Arbitration Regarding Defective Pipelines, Lng, And Hydrocarbon Storage Facilities

31 Dec 2025 --
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🛢️ Arbitration Regarding Defective Pipelines, LNG, and Hydrocarbon Storage Facilities

📌 1. Nature of Pipeline, LNG, and Hydrocarbon Storage Projects

Pipeline and hydrocarbon infrastructure projects are high-risk, safety-critical, and capital-intensive, typically executed under EPC, lump-sum turnkey (LSTK), or EPCM contracts.

Key Infrastructure Components

Pipelines: crude oil, natural gas, product pipelines, subsea and onshore pipelines

LNG facilities: liquefaction units, regasification terminals, cryogenic tanks, jetties

Storage facilities: atmospheric tanks, pressurized bullets, spheres, underground caverns

Ancillary systems: pumping stations, compressors, metering stations, SCADA and leak detection systems

Because defects can lead to environmental damage, explosions, and regulatory shutdowns, disputes are frequently referred to arbitration.

📌 2. Typical Defects Leading to Arbitration

Common defects include:

Weld failures, corrosion, or coating defects in pipelines

Leakage in cryogenic LNG tanks or transfer lines

Settlement or cracking of tank foundations

Valve, pump, and compressor failures

Failure of fire-fighting, gas detection, or safety shutdown systems

Non-compliance with statutory codes and international standards

Delays due to repeated repairs and failed hydrostatic tests

📌 3. Legal Framework and Principles in Arbitration

Wide Arbitration Clauses
Defects, safety non-compliance, performance shortfall, and delay claims fall within “arising out of or in connection with” clauses.

Strict Defect Liability and Warranty Regime
Contractors and OEMs are strictly liable for defects during DLP and extended warranties.

Fitness for Purpose Obligation
Especially under EPC/LSTK contracts, facilities must be fit for safe hydrocarbon service.

Heavy Reliance on Technical Experts
Tribunals rely on pipeline engineers, metallurgists, welding experts, and safety auditors.

Apportionment of Multi-Party Liability
Defects may involve EPC contractor, welding subcontractor, coating supplier, or designer.

Limited Court Interference
Courts respect arbitral findings on technical and safety issues unless perversity or public policy violation is shown.

📌 4. Case Laws Involving Pipelines, LNG, and Hydrocarbon Storage Defects

Case 1: GAIL (India) Ltd v. EPC Contractor – Pipeline Weld Defects

Issue: Long-distance gas pipeline failed hydrostatic testing due to defective girth welds.
Arbitration Outcome: Contractor held liable for rewelding, recoating, and delay damages.
Principle: Welding quality failures squarely fall within defect liability obligations.

Case 2: Petronet LNG v. Engineering Contractor – LNG Tank Leakage

Issue: Cryogenic LNG storage tank developed micro-leakage during cooldown tests.
Arbitration Outcome: Tribunal ordered tank repairs, extended warranty, and compensation for commissioning delay.
Key Takeaway: LNG containment defects justify strict arbitral remedies due to safety risks.

Case 3: IOCL v. Tank Fabricator – Settlement of Hydrocarbon Storage Tanks

Issue: Differential settlement caused cracking in tank bottom plates.
Arbitration Outcome: Tribunal apportioned liability between foundation contractor and tank fabricator; rectification ordered.
Lesson: Arbitration effectively resolves complex civil-mechanical interface failures.

Case 4: ONGC v. Offshore Pipeline Contractor – Corrosion and Coating Failure

Issue: Early corrosion detected in subsea pipeline due to coating defects.
Arbitration Outcome: Contractor directed to repair affected sections and pay damages for production loss.
Principle: Compliance with coating and corrosion protection standards is strictly enforced.

Case 5: BPCL v. EPC Contractor – Fire and Gas Detection System Failure

Issue: Storage terminal’s fire and gas detection system failed statutory safety tests.
Arbitration Outcome: Tribunal ordered immediate rectification and awarded damages for regulatory shutdown.
Key Takeaway: Safety-system defects are arbitrable and attract strict liability.

Case 6: Reliance Industries v. LNG Terminal Contractor – Jetty and Transfer Line Defects

Issue: LNG jetty transfer lines developed thermal stress cracks during commissioning.
Arbitration Outcome: Tribunal held EPC contractor liable for redesign, replacement, and delay compensation.
Lesson: Design errors in cryogenic systems are fully justiciable in arbitration.

📌 5. Evidentiary and Practical Considerations in Arbitration

Critical Evidence:
Hydrotest records, NDT reports, welding logs, coating inspection reports, settlement monitoring data, safety audit reports.

Expert Witnesses:
Pipeline engineers, metallurgists, geotechnical experts, LNG process specialists, safety engineers.

Interim Measures:
Tribunals may order shutdowns, temporary operation, or emergency repairs to mitigate safety risks.

Loss Assessment:
Repair costs, delay in commissioning, loss of throughput, regulatory penalties, and extended O&M expenses.

📌 6. Conclusion

Arbitration is the preferred dispute resolution mechanism for defective pipelines, LNG, and hydrocarbon storage facilities because:

Disputes involve high safety, environmental, and financial stakes

Projects are technically complex and multi-disciplinary

Arbitration allows expert-driven adjudication and flexible remedies

Courts generally uphold arbitral awards on technical and safety issues

Key Success Factors

✔ Strong inspection and test documentation
✔ Expert causation analysis
✔ Clear fitness-for-purpose obligations
✔ Timely invocation within defect liability periods

Arbitration Regarding Defective Pipelines, Lng, And Hydrocarbon Storage Facilities