Infrastructure-related SCC arbitration between the Latvian company AS BMGS and AB Klaipėdos nafta regarding the EPC contract

08.12.2017 Infrastructure-related SCC arbitration between the Latvian company AS BMGS and AB Klaipėdos nafta regarding the EPC contract

AB Klaipėdos nafta was responsible for and successfully implemented the challenging project for the construction of the Liquefied Natural Gas Terminal (LNG Terminal). Due to dependence on the sole source of supply of natural gas and risks associated with it, Lithuania needed to develop infrastructure, which would enable alternative supply of natural gas. The LNG Terminal was the most appropriate type of infrastructure, ensuring the opening of the natural gas market and security of supply of natural gas to Lithuania.

The LNG Terminal is one of the most important energy security objects in Lithuania eliminating dependence on the single natural gas supplier. The LNG Terminal’s construction had to be performed strictly under the schedule. Otherwise, significant fines had to be paid.

AB Klaipėdos nafta concluded the EPC contract with one of the constructors – AS BMGS. Under this type of contracting, the EPC contractor is made responsible for all the activities from design, procurement, construction to commissioning and handover of the project to the end-user or the owner.

Pursuant to the EPC contract, AS BMGS had to build the jetty and relevant equipment necessary for permanent mooring of the ship (that stores and re-gasifies liquefied natural gas) and delivery of natural gas from this ship to the national gas distribution grid.

AS BMGS failed to perform all relevant geotechnical investigations of the soil at construction site area under the EPC contract that were necessary for the construction of the jetty. As result of this, AS BMGS incurred additional expenses when building the piles for the jetty, because the soil conditions were different from those AS BMGS had frivolously expected. Thus, despite the fact that under the EPC contract, namely AS BMGS must bear these additional costs, the contractor claimed the expenses in the SCC arbitration.

The LNG Terminal project was the first of a kind not only in Lithuania but also in the surrounding Baltic Sea area.

TGS Baltic is the counsel for AB Klaipėdos nafta not only because of the significant firm’s experience in international commercial arbitration, but also because of the previous firm’s involvement as advisers for the construction of the LNG Terminal. The Arbitral Tribunal granted the Final Award in December 2017. The Tribunal held unanimously in favour of AB Klaipėdos nafta by rejecting all the claims of AS BMGS and awarding the costs incurred by AB Klaipėdos nafta. The Tribunal decided that AS BMGS was not diligent when constructing the jetty and its suprastructure, and because of such unprofessional behaviour of the contractor, the latter must bear all the risks and increased costs. No challenge of the Award is pending. AS BMGS compensated all costs of AB Klaipėdos nafta incurred in the arbitration.

There was no such kind of a dispute not only in Lithuania but also in other Baltic States such as Latvia, Estonia. This large-scale arbitration also involved various technical issues such as the sea soil conditions, necessity for an additional scope of works performed by AS BMGS, etc.