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Raytheon Sues Great Britain for Funds over Terminated Contract

by: Matthew Potter
August 26, 2011

Category: Business Line, Companies, Contract Awards, Countries, development program, England, Events, IT, Protest, Raytheon, Restructuring, Services | RSS 2.0

In 2010 Raytheon’s (RTN) earnings were reduced due to the decision by the British Government to cancel a border security database program that the Massachusetts based company had been contracted to build for the European country. The contract had been awarded by the previous Labour government and had a goal of keeping track of everyone entering or leaving the country. In the first quarter of this year Raytheon took a charge of about $80 million due to winding down of this contract.

The contract was not a small one valued at over $1 billion and its cancellation was not only a blow to Raytheon’s bottom line but also to there ability to grow this area of their business. It was not a traditional area for the company and success here potentially would have led to much greater opportunities with other governments interested in investing in the same capability.

Now Raytheon has announced that they are suing the U.K. for over $750 million due to unlawful termination and for damages. If they are successful they will recover most of the money they were due to gain by carrying out the contract.

In the United States contracts may be terminated for two reasons: cause and needs of the government. If for cause which is usually non-performance then the contractor is not guaranteed any money related to the termination but these are negotiated. If for needs of the government then termination costs must be paid. Normally these are identified up front so the government will know what they are and usually are based on buying material, paying for work not billed yet and for shutting down facilities.

In this case Raytheon is claiming unlawful termination and is due damages. The company’s believes that there product met the U.K.’s requirements as they were aware of them and thus they were performing. They said the customer was not clear on the requirements and it would be hard to claim they were non-performing when they had not metrics to measure against.

If Raytheon wins some or all of this money it will clearly help there future revenue in the short term. Obviously the suit will be first cleared by a Court or arbitrator and then the damages calculated. It could still be zero if the ruling body agrees with the U.K. government or it could be some amount up to $750 million.

No company likes to lose a contract especially if they feel they lost it for the wrong reasons. This is why there is a protest process and suits like this. The end result will most likely be a negotiated settlement unless the U.K. can prove that Raytheon clearly understood the contract’s requirements and metrics.

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