AgustaWestland initiates “dispute resolution” with MoD

"AgustaWestland will invoke arbitration if the MoD unilaterally cancels the AW-101 contract"

By Ajai Shukla

Business Standard, 20th Apr 13

Business Standard has learned that helicopter manufacturer AgustaWestland has written to the Indian Ministry of Defence (MoD), formally initiating a process of “dispute resolution” over allegations of bribery. This letter was sent on Apr 17, two months after the MoD slapped AgustaWestland with a show-cause notice on Feb 15, asking why a contract for twelve helicopters should not be cancelled as the Anglo-Italian company had allegedly bribed Indian officials.

The Rs 4,000 crore contract was for twelve AgustaWestland AW-101 helicopters, kitted out with plush cabins and high-tech security systems. These were for the Indian Air Force (IAF) to transport VVIPs (Very Very Important People, especially the president, top ministers and state guests) around the subcontinent in suitable style.

But controversy erupted on Feb 12, when Italian prosecutors in Milan arrested Giuseppe Orsi, the chief of Finmeccanica, the Italian defence conglomerate that owns AgustaWestland. Italian investigators also raided the offices of AgustaWestland, which Orsi headed in 2010 when the contract with India was finalized. Orsi was picked up for allegedly bribing Indian officials, including former IAF boss Air Chief Marshal Shashindra Pal Tyagi, in order to win the contract.

Three days later, following a media outcry in India and Italy, the MoD suspended payments to AgustaWestland and issued the show-cause notice. AgustaWestland responded to the show-cause notice, denying any wrongdoing. Parent company, Finmeccanica, has also protested its innocence.

Since then, MoD sources say that AgustaWestland has written several times to the MoD, offering to discuss the issue and respond to the allegations. Faced with silence from the MoD, the official letter on Wednesday represents the initiation of a more formal and legalistic process, which the contract provides for in the event of a dispute.

Sources who have seen the letter recount a paragraph: “AgustaWestland’s helicopters have served the Government of India for more than 40 years. We can state unequivocally that we have never knowingly breached any procurement rules and have adhered to the requirements of the DPP [Defence Procurement Procedure] without deviation. We want our relationship with India to continue and we are deeply concerned at the current situation. AWIL is committed to working with you and the Indian Authorities to resolve all of these difficulties as soon as possible.”

European defence industry specialists say that AgustaWestland is almost certain to invoke arbitration if the Indian MoD unilaterally cancels the AW-101 contract without clear proof of wrongdoing.

So far, clear proof remains elusive. Italian prosecutors have not yet formally charged the Finmeccanica chief, but they must do so by May 13, i.e. within 90 days of his arrest. Nor have Italian officials confirmed the veracity of an “investigation report” which the Italian and Indian media have quoted from while reporting alleged payoffs.

Nor has there been any apparent progress by the Central Bureau of Investigation (CBI), which the MoD has requested to probe the deal.

The MoD’s show-cause notice of Feb 15 alleges that AgustaWestland violated an “Integrity Clause,” a standard part of every Indian defence procurement contract. The MoD argues that Article 22 of the contract, which prohibits the use of undue influence, entitles the MoD to cancel the contract and recover from AgustaWestland any loss arising from such cancellation. 

The MoD has also pointed out that Article 23 of the contract requires AgustaWestland to declare that no Indian or foreign intermediaries were engaged or provided financial inducements to win the contract.

In a comprehensive press release on the subject on Feb 14, the MoD stated that any violation of these articles entitles it to cancel the contract “without any entitlement or compensation to (AgustaWestland) who shall be liable to refund all payments… along with interest.”

While the MoD has not responded to requests for a comment, Business Standard was told that AgustaWestland’s offices are closed for three days.