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African Subsea Pipeline Construction Defect Dispute

The following is an excerpt from an Interface Consulting work product issued for use in litigation, arbitration, or mediation (dispute resolution). Names, dates, and other information has been modified for client confidentiality purposes.


UNCITRAL Arbitration

Worldwide Offshore International v.
Universal Oil, Inc., Litigation

I. Introduction

Universal Oil, Inc. (Universal Oil), entered into a contract with Worldwide Offshore International (Worldwide) on October 22, 2002, to install two (2) pipelines (a 10-inch and 24-inch pipeline) off the coast of Africa.

Project Location

 

The project was titled the Universal Oil/H-Oil Pipeline Project (OPL Project) for a contract price of approximately....

The 24-inch pipeline is the subject of this dispute. The 24-inch pipeline is approximately 12 miles long and....The pipeline was constructed from…to the WWO Poseidon platform (Poseidon platform) in The Bay of Africa.

 

Timeline of Events

 

II. The Dispute

During construction of the original 24-inch offshore pipeline, Worldwide repaired 62 of the 1508 mainline pipeline welds. There were 61 separate mainline welds repaired on the barge with....These weld repairs occurred prior to laying the pipeline on the seabed. During the first pipeline integrity test, one of the pipeline welds failed….Worldwide presented various options to Universal Oil in an attempt to remedy the situation. Universal Oil chose to abandon the original pipeline and requested Worldwide to construct a replacement pipeline.

A replacement pipeline was successfully built by Worldwide using a different weld procedure and employing a….Worldwide performed the reconstruction work under an interim funding agreement (IFA) in which each party reserved its rights and claims under the original contract. The current dispute in this arbitration between the parties involves the financial responsibility for the costs associated with the replacement pipeline.

II.A.   Worldwide’s Position – Statement of Claims and Defenses

Interface Consulting’s summary of Worldwide’s position from its Statement of Claims and Statement of Defenses is as follows.

Worldwide’s Statement of Claims

Worldwide’s Statement of Defenses

…Worldwide’s revised damages total…, including the IFA payments. The following graphic illustrates the damages claimed by Worldwide.

 

Worldwide's Damages

 

Source...

 

II.B.   Universal Oil’s Position – Statement of Claims and Defenses

 

III. Summary of Opinions

This section summarizes Interface Consulting’s conclusions relative to the subject matter of this dispute.

Conclusions regarding the loss of the pipeline are as follows:

  • Worldwide’s non-destructive testing (hereafter NDT) subcontractor, Seaside Contracting (Seaside), inspected and....

  • Universal Oil reviewed and accepted Seaside’s work....

  • Inspections of Worldwide’s pipeline welding by two (2) independent third parties, which were performed contemporaneously during the contract period, indicate that the welds met API 1104....

  • Seaside determined that 62 of the 1508, or 4%, of the mainline welds did not meet API 1104....

  • All of the weld cracks found during hydrotesting were in the six o’clock position and....

  • The failure of the welds during the hydrotest is the event that resulted in the damage and loss of the pipeline, which in turn led to....

Conclusions relative to Worldwide’s damage claims are as follows:

  • In total, Worldwide is entitled to contract compensation from Universal Oil totaling....This amount does not include any allowances for....

Conclusions relative to Universal Oil’s breach of contract position are as follows:

  • There is no evidence to suggest that Worldwide’s actions or inactions were....

  • Worldwide submitted and Universal Oil approved the welding procedure and....

Conclusions relative to Universal Oil’s damage claims are as follows:

  • Universal Oil has failed to provide the contractual entitlement that would support....

o Pursuant to Article 5.3 of the contract, Worldwide’s liability is limited to....

o Universal Oil’s damages relative to punitive damages, lost production, and delay damages are...

 

 

IV. Discussion of Opinions

IV. A. Damage and Loss of the Pipeline

Weld Cracks

The probability of detecting defects in a repaired weld, including cracks, is higher than the.... All five (5) weld cracks were identified in repaired welds, which indicates that the weld cracks were non-existent as weld cracks prior to.... Thus, the weld cracks developed after passing inspection on the construction vessel KLB Aztec and probably developed as.... The following graphic illustrates the pipeline lowering process.

 

Worldwide KLB Aztec Pipeline Lowering Process

 

Basic Location of Weld Cracks Found during Hydrotesting

 

Replacement Pipeline Reconstruction

V.B. Article 5.3 Limits Worldwide’s Liability

In this section, Interface Consulting will address the ramifications of Article 5.3 as it relates to Worldwide’s claim for damages. We will then respond to Universal Oil’s claims relative to....

Article 5.3 – Limitation of Liability

Pursuant to Article 6.6 of the contract, Universal Oil agreed to self-insure or procure insurance to....

Article 5.3 – Builders Risk Insurance Issue

Article 5.3 – Occurrence Issues

IV.C. Worldwide’s Damages

Worldwide is entitled to…in damages for work performed under the original contract, during the investigation and repair of the leaks, and during the 24-inch pipeline relay work. The following table and chart identify the damages for which Worldwide is entitled.

 

Damages due Worldwide

 

As shown, Worldwide’s damages include outstanding payments for original scope and extra work on the....Worldwide is entitled to damages for investigation and repair work for the leaks associated with the 24-inch pipeline.

Furthermore....

Progress Payments on Original OPL Scope of Work - $4,971,722

Extra Work on Original OPL Scope of Work - $1,232,466

Repair Pipeline Crossing - $382,726

Withheld Contract Retention - $1,677,640

Investigate/Repair Leaks on 24-inch Pipeline - $4,488,812

24-inch Pipeline Reconstruction - $23,239,882

24-inch Pipeline Reconstruction Extra Work - $2,205,333

Credit for Redundant Charge of One Day – ($33,840)

Worldwide’s Liability per Article 5.3 – ($500,000)

IV.D. Universal Oil’s Breach-of-Contract Position

In both its Statement of Claims and Statement of Defenses, Universal Oil alleges that Worldwide’s actions were grossly negligent and reckless. Universal Oil has stated that its experts have determined that....

After examining the project records, Interface Consulting found no substantiation for Universal Oil’s position and, to the contrary, we found the opposite of what Universal Oil has alleged....

IV.E. Universal Oil’s Contract Rescission Position

According to Universal Oil’s Statement of Claims and Statement of Defenses, Universal Oil asserts that Worldwide....

Universal Oil’s Assertion…

IV.F. Universal Oil’s Alleged Damages

In this section, we will comment on the damages claimed by Universal Oil. In general, Universal Oil has.... Specifically, we will address the following:

  • Claims that are the same to both damage models

  • The breach of contract damage model

  • The rescission of the contract damage model

Damages Relating to Both Damage Models

Universal Oil’s Alleged Breach of Contract Claim Damages

Universal Oil’s Alleged Rescission Claim Damages

As previously discussed in Section IV.D., Universal Oil has no basis for rescinding the contract....

 

V. Conclusion

In conclusion....

 

VI. Signature

 

VII. Exhibits