Key Takeaways
- A standard, generic “Compliance with Laws” clause is insufficient and fails to mitigate the specific financial and criminal penalties associated with U.S. export control violations.
- Contracting professionals must proactively identify “red flags” like foreign national involvement, classified data access, or specialized technology before the deal is signed.
- The essential components of a robust export control clause include classification representation, flow-down obligations, and specific termination rights for non-compliance.
Introduction: Beyond the Boilerplate
Imagine finalizing a multi-million-dollar deal with a major overseas partner. You shake hands, the Docusign envelope is complete, and you breathe a sigh of relief.
Two months later, your Chief Compliance Officer calls. A simple transfer of source code to a foreign national working in your R&D lab, an act known as a “deemed export,” was made without the required license, triggering a potential investigation and fines running into the hundreds of thousands of dollars. The entire contract is now a liability.
The vast majority of contracts contain a boilerplate provision stating that both parties must “comply with all applicable laws.” On paper, this sounds fine, but in the realm of U.S. export controls, specifically the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR), this generic clause is functionally useless. These regulations carry severe financial and criminal penalties, and simply agreeing to obey the law does nothing to contractually protect your company from the counterparty’s non-compliance or help you manage the risks associated with the transfer of sensitive data.
Export control demands specific contractual attention and mitigation. This article breaks down the contract terms every legal and contracts professional needs to draft, negotiate, and enforce to truly manage global risk, shifting the burden of compliance where appropriate and building walls of protection around your most sensitive technology.
Identifying Contractual ‘Red Flags’ Before the Signature
The critical difference between a compliant contract and a compliance disaster often happens before signature. As a contracts professional, you must act as the first line of defense, conducting initial due diligence to determine if the nature of the transaction itself places the shared items, software, or technical data under export control scrutiny. If you don’t look for the signs, you can’t draft the defense.
A key conceptual pitfall is the “Deemed Export” risk. An “export” isn’t just shipping a physical item across the border; under the EAR, transferring technical data (like test data, detailed specifications, technical presentations, training materials explaining controlled technology, source code or object code) to a foreign national, even if they are an employee or subcontractor sitting right inside the U.S., is considered a deemed export. If that data is controlled, an export license may be required. Your contract must anticipate this risk, especially when the counterparty is managing technical teams.
Here are some related red flags that may come up in an agreement:
- Performance Location: Is the work occurring outside the U.S.? If so, the physical export of goods or the electronic transfer of data is certain.
- Foreign Personnel Involvement: Will the counterparty use foreign subcontractors, suppliers, or employees in the performance of the service or development of the item? This triggers a deemed export risk.
- Data Type: Are you transferring technical data (e.g., precise formulas, schematics, engineering designs) as opposed to general business data (e.g., confidential financial forecasts or marketing plans)? Controlled technology (ITAR) or technology listed on the Commerce Control List (CCL under the EAR) requires strict handling.
Finally, watch out for the simple Non-Disclosure Agreement (NDA) which can cause export control headaches. While universities and research groups often use the Fundamental Research Exclusion (FRE) to avoid these issues when working with businesses, there’s a catch. If an NDA or research agreement restricts sharing research findings beyond a quick pre-publication review (like 90 days), it cancels out the FRE. Just one little clause like that can totally change what you need to do for compliance, making your research subject to export controls.
Components of a Robust Export Control Clause
A well-drafted Export Control clause goes beyond a simple promise to comply; it contractually allocates duties and risks. Here are the three non-negotiable components you need:
1. Classification Representation and Warranty
Do not assume you know what the counterparty is transferring, or that they know what they are receiving. The most protective language mandates that the disclosing party represents and warrants the classification of any item or data they provide.
- Sample Requirement: “Discloser represents and warrants that all items, software, or technical data provided hereunder are classified in accordance with U.S. export control laws and regulations, and Discloser shall provide the applicable Export Control Classification Number (ECCN) or state its applicability under ITAR prior to any disclosure or transfer.”
- Drafting Tip: Make the delivery of this classification information a condition precedent to performance. If they don’t give you the ECCN, you don’t perform or transmit the data.
Flow-Down and Screening Obligations
Your counterparty’s downstream compliance (or lack thereof) is your problem. The clause must require the counterparty to flow down all export control requirements to their own vendors, suppliers, and subcontractors who will handle the controlled items or data. Moreover, mandate that they perform mandatory sanctions and denied party screenings (e.g., against the Entity List, Specially Designated Nationals and Blocked Persons List, etc.) before involving any third party.
Clear Licensing Responsibility
In most cases, the party exporting or disclosing the controlled item or data is responsible for obtaining any necessary government license. This must be explicit to avoid confusion and liability down the road.
- Sample Clause: “Recipient shall not export, re-export, or otherwise transfer any licensed technical data received from Discloser without first obtaining all necessary export licenses or other governmental approvals.”
Integrating Export Control Into Core Contractual Provisions
An Export Control clause is only as strong as its integration into the rest of the contract architecture. You must ensure that regulatory breaches are treated with the severity they deserve, overriding limitations placed on typical commercial breaches.
- Indemnification: Export control violations result in massive administrative, civil, and sometimes criminal fines. Standard contracts often exclude liability for indirect or consequential damages, which can inadvertently shield the breaching party from these regulatory penalties. You must include a specific carve-out in your indemnification clause:
- Essential Addition: Ensure the indemnity specifically covers “any and all damages, fines, penalties, settlements, and legal costs arising from a breach of the representations and warranties or covenants in the Export Control clause.” Crucially, ensure this indemnity is explicitly excluded from the contract’s general Limitation of Liability cap. Don’t let the Liability Cap swallow the fine risk.
- Termination: Regulatory breaches are an existential threat, not a curable business issue. Include the breach of the Export Control clause as a specific, immediate basis for Termination for Cause, regardless of the materiality or notice/cure thresholds defined in the general Termination section.
- Governing Law/Jurisdiction: The Governing Law clause defines the contractual rules, but it does not override U.S. Federal law. Reaffirm that, even if, for instance, German law governs the contract, the U.S. Export Control laws (EAR/ITAR) always apply to the technology/data in question and prevail over any conflicting contractual terms.
Conclusion: Compliance is a Contractual Negotiation
The era of relying on generic “Compliance with Laws” is over. Robust export compliance is no longer just a regulatory issue handled by your ethics and compliance team; it is a fundamental contractual negotiation issue managed by legal counsel and contracts managers. Your role is not just to close the deal, but to proactively protect the company from severe regulatory risk through specific, well-drafted clauses that anticipate, mitigate, and allocate the real-world dangers of global data transfers.
The post Why Your Generic Compliance with Laws Clause May Fail Export Control appeared first on Contract Nerds.