Northrop Corp. v. Triad Financial Establishment

• Decision Date: 04 September 1984
• Docket Number: No. CV83-7945,CV83-7948.,CV83-7945
• Citation: 593 F. Supp. 928
• Parties: NORTHROP CORPORATION, Petitioner, v. TRIAD FINANCIAL ESTABLISHMENT and Triad International Marketing, S.A., Respondents. In the Matter of the Arbitration Between TRIAD INTERNATIONAL MARKETING, S.A., et al., Petitioners, and NORTHROP CORPORATION, Respondent.
• Court: U.S. District Court — Central District of California

593 F. Supp. 928

NORTHROP CORPORATION, Petitioner, v. TRIAD FINANCIAL ESTABLISHMENT and Triad International Marketing, S.A., Respondents In the Matter of the Arbitration Between TRIAD INTERNATIONAL MARKETING, S.A., et al., Petitioners and NORTHROP CORPORATION, Respondent.

Nos. CV83-7945, CV83-7948.

United States District Court, C.D. California.

September 4, 1984.

COPYRIGHT MATERIAL OMITTED

Ronald L. Olson, Jeffrey I. Weinberger, Bradley S. Phillips, William D. Temko, Munger, Tolles & Rickershauser, Los Angeles, Cal., for Northrop Corporation.

Joseph A. Ball, John R. McDonough, Joseph D. Mullender, Jr., Carole C. Rouin, Ball, Hunt, Hart, Brown & Baerwitz, Beverly Hills, Cal., for Triad International Marketing, S.A. and Triad Financial Establishment.

Harold R. Tyler, Jr., Michael B. Mukasey, Eugene M. Gelernter, Patterson, Belknap, Webb & Tyler, New York City, William D. Keller, Hahn & Cazier, Los Angeles, Cal., for amicus curiae The Tumpane Company, Inc.

MEMORANDUM OPINION

TASHIMA, District Judge.

These are consolidated actions to, respectively, vacate and confirm an arbitration award against Northrop Corporation ("Northrop") and in favor of Triad Financial Establishment and Triad International Marketing, S.A. (collectively "Triad"). Arbitration was initiated by Triad in 1979. After lengthy proceedings involving Triad's claims to approximately $153 million in commission payments, the arbitration tribunal (the "tribunal") made an award to Triad in the amount of $31,477,378.

BACKGROUND

The Marketing Agreement

On October 4, 1970, in an effort to facilitate the sale by Northrop of fighter aircraft and related equipment to the Kingdom of Saudi Arabia,¹ Northrop and Triad executed a Marketing Agreement (the "Agreement"). The Agreement designated Triad as Northrop's sole representative for the sale of certain specified products and services in Saudi Arabia. Triad was to be paid a commission on consummated sales at a rate varying according to the type of sale and with subsequent agreements between the parties. Direct sales by Northrop to Saudi Arabia were to be compensated at a fixed percentage of the contract price.

The Agreement also contemplated "indirect" sales. These were sales effected through the United States government, which were governed by the Foreign Military Sales Act (now the Arms Export Control Act), 22 U.S.C. § 2751, et seq. ("FMS sales" or "indirect sales"). For each FMS sale, Northrop would submit to the United States Department of Defense ("DOD") a "not-to-exceed" price proposal which would serve as the basis for a "Letter of Offer" from DOD to the Government of Saudi Arabia. This offer, once accepted by Saudi Arabia, would be returned to DOD as a "Letter of Offer and Acceptance" ("LOA"). Northrop and DOD then would execute a detailed fixed-price contract which would establish the final cost to Saudi Arabia of the program covered by the LOA.

Indirect sales were to be compensated at a rate agreed upon by the parties, but not less than one percent of the sales price. The Agreement further provided that commission payments on indirect sales were "subject to the allowability and recognition of such compensation by the United States government."²

The Agreement was to continue for a period of one year, and to be extended automatically for an additional five-year period if Northrop procured a contract prior to October 4, 1971.³

Beginning in 1971, Northrop entered into a series of contracts with the Saudi government, in what came to be known as the "Peace Hawk Program" ("Peace Hawk" or the "Program"). Northrop made FMS sales of aircraft to the Royal Saudi Air Force ("RSAF") under Phases I, II, IV and VI of the Program, and sold maintenance, construction, training and other support services and material under Phases III, III Extension ("IIIE"), V and VII of the Program. Sales to Saudi Arabia under Peace Hawk Phases I through VII totalled $4.2 billion.

FMS Sales

Prior to April 1972, the Saudi government had signed LOAs for Peace Hawk Phases I, II and III. Each LOA contained line items for commission payments to Triad. The amount of commissions for Phases I, II and III also were "recognized and allowed" by DOD as an element of the contract price paid to Northrop by the United States government.⁴

By August 1975, Phases I and II of the Program were completed, and Phase III was nearing completion. In an amendment to the Agreement executed on August 15, 1975, the parties established a schedule for payment by Northrop of all Triad fees earned under Phases II and III.⁵ The amendment provided for payment of commissions on May 10, August 10, and November 10, 1975. The May and August commissions were in fact paid by Northrop on August 20. The commissions due on November 10, 1975, were never paid. Northrop denied liability for any outstanding Phase II or Phase III commissions; the issue was submitted to the tribunal for its resolution.

Northrop's Phase IV price proposal to DOD included line items for commission payments to Triad. However, DOD never advised Northrop that the Phase IV commissions had been "recognized and allowed." Nor did DOD include line items for commission payments on the Phase IV LOA signed by the Saudi government on January 4, 1975. Nevertheless, on April 10, 1975, Northrop and Triad signed an advance commission agreement under which Northrop paid $6 million to Triad against commissions which might become due under Phase IV. The agreement also provided that Phase IV commissions would not be subject to recognition and allowance by the U.S. government.

No Phase IV commissions, other than the $6 million advance, were ever paid. In the arbitration proceedings Triad claimed additional commissions on certain Phase IV FMS sales; Northrop counterclaimed for recovery of the $6 million advance commission payment.

Termination of the Marketing Agreement

DOD submitted its Phase V Letter of Offer to the Saudi government in January 1975. On March 6, 1975, Assistant Secretary of Defense Robert Ellsworth wrote to Prince Sultan, Minister of Defense and Aviation for Saudi Arabia, stating that Northrop's Phase V proposal included commission payments to Triad of approximately $45 million. In a written response dated May 17, 1975, Prince Sultan advised DOD that the proposed Phase V commissions were unacceptable and that the use of intermediaries with respect to arms sales to the Saudi government would not be permitted. Thereafter, the Director of the Defense Security Assistance Agency advised Prince Sultan that $23 million in Triad commissions had been included in the Phase IV LOA. By letter dated June 10, 1975, Prince Sultan reiterated his non-acceptance of any intermediary with respect to arms sale contracts and stated that the Saudi government would not allow Phase IV commission payments.

On June 10, 1975, the USAF advised Northrop that it would not be permitted to include commission payments in its Phase IIIE⁶ or Phase V price proposals. On June 14, the Saudi Ministry of Defense and Aviation ("MODA") issued a public proclamation referring explicitly to the Northrop-Triad relationship and stating that the government would not permit the payment of commissions to agents in arms sale contracts. On June 20, 1975, the USAF advised Northrop that agent's fees and commissions would not be recognized and allowed on Phase IV.

On July 9, 1975, DOD amended its Defense Department circular relating to agent's fees to require every supplier acting under contract with DOD for sales to Saudi Arabia and three other countries, to certify that its FMS contract price did not include any direct or indirect costs for agent's fees not approved in writing by the purchasing country. By letter dated July 28, 1975, Northrop terminated the Agreement with Triad. In so doing, Northrop stated that the U.S. government had interpreted the letters and statements of the Saudi government as an absolute prohibition against agents' fees or commissions in FMS sales. Triad refused to agree to termination of the Agreement. Only after the Saudi government signed a Phase IIIE LOA containing a specific prohibition against the payment of fees or commissions, did Triad agree, on August 15, 1975, to terminate the Agreement as to Phase IIIE.

The Saudi Decree

On September 17, 1975, the Council of Ministers of Saudi Arabia issued Decree No. 1275 (the "Saudi Decree"), which provides, in part:

First: No company under contract with the Saudi Arabian Government for the supply of arms or related equipment shall pay any amount as commission to any middleman, sales agent, representative, or broker irrespective of their nationality, and whether the contract was concluded directly between the Saudi Arabian Government and the company or through another state. Any commission arrangement already concluded by any of these companies with any other party shall be considered void and not binding for the Saudi Arabian Government;

Second: If any of the foreign companies described in Article I (one) were found to have been under obligation for the payment of commission, payment of such commission shall be suspended after notifying the concerned companies of this decision. Relevant commissions shall be deducted from the total amount of the contract for the account of the Saudi Arabian Government.

Northrop sought no further services from, and made no payments to, Triad after September 17, 1975. The Saudi prohibition, as expressed in Decree No. 1275, was incorporated in a Phase V contract between DOD and Northrop, executed in March of 1976. No fees or commissions were included in any subsequent LOA signed by the Saudi government, and each LOA required Northrop to certify that the compensation paid to a marketing agent would not be claimed as an allowable item of cost and would not be included in the contract price.

The Arbitration Award

Pursuant to the arbitration provision of the Agreement, Triad filed its Demand for Arbitration on July 31, 1979,...