Disagreement Over Design Basis Leads to Performance Dispute

Litigation, North America

A refiner claimed that certain plant process technology upgrades provided by its technology licensor cum engineering, procurement, and construction firm did not meet the contracted performance guarantees. Baker & O’Brien was engaged to assess the modified process unit performance vis-à-vis the contracted basis, any incremental performance operating costs, and the rectification cost. We set out our analysis and opinions in an expert report and provided deposition testimony.

Petroleum refiners must often modify processing equipment to meet increasingly stringent environmental and regulatory requirements. One regulation that affected most United States refiners was the Environmental Protection Agency’s (EPA’s) Tier 3 Motor Vehicle Emission and Fuel Standards (Tier 3), which lowered the permissible sulfur content of gasoline to ten parts per million beginning in 2017. In response, a refiner (the Company) contracted with a technology licensor and EPC firm (the Contractor) to upgrade certain equipment in its gasoline desulfurization unit (GDU) to reduce the sulfur content of its refined gasoline down to the permissible limit (the Project).

Before executing the Project, the Contractor conducted validation tests of its proposed solution on its pilot unit using feedstock provided by the Company. The data from the validation tests informed the Contractor’s engineering design specifications for the Project. However, after completing the Project, the Company claimed the observed performance of the upgraded GDU did not meet the expected performance. The Contractor asserted that the Company was operating the GDU at conditions different from the Project’s design basis criteria. The parties entered into arbitration.

Baker & O’Brien was retained to assess and opine on i) the mutually agreed design basis and performance parameters promised for the Project, ii) if the modified GDU performed as promised, and, if not, why, iii) the reasonableness of claimed rectification costs, and iv) if the Owner incurred higher-than-expected operating costs related to underperformance.

We reviewed contemporaneous Project documents, operating and performance data, and correspondence between the parties before, during, and after the Project. We evaluated the Company’s and Contractor’s actions regarding the alleged underperformance. We assessed the reasonableness of corrective actions taken to achieve the expected performance. We also provided opinions on the reasonableness of the Company’s damages claim, including, but not limited to, the quantity and value of tradeable sulfur credits needed to satisfy the Company’s Tier 3 compliance requirements.

Baker & O’Brien set out its analysis and opinions in an expert report and provided deposition testimony. The parties settled the matter before the arbitration hearing.