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Clauses in a Transfer of Technology Contract

Info: 5370 words (21 pages) Essay
Published: 17th Jul 2019

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Jurisdiction / Tag(s): International Law

What primary clauses should you put in a transfer of technology contract to which a private foreign investor is a party in other to protect the interest of the host country state reasons for your answer.


The concept of transfer of technology especially to developing countries is fast becoming a global issue which has drawn a lot of attention lately; it’s being discussed in meetings, seminars, workshops all over the globe. [1]

Technology is important to economic well being transforming productive systems and facilitating economic integration. [2] Due to the important nature of technology all countries seek to improve their technology in the process moving toward industrialisation, boosting their economy which trickles down to development finally.

Since development is dynamic in nature and open to all countries, its only equitable and fair for all countries to play on a level playing ground on the acquisition of technology thereby benefitting from transfer and diffusion of the very best of technology. However it’s unfortunate to state that this has not been the trend over the years.

As a result of lack of economic might which metamorphoses into low infrastructure in host developing countries and other negative effects most transnational’s operate from developed countries where they can be guaranteed good infrastructure to promote their research thereby advancing their technology. This leaves an imbalance between the technology possession and technology needed. The end product clearly will be a wide gap between technology developed by firms in foreign countries and that obtainable by developing countries. [3] This leaves developing countries in disadvantaged positions because Trans nationals tend to place stringent and onerous conditions when bargaining for contracts with host developing nations.

This has raised a lot of complains in recent times which has prompted national governments to improve their technology legislations, on the international level policies and codes(UNCTAD code on transfer of technology) are being structured to regulate transfer of technology contracts.

The aim of this paper will be to examine the primary clauses guided by the international instrument in a transfer of technology contract protecting the host country which often times is a developing country. On the flip side I will balance the fulcrum by granting protection to foreign investors as well.

The first part will explain the concept of transfer of technology. The second part which is the crux of the paper will deal with negotiating a technology transfer contract and primary clauses protecting the host country. The third part will be the conclusion which balances the equation by discussing protection for foreign investors.

PART 1.Concept of transfer of technology.

The subject matter transfer of technology can’t be deliberated upon without having a clear view of the terms ‘‘technology’’ and ‘’transfer of technology.’’

In other to have a good understanding of the subject matter it’s imperative to consider some basic definitions.

‘Technology’’ is a broad topic that can be perceived in various ways depending on the perspective it’s being scoped from. [4]

In the quest of negotiations for an acceptable international code of conduct on transfer of technology [5] the OECD states advanced the following defining technology as ‘Systematic knowledge for the manufacture of a product, for the application of the process or for the rendering of the service, including any integrally associated and marketing techniques’ [6] .

The term technology tracing it back to it ancient times can be adduced to be derived from the Greek word’ tekhnelogos’,this word is made our from two factors ‘’tekhne’’ and ‘’logo’’s.these two words encompasses knowledge relating to machinery, communication and skills. [7]

In my opinion technology should be defined in a whole comprising of intangible aspects like managerial skills and patents…not covering just the technical part of it relating it to tangible parts like machines, products, goods.etc.The end product in a technology transfer contract which for instance in a turnkey contract which entails impacting skills to the local content which is a fundamental term in technology transfer contracts is as essential as the manufacturing of the item.

Basically technology in the view of Santikarn technology:

‘‘Involves not just the methodologies and knowledge useful in production of goods and services, cognisance should be given to managerial expertise and professional know how.’’ [8]

Analysing the term transfer of technology it’s important to state that it’s no secret that the there is a moral burden or the onus lies on developed countries to transfer technology to developing countries. Like I stated earlier in my introduction developed countries are economically viable to carry out research which is the catalyst for technology.

What is transfer of technology?

The term transfer of technology is a relative in the sense that it bothers on a whole lot issues, thus there is no single definition for it.

According to Muchlinski, he defined transfer of technology ‘as the method or ways commercial technology is being distributed’ [9] .In this context there will be a form of transfer of knowledge by the transferor to the transferee via communication. The contract being literally binding at this state is not a prerequisite. [10]

Looking at Muchlinski’s definition transfer in this context takes the pattern of a business transaction which might not necessarily be legally binding the highpoint of the definition is that the technology is basically owned and can be transferred by the owner to the transferee.

Brooks defines technology transfer as ‘the process which science and technology are diffused through human activity’ [11] . Analysing this definition it simply covers a situation whereby an invention or knowledge is developed by transferee and it’s distributed to the recipient who emulates that information gotten from the transferor.

Transfer in this context could be a transfer of basic scientific knowledge into technology or upgrading of an existing one to a new use. However for it to be transferred it should be packaged in an organised form or some kind of operation. [12]

More precisely a simple approach can be adopted in analysing the concept of technology going by the definitions and comments highlighted above. In the first instance it captures a situation that transfer of technology comes in an organised methodological form, in simple terms it should contain certain underlying principles in regulating transfer of technology. Secondly there must be two parties in a transfer of technology contract, often known as the transferor (foreign investor) and the transferee (Host country).

Further analysis of the concept identifies the fact that there are always rewards, gain or embellishment by parties. often times its alleged the host countries benefit more, in my opinion that only on paper because in actual practice restrictive business clauses are inserted in technology transfer contracts which put a lot of restraints on the acquiring party thus becoming detrimental to host countries, most times developing countries.

Methods of transfer of technology.

Transfer of technology I n most cases materialises through licensing of patent and other rights tied down with contracts for the knowhow. [13]

Relying on the UNCTAD transfer of technology code transfer of technology can be transferred

Through the following means:

A: assigning or granting of industrial rights.

B:Handing over technical or non technical or other know-how in the form of supply of services

C: Providing a combination of technical or non –technical knowhow in the form of documents, plans and diagrams.

D:providing a combination of services with a view to commissioning an industrial complex

E: Providing technical service related to the selling or leasing of machinery. [14]

Considering this context from an academic background ,Chartterjee opined that technology may be transferred in two patterns:

First, knowledge and skills known to certain equipments are not driven by a monopolistic market where choices are limited. In such instances transfer could materialise through: Migration of professionals from country to country, technical training and instructions, published works will be distributed,colloboration programmes where knowledge are shared. [15]

Secondly instances where there is direct ownership of machinery it’s normally covered by industrial patent right and agreements are sealed in this context by negotiation. Transferring this instance comes in the form of: Foreign direct investments, granting of licences, patents right, trademarks right, application of expertise etc. [16]

This second segment will discuss negotiating transfer of technology contract and examine the primary clauses protecting a host country.


Parties are the determinant factors regarding the nature and scope of the contract they intend entering into. Basically parties identify their needs and the terms are sorted out in the negotiation stage. [17] For agreements involving states the sectors for intervention are outlined to the supplier, issues relating to patents right, trademarks ,local legislations on importation of technology, foreign exchange etc must be considered. [18]

This information exchange stage should be in writing depicting clear terms of the agreement ,this permits parties take a cursory look of the conditions put forward by the other party. All information clear enough concerning the agreement would be displayed at this point giving parties the room to carry out research or acquire more information where there are grey areas.

Primary Clauses Protecting Host Countries.

Owing to the exploitation of developing by trans-national corporations over the years developing host countries have improved legislations ,became more aware of their rights supported by the provision on the UNCTAD code of conduct. Most of the primary clauses needed in an agreement will be discussed below.


The importance of preamble in any agreement can’t be over emphasized. It’s simply gives an introduction underlining the purposes and intents of the agreement. This important of the agreement summarises the terms of the agreement and highlights critical aspects of the agreement. In a transfer of technology agreement the preamble amongst other things should state that the transferor has invented certain technology, possess skills or knowledge which is capable of being transferred [19] . It also establishes the fact that the recipient is keen on acquiring the licence and the supplier is prepared to transfer the technology. [20] Circumstances where industrial property rights are granted would be stated in the preamble.

Technology transfer agreements mostly apply to international bodies its pertinent to certify that all parties to the agreement have a concise ,précised knowledge of all terminologies regarding the agreement. Often times there are to lots of technical terms which might have relative meanings based on the perspective it’s being viewed from. Definitions are vital in this sort of contract. It’s not a hidden fact that some words have more than one meaning, thus the exact interpretation of that word based on the particular context should be precisely stated.

Some words which should be should be given apt interpretation and definition in such a contract is: technology ,know how ,patent, trademarks etc. [21]

The preamble gives a general scope of the contract, spelling out obligations of both parties. In a technology transfer contract the clause states the rights given to the recipient regarding using it for commercial purposes. Such rights mostly come in two forms exclusive and non exclusive. [22]

A significant importance of preamble is its conciseness and clarity availing parties the trouble of litigation. Technology transfer contracts are complex contracts due to the expertise and technicality involved. I these technical terms are f terms are not spelt out aptly it could amount to litigation. These sort of contracts are transacted in different international languages which might bring some misconceptions as well…the aim of the preamble is to make all grey areas clear avoiding lawsuits.

Arbitration or Dispute settlement clause.

As stated in the preamble a technology transfer agreement is advised to be open, clear, and unambiguous when being drafted. International contracts like theses are complex in nature, there are varying opinions and views which makes it susceptible to legal disputes. It’s trite to state that even well drafted agreements where its clarity is brilliant covering all necessary aspects doesn’t stand free from disputes.

The likelihood for an impasse or deadlock in a contract like these is natural so a key task for parties is to fairly foresee those aspects of conflict to the best of their abilities and develop into the agreement an agreeable dispute resolution apparatus simply to avoid premature termination of the agreement and unnecessary lawsuits which apparently are expensive.

Relying on chapter 9 of the UNCTAD code on transfer of technology code which relates to substantive requirement by the acquiring or supplying country. This law is applied based on the jurisdiction where the act took place irrespective of the agreement by parties. Issues such as condition of goods supplied and credit will fall into this category. [23]

Legal issues have been raised from this chapter regarding the applicable law for parties particularly where one of the parties is a sovereign state most time s the recipient party ..Host(developing)countries posits that most time they are often coerced by supplying parties to make arbitration in agreement with a legal system which is different from the recipient as the mechanism for settlement of disputes. [24]

The protest by developing countries is that such arbitration clauses compelled by pressure which takes away jurisdiction from national local courts denationalise the issue therefore it’s an abrogation on the sovereign right of the recipient country. [25] These facts are visible in the Aramco and sapphire cases [26] where agreements between oil multinationals and states where governed by international laws instead of national law abrogating the rights of the state. [27]

Host Developing countries shy away from realm of international arbitration because they feel it’s less favourable to them making them depend on their national law as means of dispute settlement when securing an agreement. This notion has been criticised by Professor Philippe Fouchard who stated that host developing countries should not hope that international disputes should always go their way. [28]

Governing law of host country or home country brings about so much debate and enforcement can’t be guaranteed. It’s advisable for parties to rely on general principles of states as the binding law in such an agreement. [29] Generally to avoid lawsuits agreements should have arbitration clause that will be binding to both parties. Such clauses should elicit in clear terms the rules that will govern the agreement. [30]

Host countries apparently will be more comfortable dealing with neutral bodies rather than acceding to the jurisdiction of one party. Host countries in drafting their agreements should tilt more towards the direction of international tribunal institutions like international chamber of commerce(I.C.C),International centre for settlement of investment disputes(ICSID).Its more beneficial in the sense that sometimes tribunals are chaired by an arbitrator from a host developing country and even sometimes laws of the host developing country is are employed. [31]

Consequently, an all encompassing arbitration clause which will cover virtually any claim concerning the technology transfer agreement is suggested .An ideal clause is the American Arbitration Association which provides that any claim amounting from the agreement shall be settled relying on the regulations of the American arbitration association and judgement awards shall be binding. [32]

Environmental clause

Environmental protection is an important issue that bothers on topics like preservation of air, water, soil; safeguarding natural resources, conserving lives of plant and the eco system at large. [33] Transnational corporations pose a lot of environmental hazards in the course of carrying out their business. However this issue is now on the front burner due to globalization of production of goods and services. [34]

Thus there is the need for a fair trading system which makes available technology transfer and at the same time offering environmental protection and trade environmental strategy. [35] It’s important for host countries to incorporate environmental protective laws into their technology transfer agreements to aid sustainable development. [36]

Host countries are advised to have strict environmental legislations and also incorporate them in their agreements. All foreign investors should be compelled to tender an environmental impact statement for approval before the agreement commences. Such reports must be all inclusive disclosing all environmental outcome of the proposed development. [37]

The clause should also ensure that contracting party executes all responsibility under international environmental treaties and also make foreign investors responsible for any form of environmental hazards caused in line with its activities. [38] Host countries should include a clause that compels foreign investor to have some kind of guarantee or retain a certain level of assets which serves as a bond in case there are environmental damages in the course of their activities . [39]

Host developing countries often due to being in disadvantaged positions when bargaining in agreements like these often times make a lot of compromises which reduces the standards. It’s suggested that that host countries should always maintain the normal standards even if it doesn’t appeal to foreign investors. [40]

Turn key clause.

Going by Chapter 5.2(a) and( i ) of the UNCTAD code on technology transfer ,it makes provision for the use of local personnel and also the training of those personnel’s. [41] Basically this clause facilitates technical assistance and training by the foreign investor to the local content in the host country. [42] This clause mainly is enabled through BOT projects in most cases host countries should negotiate transfer of technology by negotiating employment and training of citizens of the host country. Such clause should contain an arrangement where the foreign investor shall train local personnel’s practically, theoretically and administratively and other areas the host country deems necessary. [43]

Scholarships should be granted for this training and education which compulsorily must be done in the foreign investor’s home country. [44] It should also be included that foreign investors should make smooth the process of obtaining visas,accomodation,transportation etc [45] .Host governments should assign local personnel’s to expatriates as counterparts to enable them have a spot on idea orientation in all areas of the project. [46]

In precise terms a turnkey agreement the following are fundamental.

-Product in hand: it should be clearly stated that the host country must learn how to develop and manage the products.

-Market in hand: Foreign investors being big players in the sector must introduce buyers to the host country.

-Buy Back: Getting an export market may prove difficult host countries ensures that foreign investors buy back the products in hard currency probably in a cheaper rate.

Performance Guarantee clause

This clause serves as a guarantee regarding technical performance yardsticks which the foreign investor should fulfil. It should state the pattern it’s going to be met and also punitive measures if it’s not met. [47]

Generally ,the foreign investor signs an undertaking concerning technical performance stating that it will be carried out correctly and on time .The time frame should be included and the fine for not meeting such obligations. [48]

Under this clause there should be provisions that compel the foreign investor establishing research and development facilities in the host country, enabling host country benefitting directly form that facility.

Termination of contract clause;

Termination of a technology agreement may be possible due to several reasons not necessarily as a result of a legal dispute. Some possible reasons which can terminate a contract comprises of the terms of the contract being satisfied, a major misunderstanding that prevents the existence of the contract, change in legislations that deal with key aspects of the agreement. [49]

Basically, this clause should contain anticipated specific disagreement areas that could lead to termination of the contract.eg bankruptcy, liquidation etc. [50] This clause provides for written notice in a good amount of time by a party who wishes to terminate the agreement. The UNCTAD code specifically states that termination should be done in a timely manner. [51]

Renegotiation clause.

Renegotiation can occur if both parties by consensus agree to due to supervening circumstances. The UNCTAD code of technology transfer provides for a renegotiation clause. It should contain the conditions, terms and criteria’s for the renegotiation. [52] .This clause offers protection against a unilateral termination of the agreement on certain issues and it should be done in good faith [53] .However issues may arise regarding at what time it will be permissible to renegotiate and how to go about the drafting as well.

PART 3 Conclusions.

Generally, the main objective of the UNCTAD code on technology transfer is to establish fair and equitable standards between parties in the transfer of technology agreements. [54] This work will balance the fulcrum by stating that in a technology transfer agreement not only the interest of the host country should be looked after but the interest of the foreign investor should be protected as well. The major concern of foreign investor s while entering into an agreement with a state or sate owned entity is that it may use its sovereign power to amend to its benefit the terms of the contract [55] . This danger can be curbed by putting some specific clauses.

Stabilisation clause:

This clause aims at solidifying the contractual terms by constraining the state using its sovereign power to alter the agreement. [56] The clause simply states that the agreement takes superiority over any form of legislation enacted if such legislation is to the investor’s detriment. [57] This provision gives absolute protection in the sense that some kind of waiver of sovereign immunity.

Confidentiality/Intellectual Property Protection Clause.

Foreign investors will want to secure their technology thus this clause will ensure that the host country does not disclose to anyone not permitted to have it. [58] Host countries agree not to commercialise technology information except to employees or subcontractors. [59] It s normally agreed that the host country shall have the right to use the know how only for manufacturing and sell product later .This clause attracts foreign investors because it protects their patent and trademarks which they invest huge amount of resources in.

Exchange control Transfer of Payment clause.

The purport of this clause is to ease the foreign investor on restrictions from host countries regarding convertible currency due to lack of foreign currency .This clause protects foreign investor from compulsory compulsion of returning hard currency gotten abroad from the sale of local products. [60]

Basically this clause allows foreign investors run foreign accounts freely and precludes them from returning of hard currency when converted to local currency is likely to be devalued. [61]

Security& Protection from Strife Clause.

Security of lives and property is essential in every sphere of life. Thus Foreign investors should be guaranteed protection to a reasonable extent. Strife in this context signifies war ,state of emergency civil disturba

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