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Hughes Pact in Crossfire of India Sanctions

July 29, 1998|EVELYN IRITANI | TIMES STAFF WRITER

After its telecommunications joint venture ran afoul of U.S. nuclear sanctions imposed on India, Hughes Network Systems turned to a legal defense more commonly used in cases of typhoons or heat waves.

Hughes, which has a joint venture with Arkansas-based Alltel Corp. and India's Ispat Group, invoked the force majeure clause in its contract with the Indian government in hopes of getting off the hook for license fees on the project.

Force majeure, which translates as "superior power," is meant to cover unexpected circumstances such as adverse weather or labor strikes that prevent the parties from fulfilling terms of a contract. Under force majeure, the parties are allowed to suspend their contractual obligations until the conditions change.

Global economic turmoil is also inviting creative use of force majeure. Indonesia's debt-strapped government has stated that it would invoke that defense if companies challenge its cancellation of infrastructure contracts.

Hughes Ispat, the Indian joint venture, claims that its project to provide telecommunications service in India has been jeopardized by the economic sanctions imposed by the U.S. government after India and Pakistan tested nuclear devices in May.

While the project itself could proceed, the sanctions would cut off the financing that the partners were counting on.

The sanctions prohibit U.S. government aid, including Export-Import Bank loans; prevent U.S. financial institutions from lending to the Indian government; and ban sales of weapons and defense-related technology.

According to an Indian consultant, Hughes Ispat had lined up about $400 million in loans from foreign lenders, primarily in the U.S., for its telecommunications project. Those loans are now in jeopardy.

Gayle Armstrong, a Hughes Network Systems spokeswoman based in Germantown, Md., said the Indian government had not yet responded to its decision to use the force majeure defense.

James Zimmerman, an international legal specialist at Morrison & Foerster in Los Angeles, said that approach is not commonly used in such situations. The key in this case, he said, is whether the triggering event--nuclear tests and the resulting sanctions--was "foreseeable."

Force majeure has typically been used when weather or other disasters prevent the fulfillment of contracts. Last year, for example, several mining firms invoked force majeure in Papua New Guinea after a drought lowered the water level in the Fly River, making it impossible to transport copper by barges.

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In India's case, the argument could be made that the government should have anticipated that its nuclear tests would trigger sanctions, given the U.S. government's warnings. However, Hughes could argue that the sanctions were not "foreseeable" since the testing came as a surprise even to the U.S. intelligence community, according to Zimmerman.

If Hughes' strategy works, other companies in India and Pakistan, where similar sanctions were imposed, may follow suit.

Given the emotion surrounding the nuclear controversy in India, the government might react negatively to such a move, according to Zimmerman, treating it as a breach of contract or a "violation of its sovereignty."

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Times staff writer Evelyn Iritani can be reached by fax at (213) 237-7837 or by e-mail at evelyn.iritani@latimes.com.

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