8.	Commitments and Contingencies

Litigation. As previously disclosed by Servotronics, Inc. certain claims have been pending between the Company and a former Executive Officer of the Company in connection with the termination of the former Executive Officer’s employment agreement. Such claims had been pending in an arbitration proceeding before a single arbitrator under the rules of the American Arbitration Association.

On September 30, 2014 an award was issued under the rules of the American Arbitration Association in favor of the former Executive Officer and such award was revised by the arbitrator on October 28, 2014. Pursuant to the material provisions of the arbitration award as revised, the Company is to pay the former Executive Officer the sum of $3,534,534 plus interest at the annual rate of 9% calculated from September 2012 through the date of the final award. The amount of the arbitration award represented the present value of the former Executive Officer’s calculation of his estimated total compensation for the remainder of the term of the employment agreement (through December 2018). In addition, as the prevailing party, the former Executive Officer is entitled to attorney’s fees and disbursements in connection with the arbitration. On October 13, 2014 the former Executive Officer submitted a request to be awarded approximately $850,000 for such attorney’s fees and disbursements; however such request has not been approved by the arbitrator as of the date of this filing.

The Company believes that the arbitrator’s ruling was not supported by the facts of this case or the terms of the employment agreement. On October 13, 2014, the Company, without conceding the correctness of any aspect of the arbitration award, requested that the arbitration hearing be reopened to allow evidentiary submissions with respect to the calculation of damages consistent with the arbitration award. The Company argued that under New York law only non-discretionary compensation guaranteed under an employment contract is recoverable in a claim for breach of the employment contract while the arbitration award included estimated annual salary adjustments, bonus payments and other incentive compensation in future years that were not guaranteed under the terms of the employment agreement. The Company’s request was denied on October 28, 2014.

Any final arbitration award (including determination of attorney’s fees and disbursements) must be confirmed by New York State Supreme Court prior to becoming binding on the Company. New York law does provide for limited grounds on which arbitral awards may be set aside. The Company is reviewing its legal options with respect to vacating the arbitration award.

While the Company continues to challenge certain aspects of the award through legal processes, as of September 30, 2014 the Company has accrued for approximately $5,419,000 which represents $3,535,000 in damages, $645,000 in interest $850,000 in attorney fees as well as $389,000 in post-retirement health related benefits under the employment contract.

The Company has pending litigation relative to leases of certain equipment and real property with a former related party, Aero, Inc. Aero, Inc. is suing Servotronics, Inc. and its wholly owned subsidiary and has alleged damages in the amount of $3,000,000. The Company has filed a response to the Aero, Inc. lawsuit and has also filed a counter-claim in the amount of $3,191,000. The Company has not considered the risk of loss to be probable, but is unable to reasonably or accurately estimate the likelihood and amount of any liability or benefit that may be realized as a result of this litigation.

Leases. The Company leases certain equipment pursuant to operating lease arrangements. Total rental expense in the three and nine month periods ended September 30, 2014 and 2013 and future minimum payments under such leases are not material to the consolidated financial statements. The Company also leases certain real property being accounted for under capital leases. See also Note 4, Property, Plant and Equipment and Note 5, Long-Term Debt of the accompanying consolidated financial statements for information on the leases.

Facility Expansion. As previously disclosed, the Company has commenced a multi-year investment plan designed to consolidate the operations of the CPG. The five year plan includes the construction of an approximate 28,000 square foot addition, capital improvements to the existing plant, the reconfiguration of its production process within the expanded facility, and the addition of new state of the art knife-making equipment. The Company broke ground in the second quarter of 2014 and has entered into contracts for site work and equipment purchases in connection with the project. The cost of the project is approximately $4,000,000 over a five year period of which $2,000,000 is expected to be completed by the end of 2014. Costs for the project are being accounted for as construction in progress on the accompanying consolidated balance sheet and will be moved to property, plant and equipment when placed in service. The Ontario Knife Company was awarded certain incentives from the County of Cattaraugus Industrial Development Agency (CCIDA) in connection with the expansion of The Ontario Knife Company’s facility in Franklinville, New York and other proposed capital expenditures. The incentives include certain real property tax and sales tax abatements in connection with the proposed project. The Ontario Knife Company entered into customary lease and leaseback arrangements with the CCIDA to facilitate the various tax incentives. The Company has also been awarded a $300,000 grant from Cattaraugus County, New York. The grant can be used towards the payment or reimbursement for work and/or materials, incurred or to be incurred in connection with the proposed expansion project. As part of the terms of the Grant Contract with Cattaraugus County, The Ontario Knife Company has agreed to maintain certain employment levels for a period of five years from the date of the agreement. The Company was also awarded a $416,000 New York State Community Development Block Grant from the Office of Community Renewal. The grant can be used towards the purchase of equipment in connection with the proposed expansion project. No amounts have been received or recorded by The Ontario Knife Company under the grant awards as of September 30, 2014. Upon receipt, recognition of amounts will be deferred until requirements are fulfilled, at which point amounts will be recognized over the life of the corresponding assets.