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Raytheon Awarded Damages in UK Contract Termination Suit

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Aerospace and defense operator Raytheon Company (RTN - Free Report) received a favorable decision from the Arbitration Tribunal, which settled the ongoing dispute between Raytheon Systems Limited (Raytheon UK) and the United Kingdom Home Office relating to the eBorders program. The Tribunal awarded nearly $392 million (£235 million) to Raytheon UK.

The eBorder Program

The eBorders program, awarded to Raytheon and its subcontractors, aimed at furnishing UK border officials with advance details about passenger coming into or going out of UK.  This was a proactive measure from the government to control illegal immigration and create a strong defense against potential terrorist activities.

Why Raytheon was removed from the Project?

The eBorder program was conceptualized in 2003 to create an advanced electronic system with new features that were missing from existing UK immigration controls.

The UK Home Department was however not too happy with the progress of the project and came to the conclusion that work on some critical portions of the eBorder project were a year behind schedule. The UK officials felt that the delay was due to the prime contractor Raytheon and decided to remove the company from the project.

On the other hand, Raytheon believed that a default notice was not the right way to achieve important objectives of the project and its contribution towards the program was in a way neglected.

Decision of the Tribunal

The dispute went to the Tribunal for a final settlement. The Arbitration Tribunal found that the U.K. Home Office was at fault to terminate Raytheon UK for default in 2010. The Tribunal also denied all Home Office claims for damages and clawback of previous payments.

The Tribunal awarded Raytheon UK damages and other monetary relief of nearly $309 million (£185 million) and found that the Home Office had wrongfully retained the $83 million (£50 million) it had drawn on RSL letters of credit in Apr 2011. The Tribunal reserved ruling on costs and on the quantification of interest payable to RSL.

Reaction from Parties

The UK government would make the necessary payments to Raytheon as directed by the Arbitration Tribunal. However, they are presently analyzing the detailed conclusions of the Tribunal to see if there are grounds for challenging the award.

Raytheon welcomed the judgment and said that the favorable ruling in a way confirmed its contribution to the UK Home Office under the eBorders program. Besides, Raytheon said it is committed to helping the UK government on key defense, national security and commercial pursuits.

Our View    

Raytheon like all other defense majors is banking to a large extent on Foreign Military Sales to compensate for dwindling defense budgets at home. Just as these companies are looking for new destinations to boost profits, the possibility of conflict and differences of opinion may well arise in this very sensitive defense space.

The positive decision not only resolved an ongoing regulatory issue, but established Raytheon’s commitment and involvement in the said project. The $392 million compensation will also boost the financial position of the company.

Raytheon currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include The Boeing Company (BA - Free Report) , Lockheed Martin Corporation (LMT - Free Report) and Northrop Grumman Corporation (NOC - Free Report) . All these stocks hold a Zacks Rank #2 (Buy).

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