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One of the leading railcar manufacturers in the country - the Metal Structures Plant from the Saratov region - is trying to cancel a deal to supply 1000 grain hopper cars at 2022 prices due to high inflation and expensive loans.
The Metal Structures Plant (ZMK), one of the largest railcar manufacturers in the country, has been given the opportunity to withdraw from the supply of 815 hopper cars for grain transportation ordered by MosRegionTrans (MRT) company. ZMK received only 5% of the advance payment and after delivering 185 cars, decided not to produce the remaining grain hopper cars. MRT believes that ZMK should fulfill its obligations, but the court overturned the decision and sent the case for reconsideration.
The contract for the supply of railcars was signed in June 2022, ZMK received an advance payment of 225 million rubles and started fulfilling the order. However, the plant only supplied 185 grain hopper cars and then announced the termination of the contract and returned the advance.
The reason for ZMK's refusal to perform the contract is related to dissatisfaction of the shareholders. Stanislav Gamzalov, the owner of 1.84% stake in the plant's charter capital, stated that the contract was concluded without the consent of the shareholders. They also try to terminate the contract through the court and return the cars already delivered.
Shareholders argue that performance of the contract will be unprofitable due to changes in prices for raw materials and energy sources, as well as expensive loans. They indicate that the material costs for the production of railcars will amount to 3.745 billion rubles. In addition, they refer to interest rates of 12% in January 2023. Currently, interest rates on loans are significantly higher. Shareholders are trying to terminate the contract from the beginning of 2023. They also claim that the contract was concluded without their consent.
Despite various disputes and conflicts, experts point out that manufacturers are finding it increasingly difficult to fulfill long-term contracts due to high production costs and expensive loans.
Execution problems and changing conditions
Disputes between manufacturers and buyers over changes in prices and deal conditions have become more common in the railway industry. Manufacturer's refusal to fulfill the contract usually does not find support in court, lawsuits against manufacturers are usually satisfied. Changes in economic conditions or sanctions are not considered force majeure circumstances. Often parties try to amend the contract terms rather than terminate it.
In this case, the court in its decision stated that the size of the advance payment amounted to only 5% of the total cost of the production, and therefore demanding delivery of all remaining railcars is unjustified.
Participants in the dispute can apply various strategies. One option is to change the contract terms instead of terminating it. If the parties stick to their arguments, it may turn out that the railcars already delivered will not be returned to ZMK. In any case, the prospect of a global settlement is not ruled out.
Rising production costs and the current situation
The cost of railcar production has increased due to the rise in raw materials, energy sources, additional payroll costs, and expensive loans. Manufacturers are finding it increasingly difficult to fulfill contracts at a loss.
Russian railway operators have almost stopped purchasing new railcars due to high production costs and an increase in the Central Bank's rate. Prices for new hopper railcars currently average 6 million rubles.
Representatives of MRT do not deny the increase in prices for the products, but note that at the time of signing the contract the price was normal. ZMK completed part of the order and received payment for it. MRT has the option to pay the remaining cost of the railcars and receive them, as the contract has not been terminated.
Experts note that the rising production costs and the complex financial situation lead to an increase in disputes between manufacturers and buyers. Instead of producing goods at a loss, manufacturers more often seek ways to terminate long-term contracts and engage in complex legal proceedings.
The Metal Structures Plant and MosRegionTrans have no comment on the situation.
