United States: DoD Issues Interim DFARS Provision Regarding US/UK Defense Trade Treaty

On May 22, 2012, the US Department of Defense (DoD), DAR Council issued an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement the Defense Trade Cooperation Treaty between the United States and the United Kingdom (Treaty).  The interim rule, set forth at DFARS Subpart 225.79, establishes procedures intended to "facilitate maximum use" of the Treaty by prospective contractors.  In particular, the rule requires government program managers and contracting officers to determine whether contracts are eligible under the Treaty, which in turn requires them to assess the Treaty eligibility of any defense articles to be provided under particular contracts and solicitations. 

Background

As we have previously advised, the Treaty eliminates certain export licensing requirements for exports within an "Approved Community" of companies and government agencies in the US and the UK for projects in which the US and UK governments are the end users.  If the Treaty applies to a covered project or transaction, exports of most US defense articles are generally permitted to move freely, without the need for separate ITAR licenses.  The transactions that are covered for license-free treatment are those that are among members of the "Approved Community" when in support of:

• combined US-UK military or counterterrorism operations
• US-UK cooperative security and defense research, development, production, and support programs
• mutually agreed security and defense projects that are for UK government use only
• US government end use

In order to export without a license under the Treaty, exporters must verify on the US State Department website that the recipient is a member of the Approved Community, that the project is on the list of approved projects and is for US government end use or certain agreed to UK uses, and that the defense article is not on the Treaty's Exempted Technology List which is incorporated into the ITAR via Supplement No. 1 to Part 126.

Procedures Established by the Interim Rule

The interim rule establishes procedures for US government program managers and contracting officers to follow with regard to solicitations and contracts "eligible for Treaty coverage."   The accompanying Procedures, Guidance and Information (PGI) provide that a solicitation or contract is eligible if it will acquire at least one defense article that is not otherwise exempt from the Treaty coverage, and is required for any of the end uses identified above.

DFARS Subpart 225.7902-4 requires a program manager to identify in writing, and further to submit to the contracting officer prior to issuance of a solicitation and prior to award of a contract:

• The Treaty paragraph under which the solicitation/contract is eligible (Article 3(1)(a), 3(1)(b), or 3(1)(d))
• The qualifying defense article(s), using the categories described in Part 126.17(g) of the ITAR
• If applicable, any specific technologies exempted from coverage under the Treaty

DFARS Subpart 225.7902-5 also requires the use of a corresponding contract clause at DFARS 252.225-7047, "Exports by Approved Community Members in Performance of the Contract."  The contract clause requires the contracting officer to identify ineligible defense articles and contract line items, based on the information furnished to them by program managers pursuant to Subpart 225.7904.

Subpart 7902-5 requires the use of the contract clause at DFARS 252.225-7046, "Exports by Approved Community Members in Response to the Solicitation," in any RFP which contemplates the issuance the award of a contract containing the prior clause -7047.  The -7046 clause contains substantially similar substantive content as clause -7047, but relates to transfers that occur in the solicitation response process, presumably between companies and their foreign affiliates, or through putative prime contractors and their oversees teaming partners, or even with respect to prime contractors and US or UK government officials or offices involved in evaluating a bid or proposal.  This clause contains a representation from the bidder stating whether or not there were compliant exports (e.g., technical data exchanges) in response to the solicitation with respect to qualifying defense articles or, in the alternative, that there were no exports of qualifying defense articles were made in the solicitation process.

Conclusion

The interim rule is notable in that it vests a measure of discretion in program managers and contracting officers with regard to whether a solicitation/contract is eligible under the Treaty, which in turn requires some proficiency in export controls regulations.  Specifically, the eligibility determination requires government contracting personnel to assess whether defense articles are listed in Supplement No. 1 to Part 126 of the ITAR.  However, as a legal matter, DDTC (rather than DoD, through its contracting officials) has ultimate authority to determine whether an item is a defense article and contractors themselves (rather than DoD contracting officers and program managers) have the potential to be held liable if they ship items without licenses.  Therefore, by calling for DoD contracting officers and program managers to sort through the export control status of various products and services, the DFARS rule seems to grant DoD de facto classification authority.  This could possibly expose contractors to risk if they rely on a potentially erroneous DoD determination, although good faith reliance on the DoD determination would presumably be taken into account by DDTC as it considered a contractor's compliance stance.  There are aspects to this approach which should be applauded as increasing efficiency – e.g., having contractors bid on contracts with a common understanding as to whether there will be a licensing requirement—but, having contractors complete a formal representation relating to export control compliance in the bidding process is not required by the ITAR itself.  The -7046 clause presumably will require contractors to take appropriate steps to ensure accuracy of their representations regarding use and treatment of qualifying defense articles in responding to solicitations.  Comments on the interim rule are due on July 23, 2012.

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