Export Compliance Essentials in Turkish Defense Contracts19 May, 2020
After U.S.’s longstanding and well-designed export control regulations, China has drafted its first omnibus legislation regulating export controls which gives a better idea of how export compliance would be much more essential for governments procuring controlled items.
Depending on the nature of defense acquisition programs in Turkey, uniform export control clauses prove troublesome for contractors in some cases. It has been recently in place following the tension was escalated between Turkey and U.S. in contractor-supplier and authority-contractor relations. Notwithstanding the contractual relation or political tensions, there is no question that for most contractors, export control related clauses are limited to export licenses and only the details serving as condition precedent; thus, by the nature of work it is already required and there is no further impact on themselves. Unlike SMEs, manufacturers are relatively keen to contract on an export control related matter. But as with big ticket projects contractors are likely felt compelled to undersign the straight conditions of uniform contracts in this highly complicated matter and they tend to flow down exactly the full text of export control related provisions in contracts with their suppliers.
Our experience allows us to impart that export control matters become relatively a vicious circle and constitute a chicken egg situation after an unexpected turn of events in political relations. In such cases contractors or suppliers could be claimed for breach of contract which would be followed by penalty and debarment.
Running Aground or Egg- Chicken?
Export control in defense contracts in Turkey has become synonymous with high risk of contractor or supplier. In fact, uniform export license provisions are mandatory and refer to ‘obligation of contractor to obtain export license’ in government contracts. At the same time, in contracts between contractors and suppliers, export control compliance requirements refer to unilateral obligations of suppliers in many cases.
The wordings of contract clauses are highly strict, sometimes inconsistent and generally not realistic as to commitment of obtaining an export license is not only at contractor’s or supplier’s discretion and capacity. In addition, those requirements are subject to strict deadlines in contracts. Giving an example, in a contract clause, the authority or contractor may require counter party to obtain an export license within 3 months and extend this period or terminate the contract at its own discretion. In the realm of sustainability similar provisions may be acceptable with better wordings therefore in jurisdictions where there is high uncertainty the outcome might result with running aground.
Another challenge faced by us is quite fundamental but creates the egg-chicken situation due to export license related clauses are misworded or misinterpreted. In many defense contracts, no question that export license is deemed as condition precedent before principal obligation (which is to supply) is considered in effect. The struggling point is that in highly most cases, export license clauses are construed and interpreted as those constitute condition precedent before the contract is considered in effect. Not but not least, in those contracts lack of export license or failure to obtain the export license are also deemed as failure and entitle the authority or the contractor to terminate the contract.
Contrary to acceptance of conventional approaches and uniform clauses, having an optional and strategic plan regarding export control matters and reflecting those in contracts are highly crucial. This should be accompanied by not only existing export requirements but also possible scenarios such as changing control regimes on items/services. Periodically, export control lists are reviewed and updated, and scope of regulations are broadened or limited; thus, in case the contract is being reflected only the existing conditions, regulatory changes and alterations in policies may turn the events eventually.
Export Control is not Limited to Export License
For many international trade lawyers, compliance and contract officers in defense industry, it is enough to highlight the difference between ‘control’ and ‘license’ of export activities with a wording of title above. However, this is not always easy for a weaker party to explain and reflect the further in contracts where it has also no compliance concerns. For manufacturers flagging around the world, compliance is a part of their governance philosophy. But this is not even helpful to satisfy where export control clauses are poorly drafted.
As for companies to implement an effective export control program commodities, software and technology in dual use purposes along with military applications are main components of a good export practice. In addition, policies regarding destinations, deemed exports activities, encryption and specific products require a great direction and management. As the footprint of an effective export control grows, the skills of compliance officers to understand the worldwide regulatory framework are developed substantially and this helps to mitigate the possible risks which are limited to export license in defense contracts.
Sanctions: Incidents of Danger
The execution of a long-term defense contract always poses potential risks of export control and sanction related matters which may arise during the tension times in international relations. Even at the risk level, a cornerstone project may fail or suspend for a long time upon a political tension. In such times, defense contracts governing the parties’ liabilities and rights are not always helpful for contractors and suppliers to reach a solution without dispute. The authority or contractor tend the counter party to be unable to perform its obligations legally or practically whilst the current condition which is ‘potential risk’ is enough to avoid performing for contractor/supplier.
In many defense contracts in Turkey, the “sanction” and “embargo” are included as force majeure conditions (sometimes linked to export control matters) however in some jurisdictions or for come entities “relatively high potential risk of sanction and embargo” constitute the risk at force majeure level. For many, entering into a sanctioned person linked relation whether the parties of contract are not blocked person is reasonable enough to suspend the contract. As similar to export control clauses, sanction and embargo clauses are drafted poorly as they do not refer to the meaning and subject of sanction or embargo in defense contracts in Turkey. When it came time for chaotic situation, authorities are generally in comfort zone as the relied defense procurement legislation is supportive and helpful enough for authorities however the contractors and suppliers start on their journey with seeking the accurate clauses in their contract and interpreting those.
Author: Şafak Herdem