Baker & O'Brien, Inc.

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Operations and Maintenance Contracts – Not Always What They Seem

ICC Arbitration, London

January 1, 2014

Following the construction of a large, 42-inch crude oil pipeline system in the Eastern Hemisphere, an international owner (the “Owner”) entered into a contract with a regional service provider (the “Operator”) to operate and maintain (“O&M”) the pipeline, storage terminal, and loading facilities. 

The Operator served on an “arms-length” basis and was paid based on the volume of crude oil delivered.  Soon after start-up, a number of pipeline defects became apparent.  Also, disagreements arose over who should provide some of the equipment needed to service the facilities.  Finally, the parties were unable to agree on the essential O&M personnel required and their associated overhead costs.  The Operator initiated an arbitration to recover unpaid amounts, lost profits, and unrecovered costs.  The Owner responded that the amounts claimed were not owed—alleging that the costs and overheads were either already included in the agreed payments under the O&M contractor, in the case of equipment defects or failures, because the root cause analyses and mitigations were still in progress.

Baker & O’Brien was engaged to review available records relating to the issues in dispute and to provide an expert opinion on:  (1) whether the defects were due to improper design, operation, maintenance, and/or installation; (2) whether all equipment necessary to operate and maintain the facilities was part of the Operator’s contractual scope of work; (3) what industry practice would suggest, given the geography of the installations, as to the number of O&M personnel needed; and (4) what the associated overhead costs of those personnel would typically comprise.  During our investigation, we inspected the terminal and several of the pump stations and related facilities to review O&M philosophies and challenges.  Based on our findings and our experience with similar facilities in other parts of the world, we prepared an expert report and a rebuttal report, which were submitted in evidence, and testified at hearing.