in the Malaysian state of Sabah, and were undergoing procedures for a long-term berthing.
SK Line reportedly expects to sell the two “problem” LNG carriers in three months, which is the time required for the relevant administrative procedures. To date, the LNG carriers have never had a commercial operation.
The shipping industry expects that SK Line’s two LNG carriers equipped with KC-1 LNG cargo containment system will eventually face scrapping. No ports are willing to allow them to dock due to design flaws. Australia, a major natural gas exporter, has said it will deny the SK Serenity and SK Spica access to any of its ports until the issue is resolved. There are reports that the Middle Eastern country did not even respond to inquiries about access to their ports.