We continue our series highlighting IP Draughts’ “favourite” one-sided provisions in contracts. These provisions are often found in contracts where there is an imbalance of power between the parties, and where the party with the power (let us call him the “Patron”) seeks to reduce a sometimes theoretical risk by imposing it on the other party (the “Supplicant”).
Today’s one-sided term is:
The Supplicant agrees that the technology subject to this Agreement is subject to the export control laws and regulations of the United States, including but not limited to the Export Administration Regulations (“EAR”) and undertakes to comply with these laws and regulations. Without limiting the foregoing, the Supplicant will not, without a U.S. Bureau of Industry and Security license or license exception, export, re-export, or transfer any technology subject to this Agreement, either directly or indirectly, to any national of any country in breach of such laws and regulations.
For the purpose of this discussion, let us assume that the above clause is included in a research collaboration agreement where the Supplicant is based outside the US, eg is a UK university.
In passing, it is worth mentioning that US export control laws are currently very newsworthy in the UK, in view of the extradition to the US a week ago of retired UK businessman Christopher Tappin. Having lost his application for bail, Mr Tappin is now an inmate of Ontero County Prison, New Mexico awaiting trial for alleged breaches of arms control laws by exporting batteries. However, that case has very little relevance to the contract drafting issues discussed below, other than as a reminder of what can happen if US laws are alleged to be breached.
A clause of this kind is frequently seen in agreements that originate in the US. IP Draughts’ experience is that the clause is treated as boilerplate, albeit boilerplate that the US party is often very reluctant to change. The relative bargaining power of the parties seems to make very little difference on this issue: the clause seems to be regarded as a “must have” by many US negotiators.
From the perspective of a UK university (and similar considerations would apply to any other legal entity located in the UK, and probably to entities located in other countries), there are so many issues with the above wording that it is difficult to know where to start. Here are a few of those issues, in no particular order:
- If export controls are a real issue, they should be addressed more explicitly by the parties than just having a standard clause buried among boilerplate at the end of the contract. Similar comments could be made about other clauses dealing with regulatory issues in an unthinking way, eg those dealing with EU data protection laws.
- If the clause is to apply to anything, it should apply to technology generated by the US party. It should not apply to technology (eg data, results, software, biological materials) generated by the UK party in the collaboration.
- A UK university is highly unlikely to have in-house expertise in US export control laws, or to be prepared to invest in US legal advice in relation to a routine research agreement. The principal investigator may have no idea how wide-ranging such laws are, extending to so-called re-exports, eg an export of technology from the UK to another country, and not to the US.
- The UK party should not agree that US laws apply to its activities. Agreeing to such a provision may prejudice the UK party if prosecuted, and may undercut a potential defence argument that US laws do not apply to that party.
- Having said that, one of the more controversial aspects of US export control laws is that they do seek to apply worldwide. This has long been a source of tension between the UK and US Governments.
- The clause completely fails to address UK export control laws. If US laws are an issue, why are UK laws not also an issue?
On this last point, many years ago IP Draughts was an in-house lawyer for a technology-based company, one of whose activities was the design of ships. Ships can, of course, be used for military purposes. On several occasions, IP Draughts was responsible for applying for UK export licences for software and technical reports, and recalls how wide-sweeping and complex the legislation was. The process must have improved in recent years. In 2010, the UK Export Control Organisation won the Better Regulation Award for operating a licensing regime that is, in the words of BAe Systems “the most industry-friendly export licensing system of any major Western country”.
The best that may be achievable in negotiations over a US export control clause, in the absence of lengthy investigation and discussion, may be to water it down a bit to state that US laws “may” apply, and that the non-US party agrees to comply with any laws that are binding on that party. This quick fix is not ideal, but avoids an expensive debate over an issue that may be more theoretical than real. Of course, if export control laws are likely to be relevant, a more considered approach will need to be taken, and appropriate legal advice obtained.