Monday, October 13, 2014

Court is Now in Session: "Pseudo-Space Vehicle" for Russian Navy

Image courtesy of Getty Images

One December 13, 2012, the Russian Federation Ministry of Defense filed a petition with the Moscow Arbitration Court seeking RUB 1,921,920 in penalties against the Russian Federal Space Agency's Central Scientific Research Institute of Machine-Building (CSRIM) for non-fulfillment of obligations under State Contract N/2/2/08-11-DOGOZ (dated November 9, 2011). Specifically, the MOD accused CSRIM of not completing Stage 1 of scientific research work (NIR) "Kosmos-Krylo" by the agreed-to deadline. The NIR covered the creation of a "pseudo-space vehicle" that would be used for targeting and electronic warfare related to an improved system for exchanging Navy data with submarines and surface ships. According to the contract, Stage 1 of the NIR (worth RUB 40,000,000) was to be completed between the date the contract was signed and by November 25, 2011. The entire NIR was to be conducted between November 1, 2011, and November 25, 2013, for which the MOD would pay CSRIM RUB 166,400,000 incrementally.

In court, CSRIM argued that it did not receive official notification that it had won the contract until November 24, 2011 - one day before Stage 1 of the NIR was to have been completed. On January 26, 2012, CSRIM sent a letter to the MOD requesting the Stage 1 deadline be extended to March 2012 due to late arrival of the official contract notification. On February 6, CSRIM sent a letter to the MOD requesting that co-contractors and Military Representation Offices (MRO) be brought into to assist with the work. On February 10, the MOD concurred with the request, and the two sides signed Decision 2/5/12-DOGOZ, under which co-contractors would be brought in for Stage 1 of the NIR. On March 7, the MOD sent letters to the respective MROs.

On March 19, 2012, both sides signed Supplementary Agreement N/2/2/08-11-DOGOZ-2 by which the deadline for completion of Stage 1 of the NIR was set as March 31, 2012. On May 12, 2012, the MOD accepted CSRIM's research work with no complaints.

However, on July 31, 2012, the MOD sent a letter to CSRIM claiming the latter owed RUB 1,863,680 for being 42 days late in completing Stage 1. On August 27, 2012, CSRIM responded that the MOD had violated the Stage 1 deadline as MROs 153, 1382, 4116, and 5262 were brought in to the contract very late (March 7, 2012). As the MROs didn't actually start work until the second half of March, CSRIM could not complete Stage 1 by the agreed-to deadline. CSRIM also argued that the technical requirements for the interdependent contract should have been established by the MROs before the contract was signed with the co-contractors.

On May 8, 2013, the Moscow Arbitration Court ruled (Case A40-163464/12) that there was no basis for the MOD's petition for the penalty payment, as CSRIM had done everything it could to satisfy its contractual obligations despite the MOD's failure, in a timely manner, to inform CSRIM that it had won the contract and to coordinate the inclusion of MROs and co-contractors.

On June 19, the MOD filed an appeal with the 9th Arbitration Appellate Court. The two main elements of the MOD's appeal were (a) the date when the MROs and co-contractors were brought into the contract should have no effect in CSRIM's execution of Stage 1 of the NIR, and (b) the MOD, and not the MROs, establishes the technical requirements of the NIR. On 30 July, the Court also ruled (Decision 09AP-22734/2013-GK) in favor of CSRIM.

On October 3, the MOD filed an appeal with the Moscow Dictrict Federal Arbitration Court, and on November 13, the Court ruled (Decision A40-163464/12-85-986) in favor of the MOD. In its ruling, the Court explained that both of the lower Courts placed the burden of proving CSRIM did not do everything it could to fulfill its contractual obligations on the MOD instead of forcing CSRIM to prove it did. As such, the Court ordered the case be sent back to the Moscow Arbitration Court. The Court also pointed out that the March 2012 Supplementary Agreement did not change the conditions of the original contract; i.e., inclusion of MROs and co-contractors did not change the agreed-to contract deadline.

On June 26, 2014, following a second review of the case, the Moscow Arbitration Court passed a partial ruling in favor of the MOD by ordering CSRIM to pay a penalty of RUB 1,601,600 (reduced from the original RUB 1,921,920) for late completion of Stage 1 of the NIR.

Both CSRIM and the MOD filed appeals with the 9th Arbitration Appellate Court on August 7 and August 25, respectively. On September 30, the 9th Arbitration Appellate Court denied both appeals (Decisions 09AP-36963/2014-GK and 09AP-38958/2014-GK), letting the lower court's decision stand. Both sides have until October 30 to file appeals, but given its earlier decision, the Moscow District Federal Arbitration Court is likely to uphold the lower Courts' decisions.