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UPDATE 2-India agrees to arbitration on scrapped AgustaWestland helicopter deal

Nigam Prusty and Krishna N Das
Wednesday, 1 Jan 2014 | 9:41 AM ET

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* India says terminates $770 mln contract immediately

* New Delhi appoints former judge as its arbitrator

* AugustaWestland parent Finmeccanica says to defend position

* Finmeccanica says its "behaviour was ethically correct"

NEW DELHI, Jan 1 (Reuters) - India agreed to take its $770 million helicopter deal with Italian defence group Finmeccanica's AgustaWestland unit to arbitration while formally cancelling the agreement on Wednesday over what it termed a breach of integrity.

India's Defence Ministry appointed a former judge as its arbitrator on Wednesday but said in a statement it believed "integrity-related issues are not subject to arbitration".

India froze payments for the 12 AW101 helicopters after Finmeccanica's then chief executive was arrested in February for allegedly paying bribes to secure the deal, embarrassing the New Delhi government before parliamentary elections due by May 2014.

India's defence minister, A.K. Anthony, has said he did not believe AgustaWestland's denial that it paid bribes to swing the deal. Anthony had a meeting with Indian Prime Minister Manmohan Singh hours before the latest decisions were announced.

Finmeccanica spokesman Roberto Alatri, commenting on India's decision, said the company would defend its position. It invoked the arbitration, which would be conducted in India under the Indian Arbitration and Conciliation Act of 1996.

"We've not received any official communication yet but we will do everything that would be necessary to defend the correctness of our position," Alatri said. "We're sure our behaviour was ethically correct."

India in October had issued a final "show cause" notice to AgustaWestland seeking to terminate the contract. Sources told Reuters in November the deal would be scrapped.

"The Government of India has terminated with immediate effect the agreement that was signed with M/S. AugustaWestland International Ltd (AWIL) on 08 February, 2010 for the supply of 12 VVIP/VIP helicopters on grounds of breach of the Pre-contract Integrity Pact and the agreement by AWIL," the Defence Ministry said in its Wednesday statement.

Indian defence deals have been hit by a number of corruption allegations over the past two decades but a Defence Ministry spokesman said this was the first cancellation of a major deal.

WINDOW FOR OTHERS

Paying or accepting bribes is prohibited by India's defence procurement rules. The government can cancel a contract if an integrity pact in the rules is violated, and the seller has to forfeit any security money it deposited as a bidder.

India's federal auditor said in August the ministry had initially stipulated that the helicopters should be able to fly to an altitude of 6,000 metres (19,685 feet), which meant that AgustaWestland could not compete since the AW101 was certified to fly only to 4,572 metres (15,000 feet).

India took delivery of three of the helicopters before the deal stalled but the Defence Ministry spokesman said the fate of those aircraft was "uncertain".

United Technologies Corp's Sikorsky Aircraft, EADS' Eurocopter and Lockheed Martin may now be in line to provide helicopters for the country's defence forces.

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