The Supreme Court on Monday refused to let a leading defense contractor avoid paying more than $31 million to a business run by arms broker Adnan Khashoggi for help in arranging arms sales to Saudi Arabia.
The court, without comment, let stand a ruling that Northrop Corp. must pay the commissions even though Saudi Arabia has banned such payments.
Northrop, based in Los Angeles, signed an agreement in 1970 with Triad Financial Establishment, controlled by Khashoggi. Under the agreement, Triad would act as the defense contractor's marketing representative in winning $4.2 billion in contracts from the Saudis.
In return, Triad was to receive a commission based on the size of the sales.
The Council of Ministers of Saudi Arabia in 1975 outlawed the payment of commissions in connection with arms sales.
The payments have also been attacked indirectly in a 1977 law enacted by Congress, the Foreign Corrupt Practices Act. That law, spurred by reports from the Securities and Exchange Commission of widespread corruption, makes it illegal for American businesses to bribe foreign officials to win overseas contracts.
Northrop alleged that Triad bribed Saudi officials to win contracts for the U.S. corporation. Northrop cut off the commissions to Triad after the Saudis banned the payments.
Triad said Northrop owed it $153 million. The dispute was submitted to an arbitrator, who ordered payment of $31.7 million to Khashoggi's business.
When Northrop refused to pay, Triad took the case to the federal courts. A federal judge threw out most of the arbitrator's award, but it was reinstated by the 9th U.S. Circuit Court of Appeals last March.
The appeals court rejected Northrop's claims that the arbitrator's decree is invalid because it violates Saudi Arabian law and U.S. policy.
The appeals court said the contract between Northrop and Triad is governed by the laws of California and not those of Saudi Arabia.
The case is Northrop vs. Triad, 87-349.
In an unrelated development a federal bankruptcy judge on Monday temporarily froze the U.S. assets of the wealthy Saudi Arabian arms dealer and his brother, Essam Khashoggi .
U.S. Bankruptcy Judge John H. Allen's 10-day restraining order was issued in the wake of a lawsuit filed Friday naming the Khashoggis and more than 40 companies, many of them offshore corporations, as defendants.
The suit seeks $239 million in actual damages and $800 million in punitive damages from the brothers for alleged breech of contractual obligations and fiduciary duties.
Attorney Dan Berman, representing Adnan Khashoggi, unsuccessfully argued that the court lacks jurisdiction over his client's assets.
However, Allen rejected a broader motion filed by the trustee of Triad America Corp., a company controlled by the brothers, which asked that the Khashoggis' worldwide assets be temporarily frozen.
The lawsuit, filed by trustee R. Todd Neilson, accuses the Khashoggis of creating entities that were used to obscure transactions and of personally using Triad's assets, ultimately leading to Triad's collapse and insolvency.