No financial guarantees, weak legal recourse: CAG's Rafale report shows little options if contract breached

The report of the Comptroller and Auditor General (CAG) tabled in Parliament on Wednesday confirms that the Cabinet Committee on Security (CCS) headed by Prime Minister Narendra Modi had approved the Rafale fighter jet deal even though the Government of France and Dassault Aviation had both refused to furnish bank guarantees or sovereign guarantees. [caption id=“attachment_199280” align=“alignleft” width=“380”] A French Air Force Rafale manufactured by France’s Dassault Aviation speeds above Le Bourget airport, north of Paris. AP/PTI[/caption] Page 138 of the CAG report has a section on “assessment of terms and conditions in acquisition achieved through IGA” (intergovernmental agreement). It explains that the initial offer Dassault Aviation made in 2007 included a 15 percent bank guarantee against advance payments and 5 percent each for performance guarantee and warranty. But Dassault retracted these terms in its 2015 offer, which did not include any form of guarantees. Page 139 of the report says: “In the 2015  offer, the French vendor did not furnish any financial and performance bank guarantees. Since about 60 percent of advance payments were to be made to the French vendors, the Minister of Law and Justice advised that government/sovereign guarantees be requested in view of the value of the proposed procurement. However, the government of France and the vendor neither agreed to furnish the bank guarantees nor government/sovereign guarantees. Instead, it provided a letter of comfort signed by the French prime minister in lieu of bank guarantees. The issue on sovereign guarantee and letter of comfort was finally submitted to the CCS in September 2016 for consideration, which approved the acceptance of the letter of comfort from the French prime minister.” The ministry was then directed to work out any other form of guarantees or assurances in lieu of bank guarantees, such as facilitating “payments through an escrow account or similar safeguards”. An escrow account would have been a separate account operated by the French government holding specific amounts for disbursement to Dassault under conditions dependent on performance or other such terms specified by the Ministry of Defence.

The CAG report states that the French government had refused to agree to an escrow account as it felt that “the guarantees already provided by the Government of France were far reaching and unprecedented”. The report does not elaborate on what these guarantees are, as the section already established that the vendor had refused to offer any form of financial or performance bank guarantees. The negotiations ended with insertion of Article 5 of the IGA, which states that advance payments were to be made directly to the bank accounts of Dassault Aviation and not to an escrow account.

The report further elaborates that in case of a breach in agreement, the defence ministry would have to settle with Dassault through international arbitration, and the French government would have nothing to do with it. In the event of an arbitration award being made in favour of India with a direction to Dassault Aviation to pay up, India will have to exhaust all legal remedies to implement the arbitration award. Only after this will the French government get involved.

The last paragraph of this section of the CAG report mentions two justifications offered by the ministry for waiving something as crucial as sovereign guarantees. One: “An IGA has been signed between two strategic partners who are sovereign nations with a long-standing strategic relationship.” Two: “On the advice of the Ministry of Law and Justice, the responsibility of the French government and Dassault Aviation was made ‘Joint and Several’ in the IGA.” The section does not elaborate on the terms of agreement provided for joint and several liability. In no way does joint and several mean that the Government of France is liable for the financial obligations of Dassault in case of a breach of contract. It only means that both parties will adhere to the terms they had agreed to mutually, which, as per the preceding paragraph, is that the Ministry of Defence will have to pursue Dassault through arbitration and exhaust all legal remedies, and only then will the French government make these payments on behalf of the vendor. The financial guarantee waivers and weak legal recourse contradict what an intergovernmental agreement is meant to achieve, which is explained in the second paragraph of this section in the CAG report. “The buying government receives the same benefits and protections as the vendor gives to its own government,” it says. India has neither been indemnified by the French government, nor has it been given the option of prosecuting Dassault as the French government would have been able to in the event of a breach. The Government of India will be able to hold France accountable only after a long-drawn legal process with Dassault.