October 08, 2014

France Wrestles With Legal Issues Ahead of Mistral Decision

Russia and France signed a $1.6 billion deal for two Mistral-class ships in June 2011. The first carrier, the Vladivostok, was expected in Russia by the end of 2014. The second ship, the Sevastopol, was supposed to arrive in 2015.
The completion of a deal has been at risk since the West started implementing targeted economic sanctions against Russia over Ukrainian crisis. France has repeatedly threatened to suspend the deliveries of the ships.
Moscow stated that if the contact was cancelled, Paris would have to pay a large penalty. Russia has also said that if anything goes wrong, the country would be able to build an analogue to the Mistral by itself.


PARIS — France is expected to decide within the coming month whether to deliver a Mistral-class helicopter carrier to Russia, and the letter of the law looms large with officials examining the sale contract as they weigh the government's options, legal and defense specialists said.

Key to those determinations is whether the force majeure clause allows France to suspend and cancel the controversial contract, which calls for a hand over of the warship at the end of October or early November.

But one thing has become clear: President François Hollande's Sept. 6 statement on the eve of the NATO summit was widely misinterpreted as suspending the contract.

Hollande carefully avoided saying it was suspended, as that would have "called into question the contract," Jean-Pierre Maulny, deputy director of think tank Institut des Relations Internationales et Stratégique. "It was a sensitive statement" aimed at keeping the contract intact and avoiding a claim for financial penalty, he said.

"It's not in suspension," a legal expert said. "The statement was pure politics."

Defense Minister Jean-Yves Le Drian corrected the record, saying on Sept. 9 at the Summer Defense University that there was no suspension and a decision would be made "at the end of October," daily Le Parisian reported.

Foreign Minister Laurent Fabius also said there was no suspension, and that delivering the Vladivostok — the first of two Mistral-class carriers purchased by Russia — hung on two conditions: The ceasefire in Ukraine be observed, and Kiev and Moscow reach a political settlement.

In Eastern Ukraine, at least 12 people were killed — including three civilians — as government forces and pro-Russian rebels fought in the region, The Associated Press reported on Sept. 29.

The civilians fell victim to shelling as the two sides fought for the government-held airport at Donetsk.

At Saint-Nazaire, work continues on the second Mistral ship — the Sevastapol — and Russian sailors continue to be trained on the Vladivostok, an industry executive said.

The deal with Russia is worth €1.2 billion (US $1.5 billion) and covers two helicopter carriers.

Even if the first ship were delivered, there is doubt the second would be handed over next year.

The force majeur clause in the sale contract is seen as a key factor in the search for options.

"Force majeure literally means 'greater force,' " reads the opening to the International Chamber of Commerce (ICC) note published in 2003.

That greater force covers external reasons for canceling a delivery, with "war (whether declared or not), armed conflict or the serious threat of same…" leading the factors listed in the ICC note.

"Compliance with any law or governmental order…" is also listed.

If France decides against delivery, prime contractor DCNS could evoke force majeure on the grounds the interministerial commission for arms export had refused to grant the export license.

After 180 days — generally the suspension period — DCNS could cancel and would have to repay Russia for the ship. The two sides would then go to a tribunal to decide how the payment would be made.

A second legal expert said international contracts are often written under Swiss law, as neither side wanted the dispute to be judged in the other party's legal system.

Coface, the export credit guarantee agency, would cover part of the repayment, but the government would essentially cover the cost for DCNS. The shipbuilder is 65 percent state-owned.

"France would have to repay the full amount to Russia," the second expert said.

Russia lacks grounds to claim financial damages, the first expert said. There has been no breach of contract as the ship has been built on time and met specifications, the expert said.

Once bought back, France could hold onto or resell the ship if it could find a buyer.

The legal angle has attracted growing interest.

Rosoboronexport, the Russian state-owned arms export agency, has denied media reports it has asked lawyers to prepare a possible lawsuit against DCNS, Russian news agency Interfax-AVN reported on Oct. 2.

Force majeure fails to back up a suspension and cancellation of the Mistral contract, French lawyer Lilyane Anstett wrote in business daily Les Echos on Sept. 9.

Meanwhile, leasing out a bought-back vessel has been considered, as the Defense Ministry seeks solutions and looked at the British inflight tankers as an example, a defense specialist said.

In the case, the Airbus-led AirTanker consortium is supplying 14 A330M multirole tanker transport aircraft for use by the Royal Air Force in a deal spanning 27 years.

AirTanker has secured holiday organizer Thomas Cook as its first commercial customer for one of the jets, which will be leased for long-haul passenger flights in 2015.

The Mistral delivery decision will be made by Hollande, said Etienne de Durand, director of security studies at think-tank Institut des Relations Internationale.

"He's probably hanging on to the very last minute to decide. What's sure is France's lack of clarity managed to annoy both sides, the NATO allies and the Russians," he said.

"The decision that should have been made is suspension. In any case, it would have been better to make a decision and stick to it rather than to stay silent on the issue.

The government-backed Euronaval defense and maritime exhibition and conference will open on Oct. 27 in Le Bourget, France. By that point, the clock will be ticking loudly for a decision

Among the companies included in the full list of natural or legal persons, entities or bodies (Official Journal of the European Union) are:
JSC Sirius (optoelectronics for civil and military purposes);
OJSC Stankoinstrument (mechanical engineering for civil and military purposes);
OAO JSC Chemcomposite (materials for civil and military purposes);
JSC Kalashnikov (small arms);
JSC Tula Arms Plant (weapons systems);
NPK Technologii Maschinostrojenija (ammunition);
OAO Wysokototschnye Kompleksi (anti-aircraft and anti-tank systems);
OAO Almaz Antey (state-owned enterprise; arms, ammunition, research);
OAO NPO Bazalt (state-owned enterprise, production of machinery for the production of arms and ammunition);
List of persons, entities and bodies referred to in Article 5(2)(a);
OPK OBORONPROM;
UNITED AIRCRAFT CORPORATION;
URALVAGONZAVOD;
List of persons, entities and bodies referred to in Article 5(2)(b);
ROSNEFT;
TRANSNEFT;
GAZPROM NEFT.
EU travel bans and asset freezes were imposed on 24 more people, including senior Russian lawmakers and the leadership of the self-proclaimed Donetsk People's Republic .
A total of 24 people, including senior Russian lawmakers and the leadership of the self-proclaimed Donetsk People's Republic, were added to the list of individuals facing EU travel bans and asset freezes.
Russian lawmakers on the sanctions list include Vladimir Zhirinovsky, an outspoken leader of the ultra-nationalist Liberal Democratic Party (LDPR), Igor Lebedev, deputy speaker of the Russian State Duma, and Svetlana Zhurova, first deputy chairman of the State Duma foreign affairs committee.
Alexander Zakharchenko, who replaced Alexander Boroday last month as the prime minister of the self-proclaimed Donetsk People's Republic, has been also targeted by the sanctions.
The full list of persons includes:
Alexander Zakharchenko - Prime Minister of the self-proclaimed Donetsk People's Republic;
Vladimir Kononov -  Defense Minister of the self-proclaimed Donetsk People's Republic;
Miroslav Rudenko - Commander of the Donbas People's Militia;
Gennadiy Tstypkalov - Prime Minister of the self-proclaimed Lugansk People's Republic;
Andrey Pinchuk - State security minister of the self-proclaimed Donetsk People's Republic;
Oleg Bereza - Internal affairs minister of the self-proclaimed Donetsk People's Republic;
Andrei Rodrin - representative of the self-proclaimed Donetsk People's Republic;
Aleksandr Karaman - Deputy Prime Minister for Social Issues of the self-proclaimed Donetsk People's Republic;
Georgiy Muradov - Deputy Prime Minister of Crimea;
Mikhail Sheremet - First Deputy Prime Minister of Crimea;
Yuri Vorobiov - Deputy Speaker of the Federation Council of Russia;
Vladimir Zhirinovsky - member of the State Duma;
Vladimir Vasilyev - Deputy Speaker of the State Duma;
Viktor Vodolatsky - Chairman of the Union of the Russian and Foreign Cossack Forces;
Leonid Kalashnikov - First Deputy Chairman of the Committee on Foreign Affairs of the State Duma;
Vladimir Nikitin - First Deputy Chairman of the Committee on Relations with CIS Countries;
Oleg Lebedev - First Deputy Chairman of the Committee on Relations with CIS Countries;
Ivan Melnikov - First Deputy Speaker of the State Duma;
Igor Lebedev - Deputy Speaker of the State Duma;
Nikolai Levichev - Deputy Speaker of the State Duma;
Svetlana Zhurova - First Deputy Chairman of the Committee on Foreign Affairs of the State Duma;
Aleksey Naumets - Major-general of the Russian Army;
Sergey Chemezov - general director of the Russia state-own company Rostec;
Alexander Babakov - Chair of the State Duma Commission on Legislative Provisions for Development of the Military-Industrial Complex of Russia.
This brings the total number of individuals subject to sanctions to 119. A total of 23 entities remain under an asset freeze in the European Union.

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