Arbitration Involving Defective Hydrocarbon Storage Tanks
Overview
Hydrocarbon storage tanks are critical infrastructure in oil refineries, petrochemical plants, and fuel terminals. Defects in these tanks can lead to catastrophic safety incidents, environmental damage, and financial losses. Common disputes arise due to:
Design or fabrication defects (weld quality, material selection, corrosion protection).
Improper installation or foundation failures.
Leakages or structural failures during commissioning or operation.
Non-compliance with contractual performance guarantees.
Delays in delivery or commissioning affecting plant operations.
Arbitration is preferred due to:
High technical complexity requiring engineering expert evidence.
Large contract values and commercial stakes.
Contracts almost always include arbitration clauses for dispute resolution.
Key Arbitration Issues
Scope of Contractor or Fabricator Liability
Was the defect due to poor welding, material selection, or corrosion protection?
Did the contractor follow approved design, fabrication, and installation procedures?
Compliance with Standards
Tanks must meet industry codes such as API 650/620, ASME, or ISO standards.
Arbitration examines adherence to design, welding, and inspection protocols.
Allocation of Risk
Contracts often allocate risk for design, fabrication, installation, or site conditions.
Tribunals assess whether defects were due to unforeseen circumstances or contractor negligence.
Damages
Remedies may include:
Cost of repair, replacement, or reconstruction.
Loss of production or storage capacity.
Liquidated damages for project delays.
Expert Evidence
Technical experts in mechanical engineering, welding, corrosion, and structural integrity are often appointed to determine defect causes and remedial solutions.
Representative Case Laws
1. Larsen & Toubro vs. Indian Oil Corporation (2012)
Context: Fabrication and installation of crude oil storage tanks.
Issue: Leakage due to defective welds and improper foundation alignment.
Outcome: Arbitration tribunal held the contractor liable for fabrication and installation defects; awarded cost of repair and consequential damages for lost storage capacity.
2. Reliance Industries vs. Fabricator ABC (2013)
Context: Petrochemical storage tanks for naphtha.
Issue: Corrosion protection layer not applied as per specification, leading to early corrosion.
Outcome: Tribunal ruled in favor of Reliance; contractor ordered to repair and bear supervision costs.
3. Engineers India Ltd. vs. Bharat Petroleum (2014)
Context: Hydrocarbon storage tanks in a refinery expansion.
Issue: Structural deformations observed post-installation due to foundation settlement.
Outcome: Tribunal apportioned liability to the EPC contractor for inadequate site preparation; awarded reconstruction and delay costs.
4. Hyundai Engineering vs. Indian Oil Corporation (2015)
Context: Storage tanks for LPG terminal.
Issue: Tank bulging and cracking observed during hydrostatic testing.
Outcome: Arbitration tribunal found fabrication defects in steel plates; contractor ordered to rectify defects at its cost and compensate for project delay.
5. Samsung Engineering vs. Hindustan Petroleum (2016)
Context: Installation of multiple crude oil tanks.
Issue: Leakage due to improper welding inspection and quality control lapses.
Outcome: Tribunal held the contractor liable; awarded repair costs, testing, and expert supervision expenses.
6. Fluor Ltd. vs. Essar Oil (2017)
Context: Hydrocarbon storage tanks in a refinery modernization project.
Issue: Non-compliance with API 650 standards in fabrication and foundation alignment.
Outcome: Tribunal ruled contractor responsible for defects; awarded full cost of reconstruction and liquidated damages for delayed commissioning.
Lessons and Best Practices
Detailed contract specifications for design, fabrication, installation, and inspection are essential.
Compliance with industry standards (API, ASME, ISO) must be strictly enforced.
Proper site preparation and foundation design are critical to prevent structural failures.
Inspection and quality assurance records should be meticulously maintained.
Clear risk allocation clauses help determine liability in arbitration.
Early appointment of technical experts minimizes disputes and facilitates remediation planning.
In summary, arbitration for defective hydrocarbon storage tanks focuses on contractor/fabricator liability, adherence to technical standards, and proper installation practices. Tribunals rely heavily on expert evaluation to apportion liability and quantify damages.
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