Egypt: International Technology Transfer Contracts In Egypt: Practical Considerations From The Perspective Of A Foreign Licensor In Relation To Arbitration And Applicable Law

Last Updated: 10 July 2019
Article by Raffaella Cavandoli and Hend Zaghloul

Abstract

In Egypt the parties' autonomy in a technology transfer contract is subject to the restrictions imposed by the Egyptian Commercial Code, which contains a specific chapter on the transfer of technology. One of the most relevant restrictions is Article 87, according to which Egyptian law shall apply to the contract and arbitration is permitted only if held in Egypt and in accordance with Egyptian law. Nevertheless, it can be observed how part of the legal profession interpret the restrictions of the Egyptian Commercial Code not as mandatory but as permissive. For example, according to some law firms, it may be possible to agree to arbitration with seat in an arbitration-friendly third country. This article examines the risks of a permissive interpretation and considers, in particular, the reasons why an Egyptian court would be unlikely to enforce an arbitration award rendered abroad in violation of Article 87. The recommended course of action is to adopt a pragmatic approach; a foreign licensor should assume at the outset that all technology transfer provisions of the Egyptian Commercial Code, including the restrictions on applicable law and arbitration, are mandatory, when structuring the commercial deal and drafting the contract.

1. Introduction: The Diverging Legal Advice on Technology Transfer

In an attempt to improve the international competitiveness of Egyptian companies, in 1999 the Egyptian legislator enacted a new Commercial Code, the Law No. 17/1999, which includes specific provisions on the transfer of technology. Chapter 1, Part II of the Commercial Code (Technology Transfer) imposes a series of restrictions on the contractual autonomy of the parties. The underlying assumption is that the licensee is the weaker party and deserves protection. The licensee is defined as the "importer of technology," implying that the technology is usually "imported." The Technology Transfer provisions apply equally to national and international transactions. However, the Travaux Preparatoires of the Commercial Code clarify that their purpose is to protect national interests, ensuring access by local companies to technology as a tool to develop the national economy.1

The Technology Transfer provisions have been the subject of numerous articles already.2 This article therefore only considers them briefly and focuses instead, from a practical perspective, on one of the major issues that foreign companies face when concluding contracts in Egypt: the application of Article 87 of the Egyptian Commercial Code, pursuant to which Egyptian law applies to the substance of the contract and arbitration is allowed only if held in Egypt and in accordance with Egyptian law.

Article 87 represents a clear and substantial restriction on the parties' contractual autonomy, in spite of the fact that Egypt has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 and that parties to a contract in Egypt normally have the freedom to agree to the governing law of their contract.

Notwithstanding its clear wording, parts of the Egyptian legal profession read Article 87 as being permissive and not mandatory. In fact, it can be observed how some law firms advise their foreign clients in a technology transfer matter that it may be possible to agree to international arbitration with seat in an arbitration-friendly neutral country. More frequently, the issues raised by the restrictions imposed by Article 87 are simply not brought to the attention of foreign clients, who may therefore enter into contracts with arbitration clauses that are likely to be declared invalid. The same applies to the other restrictions contained in the Technology Transfer provisions.

Even if it is true that in some cases the foreign licensor may still decide, for strategic, practical or other considerations, to include in the technology transfer contract clauses that may not be upheld by a court or by an arbitral tribunal, the decision should be taken in full cognizance of the risks. The purpose of this article is to examine those risks, by shedding light on the Technology Transfer provisions and especially their Article 87.

The fundamental observation is that an Egyptian court is unlikely to enforce an arbitration award rendered in an international arbitration with seat abroad, when the underlying contract contains elements of technology transfer. The foreign party will need to balance the advantages and disadvantages of a (probably invalid) arbitration clause with seat in an arbitration-friendly country versus the advantages and disadvantages of a (valid) arbitration with seat in Egypt.

However, the foreign party is not left completely exposed to the risks deriving from the specificities of the country's legal system; this article proposes a pragmatic solution that goes beyond any academic discussions on the various interpretations of Article 87. When structuring the commercial deal and drafting the contract, the foreign party should assume at the outset that all Technology Transfer provisions are mandatory and it should not rely on the enforcement of an arbitration award. This article concludes with a series of drafting suggestions.3

2. Brief Considerations on the Egyptian Legal System

Egypt is a civil law system. Its commercial law is well developed and based broadly on the French civil code. The Shariah, i.e. the system of jurisprudence associated with Islam, plays almost no role in Egypt's commercial law.4 However, foreign licensors normally welcome any legal advice that enables them to avoid the application of Egyptian law and—in particular—to avoid any litigation in Egypt. This is understandable; a high level of bureaucracy, lack of resources and an inefficient judicial system are often the cause of delays, so that it is not uncommon for civil cases to last several years in each instance of judgement.5 In its report "Enforcing Contracts, 2017" the World Bank ranks Egypt at place 160, with an average duration of proceedings (from the filing of the suit to the recovery of the money) of 1010 days and a quality of judicial process index ranking of 5.5 (where zero is the minimum and 18 is the maximum).6 In addition, Egyptian law is perceived as being excessively in favor of the local contracting party.

For these reasons, the law applicable to the contract and a neutral seat of arbitration are often points on which the foreign party is not willing to compromise. Besides concerns of independence and impartiality of arbitrators, they fear possible interference by the ordinary courts that may affect the proceedings or negate the effect of an arbitral award.

In fact, for a broad typology of international commercial contracts the parties in Egypt have the freedom to choose the law applicable to the contract as well as the seat of the arbitration.7 This is not the case in relation to technology transfer contracts, which are subject to major restrictions in this respect.

3. Transfer of Technology in Egypt: the Egyptian Commercial Code

As discussed, technology transfer contracts are regulated by the Technology Transfer provisions of the Egyptian Commercial Code, Articles 72 to 87. It is not the purpose of this article to review them in detail and reference can be made to the Technology Transfer provisions themselves.8 This paragraph will limit its considerations to their scope of application and to the debate on their mandatory character. Article 87 (Arbitration and applicable law) will be dealt with separately in the next paragraph.

Scope of Application

The combined definition given by Articles 72 and 73 of the Commercial Code to "transfer of technology" is very broad. It includes any agreement, whether stand-alone or part of another contract,9 whereby "the supplier of a technology undertakes to transfer, against consideration, certain technology or technical know-how to be used by the importer of technology in a technical manner to produce or develop a specific product, to install or operate machines or other equipment or to provide certain services."10 The Technology Transfer provisions apply also when a contract includes the transfer of technology as an ancillary element.11 On the basis of the wording of Article 73, the provisions of Technology Transfer do not seem to apply to transfer of know-how when the know-how is not technical (business know-how, marketing and financial strategies etc.).

Mandatory vs. Non-Mandatory

Due to the scarcity of case law and some unclear wording of the Technology Transfer provisions in this respect, there is no common opinion on their mandatory or non-mandatory character as a whole.

In general, the Egyptian Commercial Code recognizes a broad contractual freedom of the parties. The provisions of the Egyptian Commercial Code normally apply only where no agreement of the parties exists and where no trade practices or trade customs apply.12 There are two exceptions to the general rule and namely when: (i) a specific provision is expressly said to be mandatory, and when (ii) the agreement between the parties contradicts with the public order of the Arab Republic of Egypt.

Only few of the restrictions of the Technology Transfer provisions contain wording that indicate their mandatory character: Article 74, for example, states that the contract must be concluded in writing; according to Article 75 "Any stipulation in a contract for transfer of technology that restricts the freedom of the importer of technology [...] may be declared void upon the request of the importer of technology."13

On the other hand, other substantive restrictions are not expressly said to be mandatory. For example:

  1. Articles 76, 77 and 78 of the Egyptian Commercial Code, and Article 83, paragraph 2, which impose specific obligations on the licensor, such as the obligation to provide technical assistance and improvements, equipment and spare parts, and to keep confidential improvements made by the licensee; and
  2. Articles from 84 to 86, which contain additional restrictions on the contractual freedom of the licensor, for example granting to the licensee the right to terminate the contract after an initial period and imposing certain liabilities on the licensor.14

According to general principles of Egyptian law and the general provisions of the Commercial Code, it may seem, therefore, that at least some of the Technology Transfer provisions can be derogated. This view seems to be reinforced by an incidental statement of the Court of Cassation in the judgement CA 1042 of 73J (that will be considered in more detail with reference to Article 87), according to which "some of the texts and provisions of the new Commercial Code with respect to contracts of technology transfer are mandatory."

Such interpretation involves certain risks. First of all, even if some of the articles do not contain any express mandatory language, at least some of them contain provisions that may be considered of public interest. Secondly, as seen in the Introduction, the declared purpose of the Technology Transfer provisions as a whole is to protect the economic interests of Egyptian companies and of the Egyptian economy in general. This is stated both in the Travaux Preparatoires of the Commercial Code and in the judgement of the Egyptian Supreme Constitutional Court 253 of 24J (also considered in more detail below). The right of the parties to derogate from the Technology Transfer provisions would render them ineffective in achieving their objective. There is therefore a distinct possibility that, in case of dispute between the parties, an Egyptian court would regard at least some of these provisions as mandatory on the grounds of public order.

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Footnotes

1. From the Travaux Preparatoires of the Egyptian Commercial Code: "The draft aims to protect national interests, [...], and at the same time ensuring that the Egyptian importer realizes technology, which is an instrument for developing the national economy and maximizing its competitiveness in international trade markets."

2. Kanaan Al-Ahmar, "The new transfer of technology rules in Egypt," International Review of Intellectual Property and Competition Law, 2011.

3. This article expressly refers to licensors of technology only, but the same considerations apply to the foreign parties in other types of contracts, such as manufacturing and sale, distributorship and franchising if they fall within the scope of the Technology Transfer provisions.

4. Sarah Rizk, Ashraf Ali, "Egypt, Litigation and Dispute Resolution," Global Legal Group, 2017.

5. Radwa Elsaman, "Factors to be Considered Before Arbitrating in the Arab Middle East: Examples of Religious and Legislative Constraints," International Commercial Arbitration Brief 1, No. 2, 2011.

6. "Enforcing Contracts 2017—Egypt," Doing Business, The World Bank, accessed on August 2017, http://www.doingbusiness.org/data/exploretopics/enforcing-contracts.

7. This does not apply to government contracts which are subject to the exclusive jurisdiction of the State Council. See Mohammed O. Taha, George Sadek, "Egypt, Legal Framework for Arbitration," The Library of Congress, 2014; www.loc.gov.

8. A non-binding English translation of the Egyptian Commercial Code by the WIPO can be found at: http://www. http://wipo.int/wipolex/en/text.jsp?file_id=312040.

9. Article 72, second paragraph, Egyptian Commercial Code.

10. Article 73, Egyptian Commercial Code.

11. This is often the case in commercial contracts that involve the transfer of non-essential technical know-how, (e.g. in relation to the use of equipment supplied by the foreign supplier).

12. Article 2, second paragraph, Egyptian Commercial Code.

13. Article 75 contains a non-exhaustive list of clauses that can be declared void upon request of the licensee. The following, inter alia, may be declared void: (i) the prohibition for the importer to introduce improvements or other modifications to suit the local market; (ii) the prohibition for the importer to acquire any other technology which is "similar or competitive" to the licensed technology, (iii) the obligation imposed on the importer to use specific trademarks to designate the products of the technology; (iv) any limitations on the importer in relation to volume, price, method of distribution and export of the products; (v) the right of the supplier of the technology to participate in "running the establishment of the importer"; (vi) the obligation imposed on the importer to purchase raw materials, machinery, equipment, or spare parts necessary for operating the technology exclusively from the supplier or from establishments designated by the supplier, or (vii) restricting the sale of the production exclusively to the supplier.

14. In particular: (i) the licensor and the licensee shall be severally liable for any damages caused to any persons or property, which might arise in connection with the use of the know-how or the products produced with the know-how; and (ii) either party to the technology transfer contract may, upon the lapse of five years from the date of its conclusion, "request its termination or the reconsideration of its terms by adjusting the agreement to the general current economic conditions."

Originally published by les Nouvelles - Journal of the Licensing Executives Society, Volume LIII No. 2, June 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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