Jędrzej Graf: Alfa Company has been present on the global defence markets for quite a long time, and in the past it was involved into the decommissioning of some of the Polish Navy ships. More recently, however, Alfa has been increasingly active on the United States market, also with the ammunition systems. What is the reason Alfa is increasingly marketing ammunition systems on the American market?
Piotr Sapieżyński, Alfa Group CEO: Various political and economic factors contribute to the fact that the US is now one of the fastest growing markets, regarding small arms and ammunition. There is some uncertainty on whether the new Biden administration could impose some limitations on the small arms market and imports in particular. This has been driving an increased demand for arms and ammunition throughout 2020 and early 2021, as many of the US customers are eager and willing to purchase arms and ammunition before any new limits and regulations are imposed.
Responding to that demand, we have decided to arrange an agreement to sell a large quantity of ammunition to the American market. In September 2020, we reached an agreement with Studebaker Defense Group, a reowned US company which is active both in commercial and in military/law enforcement markets. To fulfill that demand, the same month we have signed a large contract with KM Trade, a Bosnian company. According to the agreement, the ammunition was to be produced by Pobjeda Technology Group.
Before the signature of the agreement, Mr. Nihat Masic, CEO of KM Trade assured us that Pobjeda Technology Group is a subsidiary of KM Trade. Mr. Masic did also show us the facilities, where KM Trade logo was present, and the representatives of Pobjeda, including members of the Management Board told us they would be able to execute the agreement, which would require full manufacturing capacity for both 2020 and 2021. According to the agreement, our logo was to be shown on the cartridge case.
According to the contract, we made an upfront payment. After a month we were informed that a delay would take place. Subsequently, KM Trade requested us to provide the data on the end user, as it had been required by one of the shareholders of Pobieda. We did provide that data, despite the fact that it was our company that was the customer of KM Trade, and earlier we had shown all the necessary Polish security clearances, so there were no legal basis to the request of KM Trade. However, a few weeks later we managed to learn that Pobjeda is manufacturing another product, for the American customer. We still did not receive the deliveries, despite it was required.
Why did the deliveries not take place?
We were again told that an end user certificate is needed for the Bosnian authorities (OFAC – Office of Foreign Assets Control). We again applied for the end user certificate, which we were granted by our US partner, and we provided it to KM Trade. However, KM Trade did not accept it. On the other hand, after having contacted OFAC by ourselves, we learned that KM Trade did not request for permission to sell the ammunition in question to the US market via our company.
In the meantime, on 13 October KM Trade did declare a will to terminate the agreement. In our opinion, this termination had no legal basis, regarding the terms of the agreement.
This started looking as if the company did not want to honor the agreement at all since very beginning. According to the agreement, we were to receive the ammunition in November, and at that point it had already been significantly delayed.
What were next steps?
We were contacted by US-based man Mr. Ed Grasso, who told he is the majority shareholder of Pobjeda and KM Trade is the minority shareholder. Mr. Grasso told us that it was necessary to change the conditions of the agreement including pricing as the market conditions are changing. I replied that the terms were already included in the agreement.
After consulting our American partner, we tried to settle down with KM Trade and make some modifications. Nevertheless, KM Trade was still neither willing to provide timely deliveries, nor to provide us with the ammunition with appropriate parameters – in accordance with the agreement.
As the KM Trade did not fulfil the contract, we decided to apply to the ICC International Court of Arbitration in Switzerland. As the agreement that we signed in September with the KM Trade constitutes an international contract (so there is a need for a third party court), during the signature of the contract it was agreed that it would be the ICC that should resolve any disputes that could arise. And we already took steps to apply to the court of arbitration.
Did the contract include any penalties?
No, but we still may apply for the compensation for the damages incurred. Our company did purchase the Bosnian ammunition to re-sell it to the US market, to earn an income. Now that this income is lost, we are entitled for an appropriate compensation by the KM Trade. And this is what we are seeking in the ICC Court of Arbitration.
I have to say that it is hard to understand for me, why the KM Trade and Pobjeda decided not to execute the agreement. The agreement did include a substantial margin for KM Trade and Pobjeda, and the use of the capacity of Pobjeda through two years. Now, the ammunition will not be sold and the Bosnian company will have to pay a substantial compensation. We have made a comprehensive legal assessment and we are certain that we will be granted the compensation by the ICC Court.
Do you think the legal proceedings can affect the future of the Bosnian companies?
Trust is very important on the defence/arms markets. Not only will they have to pay the compensation for our company, but they will lose the credibility. The activities of KM Trade and Pobjeda are not in accordance with the agreement, and can cause us to incur losses.
To summarise, I would like to present the events that did negatively affect the realization of the Agreement as transparently as possible. I am only telling about facts that did take place one after another, and they comprise an entire process. I think our readers will be able to quickly assess and form their opinion on the matter.
I would also like to highlight that I do not intend to describe the scope of the losses that my company may incur or the amount of the compensation we are expecting. The principal issue is to make the name of the KM Trade company and other companies in the process known to other special equipment trade sector companies and to prove that those companies are engaged in unfair trade practices, which in turn may cause losses to their customers. I would like to make some sort of warning to all companies that are engaged in the sector.
Thank you for the conversation.