Ukraine Crisis Could Force France To Cancel Multibillion Dollar Ship Contract; Russia Prepares For Court Action

The French government’s threat to halt the sale of two military warships to Russia because of the conflict in Ukraine may cost the French contractor DCNS billions of dollars for breach of contract, IHS Jane’s Defence Weekly reported. Although recent sanctions imposed on Russia did not include the sale of the two ships, French President Francois Hollande made the decision to postpone delivery of the first one after coming under sustained pressure from fellow NATO members, the Moscow Times said.

While the two companies involved in the deal are continuing as normal, Rosoboronexport, the Russian state agency responsible for exports and imports of defense-related goods, is considering taking the issue further by exploring options to sue the shipbuilder DCNS, should the deadline for delivery pass. Hollande will make a final decision on the fate of the ships this month, RIA Novosti reported.

“This is a very unusual development,” said Allen Green, an international arbitration expert and partner at the Washington-based law firm McKenna, Long & Aldridge LLP. “There may or may not be guarantees by France in that agreement that should the deal not go ahead that France would reimburse Russia the money it paid plus a penalty.”

The contract between the French ship-building company and Rosoboronexport was signed in June 2011. The first of the two helicopter-landing ships, the Vladivostok, is currently undergoing sea trials with a Russian crew and scheduled for delivery in November, RIA Novosti reported. The second ship, the Sevastopol, is set for delivery next year.

Hollande said the delivery can go ahead if Russia adheres to a cease-fire agreement and signs a political settlement that would halt hostilities in the region, the Washington Post reported. But even the cease-fire is a contentious issue. Russia is not officially at war with Ukraine, but it is widely believed by Western powers and NATO that Russia is continuing to provide weapons to separatist rebels in eastern Ukraine. That will be a primary consideration before any decision is made by France.

Citing an unidentified source with knowledge of the matter in Russia, IHS Jane’s Defence Weekly reported the full amount of any refund and associated charges would be about $3.8 billion. “The contract has an item concerning a possible direct refund if the French party fails to fulfill the signed agreement. In this case, DCNS’ direct refund alone due to the Russian party will amount to €1.050 billion,” the source said.

International arms agreements are notoriously complex and almost always kept secret, but attorney Green said most large contracts of this type have many of the same clauses, and the wording of important clauses can be quite generic. However, this particular contract is made more complex by the involvement of two states in what is essentially a private contract. DCNS is 64 percent owned by the French government, and Rosoboronexport is under the full control of Russia.

To date, DCNS has indicated it would be more than happy to complete the contract, but it is aware of the French government’s stance, as it said in an email to the International Business Times. “The decision to deliver or not deliver the ships depends on [the] French government,” company representative Emmanuel Gaudez wrote. “DCNS is not the decision maker.”

Similarly, a Rosoboronoexport rep wrote in an email that “both parties are willing to fulfill their obligations,” but that “in the case of a breach of contract, a lawsuit is possible.”

Green suggested a lawsuit is very unlikely and that any dispute will be decided by arbitration in a neutral venue. “These agreements always have a dispute-resolution clause. Typically, it will involve arbitration under the laws of a country that both parties agree on, administered by an organization such as the International Chamber of Commerce [or ICC].”

Fortunately for DCNS, there is very likely a force majeure clause in the contract, which states that if the seller can’t deliver for a reason beyond its control, such as acts of government, as is the case here, then it is not liable. “This was known as an act of god in old language. But, similarly, if the buyer can’t accept delivery because of an act of god, then it is also excused from performing,” said Green.

In an arbitration setting, frequently overseen by a tribunal of arbitrators and most likely in a case such as this one to take place in Switzerland, anything can happen, Green said. Crucially, the clause also precludes any party from taking it to court. “Almost all courts will throw the case out if there is an arbitration clause, as dictated by international law and a number of treaties.”

But it doesn’t end there for the French. Rosoboronexport could take the matter to a Russian court, which might rule in the home agency’s favor. Should that happen, the court could begin seizing DCNS assets in the country. “It’s very unlikely that DCNS have assets in Russia, so they could take that judgment to a French court in Paris to have assets seized. Those are the games that are played and will be played,” Green said.

The scenario facing DCNS is very similar to one that saw a unit of the U.S.-based Cubic Corp. being ordered to pay Iran $2.8 million 36 years after defaulting on an agreement to sell and maintain an air combat maneuvering range for the Iranian government in 1977, as AllGov.com reported. The deal was canceled shortly after the Iranian Revolution deposed Mohammad Reza Shah Pahlavi and installed Ayatollah Ruhollah Khomeini as the leader of the country. Iran took the case to the ICC in 1991, but Cubic ignored the ruling. But 20 years later Iran filed a petition with the U.S. District Court in San Diego, which upheld the award. The decision was affirmed by the 9th U.S. Circuit Court Of Appeals.

In early September, the French president’s office said the conditions under which the deal could proceed had not yet been put in place, as reported by the Wall Street Journal. And it looks like they may not be worked out by November. A recent United Nations report said 331 people have died since the cease-fire ageement in Ukraine was reached last month.