A. Beginning from approximately 1998 to 2003 upon Petitioner entering into respective Purchase Agreements ("the Agreements in this action" hereinafter), as indicated in the attached Appendix Contract Execution Status with Respondent, with TRIDENT AUTOTECH CORP. ("Respondent 1" hereinafter) stipulating Respondent 1 to supply Oricon artillery body (BREECH) manufactured by CSMI (CENTRAL SECURITY MFG INC) based in the United States, to Petitioner, and Petitioner paid USD 3,976,147.71 to Respondent 1 and was supplied with 79 Oricon artillery bodies from Respondent 1.
B. At the time of execution of the respective Agreements in this Action, Petitioner and Respondent 1 agreed to general contract provisions including the following clause related to nonperformance.
a. In the event Seller engages in a material breach of key terms in this Agreement and fails to cure the same within 30 days. Buyer may terminate or cancel this Agreement in whole or in part by sending a written notice of failure to cure a breach.
b. Material breach to key terms mentioned in the previous section is enumerated below, and the cure period mentioned in the above section is calculated from the date of goods’ delivery or from the date of service of notice of breach of key terms from Buyer to Seller.
1) In the event of failure to deliver goods within the period stipulated in this Agreement
2) In the event of failure to meet specifications and performance requirements stipulated in Chapter 2
3) In the event of Seller abandoning this Agreement prior to the effective date of this Agreement
4) In the event of failure to set an agreement fulfillment guarantee or failure to extend the effective date
5) In the event of failure to produce materials on the list of goods stipulated in Article 27
6) In the event of nonfulfillment of other important duty by Seller
C. On respective Agreements in this action, Nexen Corporation ("Respondent 2" hereinafter) assumed joint liability "in the event Respondent 1 fails to fulfill the terms of the agreement, and particularly, in the event there are issues with Respondent 1’s fulfillment of the terms of the agreement and if such issues are not cured within 6 months of the date of receiving a demand for cure, Respondent 2 shall provide immediate compensation for damages in cash to National Defense Headquarters" indicated in the Joint Guarantee drafted by Respondent 2 and submitted to Petitioner.
D. However, the Oricon artillery body actually supplied by Respondent 1 was a product manufactured by Youngil CNC upon Respondent 2’s Chief Executive Officer Ahn Sun-tae providing discarded Oricon artillery body and materials (forged steel) as well as reverse-engineered design drawings to Youngil CNC, which possesses no weapons manufacturing technology or experience whatsoever, and requested they manufacture Oricon artillery body. Oricon artillery body produced in such a waywas sent to Respondent 1 as general supply items and thereafter Respondent 1 added place of origin certification and testing results of CSMI as attachments and re-imported Oricon artillery body and delivered them to National Defense Headquarters Handling and Port Division and supplied the Defense Acquisition Program Administration under the ploy of products being properly manufactured by CSMI based in the United States. The products could not be utilized due to, among others, failure to correspond to standard requirements and not having been properly heat-treated thereby causing artillery body to shatter at the time of firing.
E. On February 15, 2012, Petitioner served notice of termination citing Respondents’ supplying goods that fail to meet specifications and standard performance requirements, and on or about the same time. Respondents were respectively served with the above notice.
F. Meanwhile, Respondent 2 Chief Executive Officer Ahn Sun-tae was indicted on September 9, 201l for violation of Aggravated Punishment of Specific Economic Crimes (Fraud) and violation of Korea Customs Act and sentenced to 5 years in prison with a KRW 30,000,000 fine according to the decision rendered in Busan District Court 2011 Gohap 322,2011 Gohap 327 (merged) for an aggregate sum of 3,976,147.71 for deceiving the Defense Acquisition Program Administration by engaging in fraud employing the method indicated in the above Section D. Subsequently, both Ahn Sun-tae and the prosecution appealed the decision and on appeal, Ahn Sun-tae was sentenced to 4 years in prison and a KRW 31,500,000 fine on May 23, 2012 by Busan High Court 2011 No. 565. Ahn Sun-tae filed an appeal to the highest court but the appeal was denied and the sentence from the original decision on the violation of Aggravated Punishment of Specific Economic Crimes (Fraud) was confirmed.
Accordingly, Respondent 1 shall pay an aggregate sum of USD 3,976,147.71 to Petitioner that had been paid by Petitioner to Respondent 1 as payment for goods supplied according to the Agreements in this Action in fulfillment of the obligation to compensate Petitioner’s damages, and Respondent 2, as joint guarantor in conjunction with Respondent 1, shall be held liable for payment of the same amount as compensatory damages to Petitioner.
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