Sunday, February 15, 2015

Court is Now in Session: Lazurit, Admiralty Shipyards, and "Igor Belousov" Sub Rescue Ship

On October 24, 2005, the RF Ministry of Defense signed a contract (702/05/28/KN/0028 - "Creation of New-Generation Rescue Ship") with Admiralty Shipyards for the construction of Belousov submarine rescue ship "Igor Belousov". To support that effort, on May 18, 2006, Admiralty Shipyards signed a contract (#2618-06 - "Development of Working Design Documentation for Deep-Water Diver System for Project 21300 Rescue Ship (Delfin-GVK) and Production and Testing of Prototype Component Equipment") with Lazurit Central Design Bureau.

On November 9, 2011, the RF Ministry of Defense and Admiralty Shipyards signed an agreement (N/1/5/0609/D21-11-DGOZ) by which the previous state contract (702/05/28/KN/0028) was cancelled. On December 6, 2011, Admiralty Shipyards informed Lazurit that their contract (#2618-06) had been cancelled as a result.

On January 31, 2012, the RF Ministry of Defense issued a decision (#235/1/5/744) under which Admiralty Shipyards and the 208th MOD Representation Office were to determine the actual costs incurred by Lazurit under the cancelled contract (#2618-06). In its letter (#26-PDO-1092) to Admiralty Shipyards on April 6, 2012, Lazurit provided documentation of completed work under the contract totalling RUB 836,903,813, to include work completed by Italian sub-contractor DRASS Galeazzi.

After reviewing the documents, Admiralty Shipyards established that it had already paid Lazurit an advance of RUB 660,542,424, but that Lazurit had only spent RUB 472,988,767 at the time the contract had been cancelled [difference = RUB 187,553,657]. Admiralty Shipyards also determined it would not pay for the stages of the contract that were not completed, as the equipment had not been delivered and as some of the work stages (3.1, 3.2, 5, and 6.1) and related expenses linked to the contract had not been approved by Admiralty Shipyards.

In 2012, Lazurit filed a suit (Case #A56-24829/2012) against Admiralty Shipyards for payment of work [expenses (RUB 836,903,813) - advance (RUB 660,542,424) = RUB 176,361,389] completed under the contract. In its July 2013 ruling, the Arbitration Court of St. Petersburg and Leningrad Oblast ruled in favor of Lazurit, and Admiralty Shipyards was ordered to pay. Following several appeals that ended with a September 2013 decision in favor of Lazurit, Admiralty Shipyards finally paid Lazurit on December 25, 2013.

Citing unfair business practices, on April 28, 2014, Lazurit filed a new suit (Case #A56-26894/2014) with with Arbitration Court of St. Petersburg and Leningrad Oblast against Admiralty Shipyards. In its suit, Lazurit sought to receive (a) RUB 29,763,836 in penalties for late payment of expenses incurred by Lazurit between April 2012 and December 2013, (b) RUB 11,147,911 in lost revenue due to currency exchange rate variations, and (c) RUB 72,635,154 in lost profits [total = RUB 113,546,901]. By the trial date, however, those numbers had been corrected to (a) RUB 29,521,064 in penalties for late payment of expenses incurred by Lazurit between April 2012 and December 2013, (b) RUB 11,147,911 in lost revenue due to currency exchange rate variations, (c) RUB 58,941,791 in lost profits for work under Supplementary Agreement #13, and (d) in lost profits for work under Supplementary Agreement #14 [total = RUB 113,304,129].

Admiralty Shipyards argued that:

  • according to previous court decisions (A43-3989/2012 and A56-24829/2012), the RF Ministry of Defense's cancellation of the original contract (702/05/28/KN/0028) naturally led to the cancellation of the sub-contract (#2618-06) with Lazurit.
  • the RUB 176,361,389 earlier paid to Lazurit was based on Lazurit's own calculations, which included RUB 71,445,984 in profits for Lazurit.
  • Supplementary Agreement #14 was not legal, as it was not signed by Admiralty Shipyards or the 175th or 208th MOD Representation Offices.
  • Lazurit did not prove the necessary conditions to seek lost revenue due to currency exchange rate variations because the contract between Admiralty Shipyards and Lazurit (#2618-06) stated rubles as the contract's currency, and because Admiralty Shipyards was not a party to the contract (РН1/2009, dated December 22, 2009) signed between Lazurit and DRASS Galeazzi.
  • it should not have had to pay the RUB 176,361,389 required by the court's previous ruling (A56-24829/2012), as Lazurit never provided proof that the RF Ministry fo Defense had paid Admiralty Shipyards that amount of money for work performed by Lazurit.

In reviewing the materials provided by both parties, the court:

  • found that Admiralty Shipyards took 20 months to pay Lazurit for expenses incurred under the contract. In accordance with Higher Arbitration Court Letter #51 (January 24, 2000), payment by a general contractor for work by a sub-contractor must be paid regardless of whether the customer has paid the general contractor. Thus, Admiralty Shipyards [general contractor] should have paid Lazurit [sub-contractor] within one week of Lazurit's April 2012 submission of calculated expenses under the contract.
  • lowered Admiralty Shipyard's penalties to RUB 24,600,887 after determining Lazurit had miscalculated them.
  • denied Lazurit's claims for lost revenue due to currency exchange rate variations and lost profits for work under Supplementary Agreements #13 and #14.

On December 1, 2014, the court ordered Admiralty Shipyards to pay Lazurit RUB 24,600,887 in penalties and RUB 43,425 in state taxes.

On January 30, 2015, Admiralty Shipyards filed an appeal with the 13th Arbitration Appeals Court, which will begin hearing the case on March 2.