Singapore’s Seatrium New Energy (formerly Keppel Fels) has lost its US$30 million claim for damages against HJ Shipbuilding & Construction (formerly Hanjin Heavy Industries and Construction) in the Singapore High Court, for alleged defective work under a sub-contract for a newbuild offshore accommodation unit.

Seatrium had sought to hold Hanjin liable for welding defects found in parts of the flotel built by the Korean contractor. Hanjin, for its part, denied responsibility for any of the defects and argued on a point of law that Seatrium’s claim was precluded “pursuant to a variation in the parties’ contract” in a 'Side Letter'.

Floatel in August 2012 awarded then-Keppel Fels a contract to design, engineer, construct, build, test and deliver a DSS20-NS-DP3 semi-submersible accommodation unit, with a delivery date of 16 April 2015.

The semisub, named Floatel Endurance, which was design to operate as an accommodation support vessel on the Norwegian Continental Shelf, was constructed under the supervision of classification society DNV.

Keppel Fels in January 2013 appointed Hanjin as a sub-contractor for the project with the Korean company having responsibility for — among others — the fabrication, assembly and erection of the pontoons and lower columns of the flotel.

The Singapore High Court in its 20 September ruling noted that the pontoons are critical structures as they help to maintain its buoyancy.

“The pontoons are joined perpendicular to lower columns by bracings, which prevent them from splaying outwards. The lower columns support the accommodation deck and other structures of the vessel above the columns," the judgement read.

The pontoons and lower columns were constructed by Hanjin at its shipyard in the Philippines.

Under its sub-contract, Hanjin was scheduled to complete the works by 30 October 2013, but it was unable to meet this deadline. In light of this, the companies ultimately agreed that Keppel would take over part of the work with the value of these works to be offset against the amount payable to Hanjin.

The flotel was subsequently completed by the Singaporean contractor, with client Floatel accepting delivery on 16 April 2015.

Defects detected

However, during its routine first inspection at Westcon Shipyard in Norway and following initial partial repairs — some 16 months after delivery — Floatel notified Keppel of welding defects in the semisub’s pontoons.

The court noted the defects were discovered during a routine inspection, with the bracing stubs of the flotel being checked at DNV’s suggestion by non-destructive testing that was performed by Norway’s SolidTech.

Following the inspection, SolidTech prepared a report detailing it had found numerous welding defects on the bracing stubs of the pontoons and other areas.

Keppel on 24 August 2016 first notified Hanjin of the defects on the flotel, attributing them to the Korean contractor’s fabrication process.

The Floatel Endurance had been due to start its next charter around the following week, however DNV directed that the welding defects in the bracing stubs had to be repaired before that contract commenced given the stubs are considered critical structures.

Partial repairs were performed at Westcon Shipyard and the flotel departed on 4 September 2016.

However, because these repairs were only partial, leaving some of the welding defects unrectified, DNV issued Condition of Class 4 for the semisub on 4 October 2016 — meaning the unit was subject to an extended monitoring and inspection regime.

Following a second inspection in Europe, relations broke down between Keppel and Hanjin as the parties could not resolve their disputes over responsibility for the defects and the repair costs. Eventually, communications between the two ceased, the court noted.

Keppel subsequently — at its own cost — brought the flotel back to Singapore for further inspection and repairs at its own yard where it had control over the programme, quality and costs of repairs. To perform those repairs, the unit — after its bow thrusters had been removed — was loaded onto a heavy lift vessel and transported to the city state from Europe.

Court submissions

Keppel had submitted to the Singapore High Court that the works delivered by Hanjin on the flotel were defective, and further argued that Hanjin owed it a duty of care in tort to carry out the works with due skill, care and diligence — a duty it claimed was also “clearly breached”.

As such, Keppel claimed damages from Hanjin for losses it says it suffered in undertaking various inspections and repairs of the flotel, amounting to US$14,176,001, €11,479,566 (US$12,272,330) and S$5,635,924 (US$4,129,200).

Hanjin denied that the works were defective and submitted to the Singapore High Court that its sub-contract only required it to carry out the works in compliance with the relevant DNV standards, and that it had done so.

More significantly — in the court’s eyes — Hanjin said that its sub-contract was varied by the side letter whereby Keppel was not entitled to make any claim whatsoever in respect of the defects save for calling on Hanjin’s warranty obligations during the 12-month warranty period.

The sub-contractor also contended that SolidTech’s reports should be disregarded as its inspectors “wrongly applied a stricter set of acceptance criteria in assessing indications detected during the testing process”.

The High Court found that the works were defective, were attributable to Hanjin’s workmanship, and that — on a balance of probabilities — the Korean company had breached its contractual duties to Keppel.

However, the court placed significant weight on the Side Letter between the two companies after the original contract award that clearly states: “[The] builder shall not have any claims whatsoever against the [sub-contractor] for the works which will have to be carried out by [the] builder to complete/remedy the sub-contract works.”

“After considering the Side Letter and the parties’ arguments carefully, I find that Keppel’s claim is precluded by the terms of the Side Letter and that consequently, Hanjin is not liable to Keppel,” said Singapore High Court Judge S Mohan.

“Given my decision on liability, there is no need for me to consider the parties’ arguments on the question of the damages claimed by Keppel. I will hear the parties on costs separately,” said Mohan.

Download the Upstream News app
Read high quality news and insight on the oil and gas business on-the-go