Lessons learned…

Lessons learned…

Split contractual structures are commonly used in cross-border EPC contracts where it is financially advantageous to do so. Under split contracts, the scope is divided into two separate contracts: an onshore and an offshore contract. The parties also usually conclude an “umbrella” or “bridging” agreement to ensure that the EPC advantages remain in place.  This may, however, be far easier said than done as is demonstrated in Petroleum Co of Trinidad and Tobago Limited v Samsung Engineering Trinidad Co Limited [2017] EWHC 3055 (TCC).

Petroleum Co of Trinidad and Tobago Limited (the Employer), entered into split contracts with Samsung Engineering Trinidad Co. Limited (the Onshore Contractor) and Samsung Engineering Co. Limited (Seoul, South Korea) (the Offshore Contractor). The project was for the procurement, construction and commissioning of a CCR Platformer Complex and a new substation at the Employer’s refinery in Trinidad. The works were split into onshore and offshore agreements to maximise tax efficiencies.

The Onshore Contractor commenced arbitration proceedings against the Employer under the onshore agreement.  The Employer counterclaimed for liquidated damages. The issue before the TCC was whether the cap on liquidated damages in respect of the counterclaim was 10% of the value of the onshore agreement, or 10% of the total value of the onshore and offshore agreements (as referenced in a linkage agreement, which was, effectively, the umbrella or bridging agreement between the parties).

The Arbitral Tribunal found that the cap was the lower 10% cap in the onshore agreement.  The Employer sought to set aside this award before the TCC.

The Onshore Contractor argued that the provisions of the linkage agreement would only apply if a claim for liquidated damages is made, and referred to arbitration, in respect of both the onshore and offshore agreements. As the present dispute arose purely under the onshore agreement and concerned only the parties to that agreement, the Onshore Contractor argued that the provisions of the linkage agreement did not apply.

The Employer argued that, even if it were jurisdictionally confined to a counterclaim under the onshore agreement, the linkage agreement required the Tribunal to treat the onshore agreement and the offshore agreement as a single contract. The linkage agreement, therefore, overrode and amended the cap stated in the onshore agreement.

The Tribunal found that the only applicable arbitration agreement in the dispute was the one in the onshore agreement. As a result, the Tribunal’s jurisdiction was limited to matters arising from the onshore agreement, and this agreement determined the applicable cap.

The Tribunal disregarded the Employer’s argument that the three separate contracts were in conflict with each other. It found that the liquidated damages cap in the linkage agreement limited the aggregate liquidated damages cap under all three agreements.  There was no inconsistency and conflict between the agreements because the liquidated damages cap in the linkage agreement “sat above” the lower cap applicable under the onshore and offshore agreements.

The TCC confirmed the Tribunal’s findings that the Employer’s reliance on the higher liquidated damages’ cap contained in the linkage agreement was misplaced.

Implications of the case

Negotiating split contracts is often messy. In this case, it was not sufficient for the linkage agreement to encapsulate a single point of responsibility.  The parties should have ensured consistency between when and how liability is incurred.

One solution to the dilemma presented above is for the liquidated damages cap to equal the total contract prices under both the onshore and offshore agreements, not just one of them.  A contractor may complain. but the simple answer is that works of this nature are only split for tax efficiencies.  A contractor should not be able to avoid liability as a result of such a structure.

Authors

Nikita Lalla, Chief Executive, LNP Attorneys Inc

Ricardo Pillay,Director, LNP Attorneys Inc

Bongani Memani,Candidate Attorney, LNP Attorneys Inc