Elbit Sues Israeli Gov’t Over Turkish Contract Default
Nov. 9, 2012 - 11:40AM By Barbara Opall-Rome Defense News
TEL AVIV — Israel’s Elbit Systems is suing the Israeli government for some
$74 million in damages due to revoked MoD export licenses for a long-range
aerial photography program for the Turkish Air Force.
The Haifa-based firm announced Nov. 8 that its subsidiary, Elop Ltd,. “was
compelled” to file suit following “unsuccessful efforts to reach an
appropriate compensatory settlement” with the government.
It marked the first time in Elbit’s history that the privately held,
publicly traded firm took legal action against its host government. Due to
sensitive security and defense trade information likely to be aired by
plaintiffs and defendants alike, the government has imposed a media blackout
during the entire course of closed-door proceedings.
The case in question stems from a 2005, $141 million contract with Turkey
between prime contractor Elop and Elta Systems, a subsidiary of state-owned
Israel Aerospace Industries (IAI), for Lorop reconnaissance pods for Turkish
Phantom fighters that had been upgraded by IAI. Technical and competitive
business hurdles forced a temporary suspension of the contract, but after
active intervention from Israel’s MoD and the Israel Air Force — with whom
the Turkish Air Force was cooperating intensively at the time — the program
was reinitiated in 2009.
But late last year, in response to deteriorating ties with Ankara over
Israel’s 2008 incursion into Gaza, the killing of nine activists during an
Israeli raid of a Gaza-bound Turkish ship, and Turkey’s expanding strategic
ties with Iran, Israel’s MoD took the unusual step of barring both firms
from completing deliveries of the sophisticated spy system.
The decision exposed Elta to $55 million in lost revenue while Elbit
reported losses of $90 million due to write-offs and other costs associated
with the terminated program.
At the time, executives from both firms voiced understanding for the
strategic and political considerations driving the government’s decision to
scrap the program, yet insisted they be compensated for termination
liabilities incurred through no fault of their own.
“It’s an unprecedented step, but just as the government has sovereign
obligations, Elbit as a private company has responsibilities to its
shareholders,” an industry executive said Nov. 9.
As of press time Nov. 9, MoD had not issued a statement in response to the
As a government-owned company, industry executives expect IAI to wait
patiently for positive resolution of two export licensing issues pertaining
to Turkey. In addition to the $55 million in damages due to the terminated
Lorop program, IAI’s Elta risks losing its lucrative position as preferred
subcontractor to Boeing on the high-profile U.S.-Turkish Peace Eagle
airborne early warning and control program.
IAI has been lobbying for more than a year for permission to deliver the
last two of four Elta-produced electronic support systems ordered by the
Seattle-based firm. Early last September, as part of the government’s
clampdown on defense technology transfers to Turkey, MoD decided to hold,
rather than suspend, Elta’s export license to Boeing.
Without near-term resolution, industry sources say Boeing may be forced to
declare Elta in default. Such a step, industry sources say, would cause
considerable damage to Elta’s reputation as a reliable supplier, expose the
firm to liability penalties and compel Boeing to select another supplier for
the electronic subsystems.
“There’s a danger that Boeing will have to declare force majeure and kick us
out of this prestigious program, which we hope will serve as a springboard
for major future business,” an Israeli executive said in an interview last
IAI declined comment on its ongoing deliberations with MoD over the two
Turkish-related export issues, but an industry source said the sides are
making progress “toward positive accommodation, at least on the matter of
lifting the license hold to Boeing.”
Boeing plans to deliver the first Peace Eagle aircraft by the end of the
year, and the remaining three planes are expected to enter service toward
the end of 2013.