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The Price of Ambiguity: $52M

Friday, January 18, 2013

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SAN ANTONIO—A picture may be worth a thousand words, but one squishy word in a contract could trigger a bill that could break your company.

That was the warning that L. Skip Vernon, PCS, MCI—SSPC board member, 40-year coating and lining consultant, SSPC Master Coating Inspector, NACE Certified Coating Inspector and, yes, lawyer—brought to a packed crowd Wednesday at SSPC 2013.

“Anomalies, Ambiguities and the Certain Uncertainties of Ballast Tank Corrosion Protection Systems and Regulations,” Vernon’s presentation, offered a cautionary tale of the multimillion-dollar landmines buried in words commonly used in industrial coating contracts.

ABS Inspectors
American Bureau of Shipping

Even incorporating recognized standards into a contract will be of limited value unless consequences for noncompliance are spelled out.

Unclearly written contracts could raise more questions than answers, Vernon explained. And questions lead to potentially expensive disputes when a project goes wrong.

Ballast Tanks and Blisters

The project that prompted Vernon's presentation involved a semi-submersible offshore facility in the Gulf of Mexico that was built several years ago by one of the oil giants. The $800,000-plus facility, situated in 7,000 feet of water, included 28 ballast tanks with about 550,000 square feet of coated steel.

Two years after the coating work was completed, the U.S. Coast Guard conducted its first inspection of the coating and found blistering over 1-2 percent of the tanks. All of the tanks were found to be in similar condition, showing blisters containing a high-pH fluid with clean metal underneath, Vernon said.

The structure owner’s coating expert contended that the blisters should not have occurred and were the result of coating over contaminants and salts. The owner sued, seeking $52 million to blast and repaint the tanks.

Vernon, an expert in the case, was necessarily discreet about the parties and particulars, and he was mum about the disposition. But the technical outcome, he said, was not the point of his talk.

The contract lessons were.

Lesson 1: Owner, Beware

As a “general principle,” ambiguities in contract language are likely to cost the facility owner, rather than the contractor, Vernon said.

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“Define failure, or you’re going to argue about what that constitutes," Vernon said.

“Technically, the owner loses if it’s ambiguous,” he said. “To the extent that it’s unclear … the owner had the opportunity to make it right. If they didn’t, they’ll bear that risk.”

Lesson 2: Define Your Terms

Much of the dispute in the offshore case involved this line in the contract, Vernon said: “The coating system in the ballast tanks shall, combined with anodes, provide sufficient protection for a lifetime of 30 years.”

The language may seem simple, but various terms caused significant disagreement, Vernon said. For example, he said, what constitutes a “lifetime?”

“Is that when the paint fails?" he said. "Is that when the anodes fail?”

The lesson, especially for facility owners: “If you’re going to write something like that, define lifetime.”

Other words that may seem clear but are not, Vernon said:

  • Failure: “Define failure, or you’re going to argue about what that constitutes.”
  • Coating Breakdown
  • Service Life: “When is it dead? When did it die?”
  • Condition terms such as good, fair and poor.
  • System: In this case, Vernon said, the "system" consisted of both cathodic protection and coatings, “which have to be evaluated in conjunction with each other. If you don’t want that, write them to be evaluated separately.”

Lesson 3: Know Contracts from Warranties

Even if a requirement is clear, Vernon said, parties may not understand whether it is a contract obligation or a warranty obligation, or they may assume the two are interchangeable. (In this case, the owner alleged both breach of contract and breach of warranty.)

“The difference between the warranty and the contract ends up being huge,” said Vernon. In general, warranties remain in force after the contract closes.

Thus, parties may want to ask: “Do we need a separate set of terms, or do we need to tie our warranty claims to our contract?”

L. Skip Vernon

Consultant L. Skip Vernon holds multiple SSPC and NACE certifications and a J.D. degree. He is a member of the SSPC Board of Governors.

A contractor warranty “is unlikely to get into the level of detail the owner wants,” Vernon added.

And having a bond is no panacea. “The bond doesn’t clean it up,” he said. “It gives the owner a warm fuzzy,” but it won’t cover all the problems that may arise.

Lesson 4: Follow Through

Incorporating even the toughest standards into the contract won’t be sufficient if the consequences for noncompliance aren’t laid out, Vernon said.

For example, he noted that IACS has standards for ballast tank coating that establish lower limits for corrosion and coating deterioration. But if the standard is not met, he added, “What does that trigger?” More inspections? A complete repaint?

Enforcing requirements is also important, he said. In this case, the owner was required to inspect the tanks in the first year, but did not do so, so it could not be determined precisely when the blistering began.

Lesson 5: Protect Yourself from Generalists

Another big reason to cross T’s, dot I’s, and define terms: Any dispute is unlikely to be adjudicated by someone who knows anything about coatings.

“Let me assure you,” Vernon said. “Your arbitrators will not be experts on coatings.”

Partly for that reason, regardless of the merits of the case, he said, “The risk of arbitration is when you go, they tend to split the baby.”

Of his case, he said, “Ultimately, it was resolved by people who didn’t really know coatings.”

Despite the legal sensitivities of the case, Vernon did answer one question of keen interest from his audience: How did the coating job line up against the specification requirements?

“Fundamentally, it fell within the parameters of the specifications,” he said carefully. “It wasn’t the best paint job I’ve ever seen; it wasn’t the worse. I’d say it was high average.”

   

Tagged categories: Ballast tanks; Blistering; Cathodic protection; Coating failure; Contracts; Corrosion protection; Facility Managers; Laws and litigation; Lawsuits; Offshore; Oil and Gas; Painting Contractor

Comment from jan Maurits Schouten, (1/18/2013, 3:53 AM)

One could argue that the demands where formulated even too precize: when the demand would be: the coating should protect the metal for corrosion for at least thirty years, and the contractor signs for that, all the responsibility for technical details is on the shoulders of the contractor. The owners just has to inspect if the metal is still protected and does not show signs of corrosion: defining terms leads to lawsuits.


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