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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
Top Pipings Ltd. v SuperDrilling Ltd.
Giovanni De Berti
General Information
Top Pipings Ltd. (“Top Pipings”) is a company located in Zovgorod, capital city of Ixania, manufacturing and selling all kinds of piping to be installed on various plants, including offshore oil drilling platforms.
SuperDrilling Ltd. (“SuperDrilling”) is a company located in Zenda, capital city of Ruritania, trading wholesale in equipment for oil prospecting and drilling to final users both in Ruritania and abroad.
The two companies have been doing business with each other for a number of years, namely Top Pipings has sold vast quantities of piping equipment to SuperDrilling which in turn has resold them to final customers, mainly companies active in oil prospecting and drilling.
The piping to be employed on sea drilling platforms must be manufactured so as to resist corrosion due to their continued immersion in seawater. To this end, the piping is subject to special manufacturing procedures, which are inspected and approved by an international body of quality control called Interoil. Usually, only equipment whose manufacturing procedures are certified by Interoil is accepted by final customers, and it is a common requirement in purchase orders that such equipment be guaranteed as “Interoil certified”.
The certification proceedings are very thorough and certification is granted only after Interoil is satisfied that the manufacturing procedures respect every requirement. Should any change in the manufacturing procedures occur, Interoil must be notified in advance, in order to be able to inspect the new procedures and either confirm or withdraw its certification.
The manufacturing procedures of Top Pipings had been originally certified by Interoil eight years ago. They included the individual heating of every pipe in special heating chambers. Four years ago, due to sudden and mounting requests from the market for deliveries of huge quantities of pipe, Top Pipings studied ways of increasing their production. Top Pipings’ technicians concluded that some of the pipes, namely those under a certain dimension (sometimes referred to as “shorties”) could be passed in pairs, rather than individually, through the heating chamber. In their view, this would make it possible to double the production of shorties, a size much in demand, without altering the manufacturing procedures certified by Interoil.
For the next two years, Top Pipings manufactured and sold pipes (including shorties manufactured in this way) without any problem being detected. Deliveries of pipes were made to various customers, both final users and distributors, including SuperDrilling. SuperDrilling in turn sold a great amount of Top Piping’s pipes manufactured in that period of time to Zenda Pride Ltd., a company that was building a gigantic oil-drilling platform named “Zenda Pride 7” off the Ruritanian coast. Zenda Pride detected a case of seawater corrosion with reference to one shorty manufactured by Top Pipings and installed on the platform.
Zenda Pride notified the occurrence to SuperDrilling by e-mail, with a copy to Interoil. Just three days after receiving the notification, Interoil suspended the certification of Top Pipings’ pipes generally, pending enquiries, informing by e-mail Zenda Pride, SuperDrilling and Top Pipings. The next day, SuperDrilling sent e-mails to all its customers, informing them that the pipes manufactured by Top Pipings could be unsafe as far as seawater corrosion was concerned. SuperDrilling did not specify that the problem had arisen with reference only to an individual shorty.
Top Pipings immediately got in contact with Interoil to clarify the matter. Interoil swiftly sent inspectors to Zovgorod. The inspectors were informed of the new heating procedure applied to the shorties and concluded that heating the pipes in pairs instead of individually was (a) an alteration to the manufacturing procedure originally certified by Interoil, and (b) a system that did not guarantee the proper resistance to seawater corrosion of the pipes. They told Top Pipings’ managers that unless they reverted to the original manufacturing processes, the suspension of the certification would become final, even if limited to the shorties. Top Pipings immediately issued and delivered to the inspectors a formal statement to Interoil to the effect that the original heating procedure would be reintroduced as from that same day.
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Thereupon, Interoil issued an official statement lifting the suspension and declaring the pipes manufactured by Top Pipings to be certified again. The suspension had lasted exactly three weeks. Two weeks later, upon repeated and urgent requests by Top Pipings, Interoil issued a new statement, specifying that (a) its suspension had referred only to shorties, and that (b) only shorties manufactured by Top Pipings during the named period of altered production methods should be considered uncertified.
Representatives of both Top Pipings and SuperDrilling met and debated how to handle the problem, namely with regard to the Zenda Pride 7 platform, for which SuperDrilling had supplied a vast number of Top Pipings’ pipes. At a meeting held at SuperDrilling’s office in Zenda, the two parties agreed that inspections at the Zenda Pride 7 platform would be carried out by SuperDrilling to ascertain the extent of the problem and to replace all shorties manufactured during the suspected period. The cost of inspecting and the labour for replacing was anticipated to be about €400,000, of which one half, that is €200,000, would be borne by Top Pipings. Top Pipings would also replace all such shorties at no cost to Zenda Pride.
By e-mail, SuperDrilling informed Top Pipings that Zenda Pride had decided that they would, in any event, replace all Top Pipings’ pipes of any size already installed on the platform and that they requested replacement of all pipes previously delivered including those certified to have been manufactured after Interoil’s certification had been reinstated. This decision had been adopted by Zenda Pride notwithstanding the fact that the first inspections had ascertained that only one shorty in four (and no other kinds of pipe) had shown any sign of possible unsuitableness.
By e-mail reply the following day, Top Pipings confirmed that they would replace at no cost all pipes rejected by Zenda Pride. However, they remarked that at this point there was no need for further inspections on site by SuperDrilling, since Zenda Pride had already decided, in any event, to replace all pipes. SuperDrilling replied that they thought that it was advisable, vis-à-vis their customer Zenda Pride, to continue the inspections and that they would keep Top Pipings informed. Top Pipings did not reply.
In the meantime, the news that the Interoil certification of Top Pipings’ pipes had been suspended had spread like wildfire. Top Pipings started receiving e-mails from customers cancelling orders, requesting that pipes already delivered be taken back and the relevant invoices cancelled, and generally anticipating claims for damages. These notices related to all kind of pipes, not just to shorties. Top Pipings would reply that all pipes but the shorties had been certified by Interoil all along, offering to replace shorties manufactured during the suspected period with new ones and rejecting any claims.
Some months later SuperDrilling sent an e-mail to Top Pipings, enclosing a detailed list of costs incurred for inspections on the Zenda Pride 7 platform by a firm of expert consultants. The total amount was €1,250,000, for which SuperDrilling was asking full reimbursement.
Top Pipings replied by e-mail rejecting the claim and stating that:
SuperDrilling replied that:
Subsequent correspondence between the parties and their lawyers has come to no settlement agreement. The contractual documents (standard forms of offer and acceptance exchanged between the parties) make reference to the respective laws and jurisdictions. The two countries have no mutual conventions on recognition of judgements, thus the alternatives would be either to face the uncertainties of suing in the country of the defendant, or to proceed in its own jurisdiction and face the uncertainties of obtaining recognition abroad.
Top Pipings has sent to the ICC a written request for mediation and SuperDrilling has agreed to participate in the proceedings. At the mediation, Top Pipings is represented by its Managing Director, accompanied by the external lawyer of the company. SuperDrilling is represented by its Chief Executive Officer, accompanied by the General Counsel of the holding company of the group of companies to which it belongs. Both parties have full settlement authority.
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Confidential Information for Top Pipings Ltd.
Requesting Party
Top Pipings is a family-owned and run company. It was founded 40 years ago by its present chairman, and his son has been its Managing Director since the beginning of last year.
The news of the defects in the shorties was a big blow for Top Pipings. Actually, when it was decided to increase production in view of the mounting requests from the market, someone took a rash decision, without realizing, or pretending not to realize, that the proper course of action would have been to check with Interoil first. The then plant manager left the company just before the problem occurred, the chief technician had left the company a few months before, and no one seems to know exactly how the decision was made.
In any event, the matter was solved promptly, the certification by Interoil was suspended only for a very few weeks, and if SuperDrilling had not rushed to tell all the world, the problem could have been quietly managed. Instead, the whole range of pipes manufactured by Top Pipings had become suspect; many customers cancelled orders and/or anticipated requests for damages. It is true that by now the worst effects seem to have been overcome. No customer has sued yet nor threatens now to sue for damages. It is also true that the figure of €1 million for damages is grossly inflated: the decrease in turnover was less than €500,000. However, it will take time to regain the market position of before.
SuperDrilling has always been a good customer and its customers, in turn, have always been of top level. In particular, Zenda Pride has a programme of constructing numerous and important offshore platforms, and Top Pipings does not wish to lose a prospective market that appears very sizeable. Top Pipings is very keen to find a satisfactory solution and this is the reason why it has applied for mediation.
Maybe SuperDrilling was right in continuing to cooperate with Zenda Pride in order to show goodwill and keep an important customer satisfied. However, this was an inordinately expensive act of public relations and was primarily to SuperDrilling’s benefit. It is preposterous to ask Top Pipings to foot the whole bill in such circumstances. In addition, if Zenda Pride were in the future to sue for damages and if SuperDrilling were to try and invoke Top Pipings’ liability, what would have been the advantage — for Top Pipings — of showing so much goodwill? SuperDrilling would get the merit and Top Pipings would pay for both the costs and the damages!
It is very important to understand how real the risk of an action for damages from Zenda Pride is. Super Drilling indicated that Zenda Pride could ask for damages up to €5 million, being the equivalent of a penalty for late delivery of the platform. Was the platform actually delivered late? The promptness with which Top Pipings replaced the pipes should have avoided that. Maybe the mediation could allow Top Pipings to get this information.
If no real risk of a damages action exists and/or SuperDrilling agrees to keep Top Pipings indemnified in that respect, Top Pipings would be ready to share some of the expenses incurred by SuperDrilling with the inspections, but no more than 50%, as was originally agreed in Zenda. That is — on the final amount that Top Pipings would not dispute — up to €625,000. That is really the ceiling. Liquidity is not a big problem for Top Pipings. Any financial settlement over and above that figure would make sense only if it involved the prospect of continuing business between the parties.
Finally, Top Pipings does not wish to be involved in court proceedings. While its lawyer is fairly positive about their outcome, a case in court would mean continuing bad publicity for Top Pipings, and that must be avoided at — almost — any cost.
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Confidential Information for SuperDrilling Ltd.
Responding Party
SuperDrilling is a trading company belonging to a group of companies involved in various business fields. It is run with full powers by the CEO, a professional manager reporting directly to the Board of Directors of the holding company.
The news of the defects in the pipes was a big blow for SuperDrilling. Top Pipings had always been a reliable supplier of pipes and SuperDrilling has distributed them to many customers. It was particularly worrisome because Zenda Pride was a recently acquired client and a very promising one. It has a programme of constructing numerous and important offshore platforms, and SuperDrilling was keen not to lose a very sizable business.
SuperDrilling spent a lot of money on the activities of inspection conducted on the Zenda Pride 7 platform. It was indeed a very expensive exercise of customer care, and the amount of costs incurred raised questions at holding company level. The CEO answered by assuring the Board that the cost would be borne by Top Pipings. Unfortunately, it has turned out that no one at SuperDrilling kept Top Pipings informed of the escalation of costs, and a confidential memo by the in-house legal department has indicated that the request that Top Pipings pay for all the expenditure might be difficult to sustain in legal proceedings.
Actually, the show of support and assistance to Zenda Pride appears to have paid off. Recently the management of Zenda Pride confirmed to SuperDrilling that it will be chosen as main supplier for the next platform, Zenda Pride 8, which will be an even bigger and more sophisticated structure.
It appears highly unlikely that Zenda Pride would claim any damages — as threatened in correspondence at the very beginning of the episode. Indeed, due both to SuperDrilling’s active cooperation and to Top Pipings’ swift replacement of all the pipes at no cost, the platform was completed and delivered within the set deadline. To be sure, no formal waiver of such claim has been issued by Zenda Pride, but SuperDrilling is loath to raise the issue with them; it would rather “let sleeping dogs lie”. The contract with Zenda Pride contains an arbitration clause: if Zenda Pride were to start proceedings it would be impossible to join Top Pipings without the latter’s agreement — which SuperDrilling would be unlikely to obtain. If SuperDrilling were later to sue Top Pipings in court to recover the amounts paid under an award, it might face conflicting decisions. Even more difficult would be to recover amounts paid according to a settlement agreed with Zenda Pride only.
Finally, SuperDrilling badly needs cash for its current business. Suing Top Pipings for damages would take time and money, since proceedings should probably be started in the jurisdiction of the defendant in Ixania.
Top Pipings would no doubt counterclaim for the alleged damages caused by what it calls bad publicity made by SuperDrilling informing its customers of the problem. With hindsight, the circular e-mails sent to SuperDrilling’s customers at the time could have been drafted in more cautious terms. It would be important to ascertain whether, in actual fact, Top Pipings either has already paid or risks having to pay damages to alarmed customers.
SuperDrilling would settle for an immediate payment of at least €500,000. The balance could be paid in instalments, within a year. However, it is very important that the whole amount of €1,250,000 be recovered sooner or later, one way or another, to avoid internal criticism at Group level. Top
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Colin J Wall
Case Analysis
This is a typical construction dispute, involving a supplier of pipes, a contractor installing them for a client, and a subsequent quality issue. The two companies have a successful track record of doing business together. This common ground should enable the parties to realize from the onset of the mediation that they can and should work together in the future, provided that the current disputes can be amicably settled. In the case of an impasse, the mediator can seize upon this common ground, to help the parties move forward.
In reality, the parties have little choice other than to mediate this dispute as neither of them wants to start litigation in each other’s home jurisdiction. This is because neither party wants further bad publicity or the disadvantage of litigating in a country where the resultant judgement, even if successful, will not be recognized. The parties could opt for ad-hoc international arbitration but that process will be adversarial and we are not told whether Ixania or Ruritania are signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958). Mediation is thus the only practical option, as the parties and their lawyers have thus far failed to make any progress in resolving the disputes.
The fact pattern in this mediation shows that each party was trying, in difficult and dynamic circumstances, to deal with the problems brought about by non-compliant shorties pipes. The poor communications between them compounded those problems. The extent of the noncompliance was fairly minimal, but as so often happens in situations such as these and out of an abundance of caution, the inspection of all pipes took place at great cost. It is understandable that Zenda Pride Ltd. wanted to make sure that there would be no future environmental disaster caused by corroded pipes, because they failed to take adequate precautions during the time of construction.
To move forward, each party needs the help of the mediator to find out exactly what liabilities and losses might have resulted from this unfortunate incident. Top Pipings needs to establish whether Zenda Pride is going to ask for damages, if the offshore platform was completed late. SuperDrilling needs to establish how much damage was caused to Top Pipings’ business due to the adverse publicity of the incident. It is unlikely that either party would be willing to exchange such information directly in a plenary session and so using the mediator in caucus might be the best way to effect this exchange. Once that information is known to both parties they can negotiate how much money needs to be paid to resolve this unfortunate situation. As Top Pipings has fixed a “bottom line” payment in advance of the mediation to resolve this dispute, any further payments to SuperDrilling over and above that sum would need to be made in future payments or discounts on further contracts that SuperDrilling might obtain.
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Greg Bond
Commentary for Training
Understanding What Went Wrong
Listening to this story a mediator — who does not have access to the Confidential Information — will need to get a good grasp of the facts. What exactly went wrong? What exactly has led to this dispute? The answer may not be entirely clear to the parties either, and mediation can provide clarity. Reviewing this story, it may begin to look like an unfortunate incident in which no one is much to blame. Things happened quickly, communication was not always great, and decisions were taken with insufficient consultation. The result is costly, and each party thinks the costs were caused by the other. Basically, however, they had — and can still have — a very healthy business relationship with plenty of common interests.
It is unfortunate that things went wrong, and it also seems likely that they can be put back on track. The mediator first needs to understand that this is a real possibility and that will help the parties understand that too. It is probably useful here to slowly disentangle the facts. Visualizing the events that led to the dispute in a timeline would be a way to help the parties to look objectively at what happened. There is a sense of inevitability about the story, but the dispute could have been avoided early, by the two companies working together on resolving the problem. The mediator may want to use a review of the hectic events to work out the interests that led to the action each company took. Here too visualization can help, as the interests can be added to the timeline. Each party should have no problem in then seeing that the other’s interests in public relations, good relations with Zenda Pride or Interoil, and general damage and cost limitation were legitimate. And each should have no problem in understanding that both had good business interests in working together, and that their cooperation is bigger than this dispute.
There is one particular stumbling block, however. This is the prospect of Zenda Pride bringing a claim for damages and Top Pipings being drawn into that claim. If Top Pipings were to know that it is highly unlikely that they will be involved in any claim, because Zenda Pride is itself unlikely to claim (and if they did it would be in arbitration with SuperDrilling only), then it would be easier for Top Pipings to offer to contribute to SuperDrilling’s costs. Moreover, if SuperDrilling were able confidently to inform Top Pipings that there is an exciting new contract with Zenda Pride in the pipeline (as it were), then the prospect of amicable agreement would be good. Here the parties or the mediator can request and use caucuses. The parties might then get down to business, draft a settlement and talk about future cooperation. Part of that dialogue may include contingency plans for better communication in case of future unexpected situations or emergencies.
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