Samsung Heavy ordered to pay SK $290 million for carrier defects

Samsung Heavy has been ordered to pay $290 million in compensation to SK Shipping for defects in two of its LNG carriers. Issues with the vessels resulted in their operational suspension, though responsibility for those issues remains disputed.

SK Spica, applying Korea's first developed LNG cargo containment system technology, is entangled in legal disputes due to issues such as cold spots. [KOGAS]

Samsung Heavy Industries has been ordered to pay $290 million in compensation to SK Shipping for defects in two liquefied natural gas (LNG) carriers manufactured by the Korean shipbuilding company.

The London Maritime Arbitrators Association ruled on Dec. 15 that two LNG carriers that were delivered to SK Shipping's special purpose companies — SHIKC1 and SHIKC2 — had defects in their cargo containment systems that were “not adequately repaired within a reasonable time frame,” per the Financial Supervisory Service's electronic disclosure on Monday.

The two companies entered arbitration, which resulted in Samsung's being ordered to pay.

The dispute stems originates from a contract signed in January 2015, wherein Samsung Heavy agreed to construct two LNG carriers applying the country's first LNG membrane tank system, KC-1. KC-1, was designed by Korea Gas Corp., built by Samsung Heavy Industries and operated by SK Shipping throughout its development. The two vessels were delivered in February and March of 2018, respectively.

The ships, however, soon faced operational suspension due to defects such as cold spots, where ice formed on the outer walls of the cargo containment system, risking cracking its casing. SK Shipping formally launched legal action against Samsung Heavy, citing a “decrease in vessel value and losses due to non-operation.”

“Recognition of liability for damages has been acknowledged, as the cargo containment system defect has not been fully repaired,” said the company. “However, losses for non-operation have not recognized as compensable, as they fall under indirect damages according to the contract.”

A KC-1 LNG tank installed in an SK Shipping LNG carrier [YONHAP]

Responsibility for the carriers' suspensions remains under dispute. Korea Gas Corp. claims that Samsung Heavy Industries introduced construction defects to the vessels, while Samsung Heavy Industries blames Korea Gas Corp. for design flaws in the LNG tank.

A previous ruling by a domestic court held Korea Gas Corp responsible and ordered the company to pay Samsung Heavy Industries 72.6 billion won ($55.88 million) for repair costs and 115.4 billion won to SK Shipping for non-operation losses.

“We are in negotiations for resolving legal disputes and mediating the issues with SK Shipping and Korea Gas Corp.,” Samsung Heavy said, while adding that, “If a three-party agreement fails, we plan to proceed with a damage recovery lawsuit against Korea Gas Corp. to recoup the compensation resulting from this arbitration.”

Shares of Samsung Heavy Industries closed at 7,510 won on Monday, plummeting by 5.65 percent from the previous trading day following the news.

BY SEO JI-EUN [seo.jieun1@joongang.co.kr]