BAE Systems claims South Korea’s military purchasing agency is shaking the company down for $43 million following a canceled deal to upgrade the nation’s fleet of Lockheed Martin F-16 fighters and has filed suit in US district court to avoid payment.

South Korea on 5 November terminated a Foreign Military Sales contract with BAE to upgrade its F-16 fighters, a deal potentially worth $1.7 billion. The company saw the FMS deal as a huge win in the competition with Lockheed to upgrade the thousands of F-16s currently in service worldwide.

BAE Systems’s contract would have seen 134 aircraft receive new avionics and an active electronic scanned array (AESA) radar produced by Raytheon. The company alleges that South Korea killed the deal because BAE failed to secure a sufficiently low price through the US foreign military sales process. BAE is not seeking reinstatement of the contract.

Two South Korean F-16s – one single-seat C and a twin-seat D model – have already received the upgrade in BAE System’s Fort Worth Facility. The contract cancellation followed a period of price haggling between BAE, South Korea’s Defense Acquisition Programme Administration (DAPA) and the US Government that is outlined in BAE’s lawsuit.

The US government in August “informed South Korea that the overall price of the upgrade program could increase by as much as $800 million”, to between $2.4 billion to $2.5 billion, alleges the suit, filed on 12 November by BAE in the US District Court of Maryland.

A report by South Korean official news agency Yonhap, quoting a spokesman at South Korea’s Defense Programme Administration (DAPA), said the US government wanted an additional W500 billion ($473 million) and prime contractor BAE Systems W300 billion.

Despite the exact amount of the potential increase, BAE alleges that South Korea backed out of the deal because the company was not able to talk down the US government, which oversaw the contract under the foreign military sales (FMS) process.

“Clearly disappointed by the progress of its discussions with the U.S. Government, in early November 2014, South Korea instructed the USAF to cancel the selection of BAE,” the suit says.

In April 2014, the company provided DAPA with a Guarantee for payment in the amount of $43.25 million. BAE promised to hand over that amount if it failed to take certain actions during the bid phase of the upgrade program, “a phase now long completed”, the suit says.

“DAPA is now impermissibly seeking to require BAE to pay $43,250,000 under the April 2014 Letter of Guarantee,” the suit says. BAE claims South Korea blames the company not for violation of the initial agreement, but on its “inability to force the US government to withdraw its proposed price increases”.