In case of foreign government seeking to bring breach of contract suit against U.S. Contractor under third party beneficiary theory pursuant to Foreign Military Sales (FMS) agreement under Arms Export Control Act, Fourth Circuit holds that, unlike Direct Commercial Sales (DCS) process, FMS method of procurement does not place foreign buyer in privity with manufacturer
The U.K. Ministry of Defense (UK MOD) entered into a Letter of Agreement (LOA) with the United States to buy auxiliary output chips (AOC) manufactured by Trimble Navigation Limited (Trimble). The U.S. entered into separate agreements with Trimble for the production and delivery of the AOCs. AOCs were purchased through the two step Foreign Military Sales (FMS) method rather than the Direct Commercial Sales (DCS) method where UK MOD would have dealt directly with the manufacturer.
The first delivery of AOC's to UK MOD did not fit specifications. Trimble attempted to repair or replace the AOC's but UK MOD was not satisfied with the result. UK MOD requested help from the U.S. to recover it's costs from Trimble, however, after an investigation the U.S. decided it would take no action against Trimble.
UK MOD sued Trimble in a Virginia federal court claiming that Trimble had breached its contract with the U.S. and that UK MOD was harmed as a third party beneficiary. On remand from a determination that subject matter jurisdiction was proper, the District Court dismissed, ruling that UK MOD was not a third party beneficiary, and could not enforce rights under the
U.S. Trimble contracts. UK MOD appealed. The U.S. Court of Appeals for the Fourth Circuit affirms, based [mainly] on Montana v. United States, 124 F.3d 1269 (Fed. Cir. 1997).
The Arms Export Control Act (AECA) authorizes this type of contract. Affording third party standing to UK MOD would grant the advantages of a DCS purchase to FMS purchases and destroy the statutory distinction. Because the purpose of the governing statute is contrary to third party standing, the circumstances surrounding the formation of the contract do not reflect any intent to benefit the third party. Thus, UK MOD is not entitled to recognition as a third party beneficiary.
"Foreign governments generally may choose to acquire military goods through either FMS or DCS. Each method has its advantages and disadvantages in most cases, then, the choice between proceeding via FMS or DCS is a strategic decision based upon the needs of the foreign purchaser or defense contractor. In exchange for some of the advantages of proceeding via FMS,
however, the foreign purchaser must relinquish some benefits. One concession is that the United States "selects the source and manages the contractthus, a foreign purchaser proceeding via FMS necessarily delegates the ability to negotiate and service the contract to the United States." [Slip op. 7].
"There is no dispute that, in a DCS transaction, a foreign government directly contracts with the domestic manufacturer and can sue that manufacturer on the direct agreement it is also without dispute that the FMS program requires the intermediation of the United Sates and a
back to back contract structure. Because the choice of this structure reflects the national security interests of the United States, it would be contrary to the statutory scheme to imply a direct relationship between the domestic contractor and the foreign purchaser by affording third party
beneficiary status to the foreign purchaser on the contractors agreement with the United States."
"To recognize such a right of action would allow the foreign purchaser to hold the contractor directly liable for the purchased goods, a level of accountability that may be achieved through a DCS arrangement. Accordingly, the recognition of UK MOD as a third party beneficiary of the U.S. Trimble agreements would be contrary to the AECA because it would afford UK MOD a
right exclusive to DCS transactions because recognition of third party beneficiary status in a contract made under a statutory scheme must accord with that scheme, the recognition of such status in this case is barred as a matter of law." [Slip op. 8].
Citation: Secretary of State for Defence v. Trimble Navigation Limited,484 F.3d 700 (4th Cir. 2007).
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