LOA StAndArd termS And COnditiOnS

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Introduction to Security Cooperation

Chapter

LOA StAndArd termS And

COnditiOnS

IntroductIon

Basic contract law concepts are evident in the government-to-government agreements for Foreign

Military Sales (FMS). This chapter examines FMS standard terms and conditions that are an integral

component of every FMS case’s Letter of Offer and Acceptance (LOA). In contrast, the standard

terms and conditions introduced in this chapter are not included as a component of BPC cases used

to implement various Building Partner Capacity (BPC) programs. For BPC transfers, the benetting

international partner acknowledges its various responsibilities via a separate agreement pursuant to

Section 505 of the Foreign Assistance Act (FAA). More information about BPC cases is contained in

Chapter 6 of this textbook.

contracts

The term contract is commonly understood to refer to a binding agreement between two or more

parties that is enforceable by law. Contracts to acquire supplies or services for the USG are developed

and executed under the uniform policies and procedures delineated in the Federal Acquisition Regulation

(FAR). The USG contracting process under the FAR is briey outlined in Chapter 9 of this textbook.

The FMS case is not a procurement type contract developed and executed under the FAR. Instead,

an FMS case is a unique agreement that is developed under the authority of the Arms Export Control

Act (AECA) and in accordance with the policies and procedures specied in the Security Assistance

Management Manual (SAMM). The FMS case documents the bilateral government-to-

government agreement between the USG and the international partner. In the LOA document, the

USG commits itself to provide certain defense items or services and the international partner commits

to abide by specic terms and conditions associated with the sale and to make specied nancial

payments. Although the FMS case is its own unique type of agreement, a brief examination of the FMS

case LOA documents viewed through the contract paradigm is a helpful tool to better understand it.

Elements of a Contract

Six basic elements must be present for an agreement to be enforceable by law as a contract. These

six contractual elements are present in each FMS case. This section highlights how these six contract

elements relate to the FMS case process.

Offer

The offer is a proposal by one party to enter into a contractual relationship with another party. In order

for a statement or communication to be a valid offer, the respective statement or communication must

be intended to be an offer. This element plays an important role in the FMS process. An international

partner may submit a request for price and availability (P&A) data. When P&A data is provided to

an international partner, the SAMM requires that a statement be included with the P&A response to

emphasize that providing P&A data does not constitute an offer to sell. A P&A response only provides

information. If an international partner desires a case to purchase the materiel or services identied in

the P&A data, the international partner must submit a subsequent request for an LOA.

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Introduction to Security Cooperation

Under the FMS process, a formal USG offer to sell military articles or services is communicated

by presenting an LOA, complete with the authorized USG signatures, to the prospective international

partner. LOAs are generally only offered in response to a specic international partner’s Letter of

Request (LOR). The international partner’s LOR is referenced in each offered LOA. The LOA offer

remains valid through the offer expiration date cited in the LOA. After the offer expiration date, the

LOA is no longer an offer and cannot be accepted unless reinstated or reissued by the USG.

Acceptance

Acceptance is an expression of agreement to the contract offer. In order for the acceptance to

be effective, it must be clear, timely, and in the same terms as the offer. This contract principle is

key to the FMS process. Even though an international partner submitted an LOR for an LOA, the

international partner is under no obligation to accept the LOA offered by the USG. Acceptance of

the LOA is accomplished by an authorized country representative signing the LOA prior to the offer

expiration date, forwarding the specied initial deposit and returning the proper number of signed

LOA copies. Payment of the initial deposit is a condition of acceptance. Implementation of the FMS

case cannot take place without receipt of the initial deposit. Additionally, in the acceptance process,

the international partner informs the USG of the applicable mark for code, freight forwarder code,

purchaser procuring agency code, and the name/address of their paying ofce. This information is

entered by the international partner on the bottom of the rst page of the LOA.

Consideration

Consideration exists when something of legal value or benet is offered by one party to another.

Consideration is the value of a promised action and is often stated in monetary terms. With respect

to an FMS case, consideration consists of the SC partner’s nancial payment(s) in return for defense

articles and services provided by the USG.

Competent Parties

The term “competent parties” means that both parties to the contract possess the legal capacity

to enter into the contract. Competent parties relative to the FMS case are the authorized USG and

authorized country representatives who sign the LOA. Each LOA will contain a written/digital signature

by a representative of the implementing agency (IA) that generated the LOA. Additionally, each LOA

will contain an electronic countersignature signifying that DSCA has reviewed and approved the LOA.

Each international partner establishes their own process for LOA review and acceptance. From a

U.S. perspective, receipt of a signed LOA from the international partner coupled with receipt of the

initial deposit (which is typically substantial) indicates that the individual who signed to accept the

FMS case is an authorized country representative of that respective government.

Lawful Purpose

As a general rule, a contract that violates a statute is unlawful and will not be enforced. Under the

FMS process, it is incumbent upon the representatives of both governments to ensure that the LOA is

in compliance with their respective laws and policies prior to offering or accepting a given LOA. The

USG must comply with the Arms Export Control Act (AECA), the Foreign Assistance Act (FAA), and

other associated statutes. Each FMS LOA includes the statement “Pursuant to the Arms Export Control

Act” in the second paragraph. From the U.S. perspective, the congressional notication process for

certain high-value cases is an example of ensuring that cases offered to international partners comply

with U.S. statutory requirements. A DSCA Ofce of General Counsel attorney reviews each LOA to

ensure legal sufciency. DSCA countersignature signies that each LOA complies with all applicable

statutory and policy requirements. International partners have the responsibility to ensure that their

actions regarding the LOA are in compliance with their respective national laws.

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Introduction to Security Cooperation

Terms and Conditions

A contract must clearly delineate what actions each party has committed to perform. A contract that

poorly denes who, what, when, where, how, at what cost, and under what conditions these actions

will occur, could lead to confusion and may be unenforceable. In this regard, every FMS LOA contains

a set of standard terms and conditions, which apply whether or not they are physically attached to a

particular case. The standard terms and conditions must, however, be included in the original LOA sent

to the international partner for review and acceptance.

The same set of standard terms and conditions applies to all FMS LOAs and is exactly the same

for all international partners; however, DSCA periodically updates the terms and conditions to reect

current policy and incorporate standard notes. The terms and conditions in effect at the time the basic

LOA is prepared and signed are the conditions that apply throughout the life of the FMS case.

It is important to note that the LOA standard terms and conditions do not apply to BPC cases

used to implement BPC programs. The reason for this difference is that, under BPC cases, the USG is

actually selling defense articles and services to another component of the USG rather than directly to

an international partner. As a reminder, benetting countries acknowledge their responsibilities via a

separate agreement pursuant to Section 505 of the FAA.

Letter of offer and acceptance standard terms and condItIons

The standard terms and conditions to be used with all FMS LOAs are discussed below. The standard

terms and conditions are categorized into seven sections. These LOA terms and conditions establish

certain rights and responsibilities for each of the parties in the LOA. The terms and conditions also

delineate certain limitations or constraints associated with the sale.

 Section1 Conditions—UnitedStatesGovernment(USG)Obligations Section1 Conditions—UnitedStatesGovernment(USG)Obligations

Section 2 Conditions—General Purchaser Agreements Section 2 Conditions—General Purchaser Agreements

 Section3 IndemnicationandAssumptionofRisks Section3 IndemnicationandAssumptionofRisks

Section 4 Financial Terms and Conditions Section 4 Financial Terms and Conditions

 Section5 TransportationandDiscrepancyProvisions Section5 TransportationandDiscrepancyProvisions

Section 6 Warranties Section 6 Warranties

 Section7 DisputeResolution Section7 DisputeResolution

Section 1 Conditions—United States Government (USG) Obligations

1.1Unlessotherwisespecied,itemswillbethosewhicharestandardtotheU.S.Department

ofDefense(DOD),withoutregardtomakeormodel.

1.2TheUSGwillfurnishtheitemsfromitsstocksandresources,orwillprocurethemunder

terms and conditions consistent with DOD regulations and procedures.When procuring for

the Purchaser, DOD will, in general, employ the same contract clauses, the same contract

administration, and the same quality and audit inspection procedures as would be used in

procuring for itself; except as otherwise requested by the Purchaser and as agreed to by

DOD and set forth in this LOA. Unless the Purchaser has requested,in writing, that a sole

sourcecontractor be designated, and this LOA reectsacceptance of such designation by

DOD,the Purchaserunderstands that selection of thecontractorsourcetollrequirements

isthe responsibilityofthe USG,whichwill selectthecontractor onthesamebasisused to

selectcontractorsforUSGrequirements.Further,thePurchaseragreesthattheU.S.DODis

solelyresponsiblefornegotiatingthetermsandconditionsofcontractsnecessarytofulllthe

requirementsinthisLOA.

1.3TheUSGmayincorporateanti-tamper(AT)protectionintoweaponsystemsandcomponents

that contain critical program information (CPI). The AT protection will not impact operations,

maintenance,orlogisticsprovidedthatalltermsdelineatedinthesystemtechnicaldocumentation

arefollowed.

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Introduction to Security Cooperation

Section 1.1 Standard Items

This section noties the international partner that the items to be furnished under the FMS case

will typically be standard items. The term “standard” in this context means that the items provided

will be the same as those currently in use by the DOD. The ultimate purpose of FMS/SC is to enhance

U.S. national security. When international partners use standard U.S. systems and components,

opportunities for interoperability and logistics cross-servicing are greatly increased which, in turn,

enhances U.S. national security. This general commitment to supply standard items will be applied

subject to U.S. releasability determinations and technology transfer decisions, which are discussed in

Chapter 7, “Technology Transfer, Disclosure, Export Controls, and International Programs Security.”

This condition further highlights that items will be provided without regard to make or model.

This provision is necessary, because the DOD generally procures using a competitive process. In the

competition, the potential exists for any given manufacturer’s make or model product to be selected if

the respective product meets the procurement specication requirements such as performance, form,

t, or function. Although the international partner may have received a certain make and model product

in a prior procurement, the international partner should not expect to automatically receive the exact

same make and model product in future procurements. If the international partner has certain unique

requirements for specic makes or models, this condition places the responsibility on the international

partner to make those unique requirements known to the IA; otherwise, the standard U.S. conguration

will be supplied.

Section 1.2 Buyer-Seller Relationship

This section establishes the buyer-seller relationship between the international partner and the

USG. By accepting the case, the SC partner authorizes the USG representatives to act on its behalf.

When the DOD procures items to fulll the SC partner’s requirements, it will generally apply the same

acquisition and contract procedures that it uses in procuring for itself. This affords the SC partner the

same benets and protections that apply to DOD procurements, and is one of the principal reasons why

SC partners choose to procure through FMS channels.

1.4The USGwilluse its besteortsto providetheitemsfor the dollaramountand withinthe

availabilitycited.

1.5Underunusualandcompellingcircumstances,whenthenationalinterestoftheU.S.requires,

theUSGreservestherighttocancelorsuspendallorpartofthisLOAatanytimepriortothe

deliveryof defense articles or performance of defense services. The USG shallberesponsible

forterminationcostsofitssuppliersresultingfromcancellationorsuspensionunderthissection.

Termination by the USG of its contracts with its suppliers, other actions pertaining to such

contracts,orcessationofdeliveriesorperformanceofdefenseservicesisnottobeconstruedas

cancellationorsuspensionofthisLOAitselfunderthissection.

1.6 U.S. personnel performing defense services under this LOA will not perform duties of a

combatant nature, including duties relating to training and advising that may engage U.S.

personnel in combat activities outside the U.S., in connection with the performance of these

defenseservices.

1.7TheassignmentoremploymentofU.S.personnelfortheperformanceofthisLOAbytheUSG

willnottakeintoaccountrace,religion,nationalorigin,orgender.

1.8Unlessotherwisespecied,thisLOAmaybemadeavailableforpublicinspectionconsistent

withthenationalsecurityoftheUnitedStates.

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Introduction to Security Cooperation

Sole source for the purposes of an FMS case is a process whereby an international partner may

request case items or services to be procured from one specic vendor. Sole source procedures are

outlined in the SAMM, Section C6.3.4, Requests for Other than Full and Open Competition, and

Defense Federal Acquisition Regulation Supplement (DFARS) 225.7301-2, “Solicitation approval

for sole source contracts.” More information on sole source procurement is contained in Chapter 9,

“Foreign Military Sales Acquisition Policy and Process.”

Section 1.3 Anti-tamper Protection

The Anti-tamper protection section alerts the international partner that the USG may incorporate

anti-tamper protection in equipment sold under FMS to safeguard critical technology. In addition,

it states that the use of anti-tamper protection will not impact operations, maintenance, or logistics

provided that all terms delineated in the system technical documentation are followed.

Section 1.4 Best Efforts

The term “best efforts” is a legal term that implies a party’s good faith or intent to achieve a stated

future outcome; however, this term also recognizes the potential for other factors to subsequently arise

that could preclude the offer from actually attaining the intended goal. Therefore, a party performing

under a “best effort” condition will not be considered in default of the contract if the intended

performance outcomes are not achieved.

In regard to the LOA, this section means that the USG will undertake the execution of each case

with the intent to deliver within the estimated cost and delivery dates cited in the LOA, but the USG

cannot promise or guarantee these estimates will be achieved. As such, the international partner

understands and accepts the risk that the USG may fail to meet the LOA cost and delivery estimates.

Section 1.5 U.S. Government Right to Cancel or Suspend

The USG reserves the right to cancel a case, in whole or in part, when determined to be in the

USG’s best interest. This provision implements an AECA statutory requirement. The USG carefully

reviews international partner requests before extending an LOA offer. As indicated by Section 1.5, an

unusual, signicant event must occur to cause the USG to change its position and decide to cancel or

suspend the FMS case sale. If the USG chooses to cancel a case, the USG is responsible for paying the

costs associated with terminating the respective procurement contracts with its suppliers. This does

not necessarily mean that the entire case amount will be refunded to the international partner. Given

the fact that there will be unusual and compelling circumstances surrounding the exercise of this LOA

term, generally a politically negotiated agreement will be necessary to settle the nancial obligations

and disposition of materiel associated with cancelled or suspended cases. SAMM Section C6.6 states

that DSCA will provide the IA direction regarding the disposition of property and the liquidation of

liabilities in regard to any cancelled or suspended case.

Section 1.6 & 1.7 U.S. Personnel Requirements

Sections 1.6 and 1.7 implement FAA and AECA statutory requirements that apply to U.S.

personnel performing SA functions. Section 1.6 emphasizes that U.S. personnel in the international

partner’s country will not conduct combat activities in connection with the performance of their

Security Assistance (SA) duties. Additionally, Section 1.7 species that the U.S. may not consider

race, religion, national origin, or gender in assigning individuals to conduct SA functions on behalf of

the international partner.

Section 1.8 Freedom of Information Guidelines

Section 1.8 imposes the Freedom of Information Act (FOIA) process in whether a case may be

made publicly available. However, under FOIA, information provided to the USG in condence by

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Introduction to Security Cooperation

an international partner may be exempt from disclosure to the public. Conditions, which may exempt

the case from public release, include determinations that the case contains information not normally

released by the respective foreign government. Any decision to release or withhold information must

be coordinated with DSCA and the appropriate legal counsel of the involved DOD component. The

ofcial policy for release is found in SAMM, Section C3.5. More information on FOIA is contained in

Chapter 7, “Technology Transfer, Disclosure, Export Controls, and International Programs Security.”

Section 2 Conditions—General Purchaser Agreements

2.1ThePurchasermaycancelthisLOAordeleteitemsatanytimepriortodeliveryofdefense

articlesorperformanceofdefenseservices.ThePurchaserisresponsibleforallcostsresulting

fromcancellationunderthissection.

2.2 The purchaser notes its obligations under International Humanitarian Law and Human

RightsLaw.ThePurchaseragrees,exceptasmayotherwisebemutuallyagreedinwritingby

thePurchaserandtheUSG,tousethedefensearticlessoldhereunderonly:

2.2.1forinternalsecurity;

2.2.2forlegitimateself-defense;

2.2.3forpreventingorhinderingtheproliferationofweaponsofmassdestructionandofthe

meansofdeliveringsuchweapons;

2.2.4topermitthePurchasertoparticipateinregionalorcollectivearrangementsormeasures

consistent with the Charter of the United Nations, or otherwise to permit the Purchaser

to participate incollective measures requested by the United Nations for the purpose of

maintainingorrestoringinternationalpeaceandsecurity;or

2.2.5 for the purpose of enabling foreign military forces in less developed countries to

construct public works and to engage in other activities helpful to social and economic

development.

2.2.6forpurposesspeciedinanyMutualDefenseAssistanceAgreementbetweentheUSG

andthePurchaser;or,

2.2.7forpurposesspeciedinanyotherbilateralorregionaldefenseagreementtowhichthe

USGandthePurchaserarebothparties.

2.3ThePurchaseragreesthattheUSGretainstherighttoverifyreportsthatdefensearticlesand

serviceshavebeenusedforpurposesnotauthorizedorforusesnotconsentedtobytheUSG.

2.4ThePurchaserwillnottransfertitleto,orpossessionof,thedefensearticles,components

and associated support materiel, related training or other defense services (including plans,

specications,orinformation),ortechnologyfurnishedunderthisLOAtoanyonewhoisnotan

ocer,employee,oragentofthePurchaser(excludingtransportationagencies)oroftheUSG,

andshallnotuseorpermittheiruseforpurposesotherthanthoseauthorized,unlessthewritten

consentoftheUSGhasrstbeenobtained.ThePurchaserwillensure,byallmeansavailable

toit, respectforproprietaryrights inanyitems andanyplans, specications,or information

furnished,whetherpatentedornot.ThePurchaseralsoagreesthatthedefensearticlesoered

willnotbetransferredtoCyprusorotherwiseusedtofurthertheseveranceordivisionofCyprus,

andrecognizesthattheU.S.Congressisrequiredtobenotiedofanysubstantialevidence

thatthedefensearticlessoldinthisLOAhavebeenusedinamannerthatisinconsistentwith

thisprovision.

2.5 The Purchaser agrees not to divert articles and services received under this LOA for

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Introduction to Security Cooperation

purposesorusesotherthanthoseforwhichitwasfurnished,including,butnotlimitedto,any

usethatcouldcontributetotheacquisition,design,developmentorproductionofa“missile,”

asdenedinSection74oftheArmsExportControlAct(AECA)(22U.S.C.2797c).Theitemswill

beusedonlyforthepurposesstatedandsuchusewillnotbemodiednortheitemsmodied

orreplicatedwithoutthepriorconsentoftheUSG;neithertheitemsnorreplicasnorderivatives

thereofwill beretransferredwithout theconsent of the USG.The USG has the rightto take

actionunderSection73(a)oftheAECA(22U.S.C.2797b(a))inthecaseofanyexportortransfer

ofanyMissileTechnologyControlRegime(MTCR)equipmentortechnologythatcontributesto

theacquisition,design,developmentorproductionofmissilesinacountrythatisnotanMTCR

adherent.

2.6ThePurchaserwillmaintainthesecurityofsucharticleorserviceandwillprovidesubstantially

thesamedegreeofsecurityprotectionaordedtosucharticleorservicebytheUnitedStates

Government. To the extent that items, including plans, designs, specications, technical

data,orinformation,furnishedinconnectionwiththisLOAmaybeclassiedbytheUSGfor

securitypurposes,thePurchasercertiesthatitwillmaintainasimilarclassicationandemploy

measuresnecessarytopreservesuchsecurity,equivalenttothoseemployedbytheUSGand

commensuratewithsecurityagreementsbetweentheUSGandthePurchaser.Ifsuchsecurity

agreementsdonotexist,thePurchasercertiesthatclassieditemswillbeprovidedonlyto

thoseindividualshavinganadequatesecurityclearanceandaspecicneedtoknowinorderto

carryouttheLOAprogramandthatitwillpromptlyandfullyinformtheUSGofanycompromise,

orpossiblecompromise,ofU.S.classiedmaterialorinformationfurnishedpursuanttothisLOA.

ThePurchaserfurthercertiesthatifaU.S.classieditemistobefurnishedtoitscontractor

pursuanttothisLOA:(a)theitemwillbeexchangedthroughocialGovernmentchannels,(b)

thespeciedcontractorwillhavebeengrantedafacilitysecurityclearancebythePurchaserat

alevelatleastequaltotheclassicationleveloftheU.S.informationinvolved,(c)allcontractor

personnelrequiringaccesstosuchitemswillhavebeenclearedtotheappropriatelevelbythe

Purchaser,and(d)thePurchaserisalsoresponsibleforadministeringsecuritymeasureswhile

theitemisinthecontractor’spossession.Ifacommercialtransportationagentistobeused

forshipment,thePurchasercertiesthatsuchagenthasbeenclearedattheappropriatelevel

forhandlingclassieditems.Thesemeasureswillbemaintainedthroughouttheperiodduring

whichtheUSGmaymaintainsuchclassication.TheUSGwilluseitsbesteortstonotifythe

Purchaseriftheclassicationischanged.

2.7 Pursuant to Section 505 of the Foreign Assistance Act of 1961, as amended (FAA) (22

U.S.C.2314),andSection40AoftheAECA(22U.S.C.2785),theUSGwillbepermitted,upon

request,toconductend-usemonitoring(EUM)vericationwithrespecttotheuse,transfer,and

securityofalldefensearticlesanddefenseservicestransferredunderthisLOA.ThePurchaser

agreestopermitscheduledinspectionsorphysicalinventoriesuponUSGrequest,exceptwhen

othermeansofEUMvericationshallhavebeenmutuallyagreed.Uponrequest,inventoryand

accountabilityrecordsmaintainedby the Purchaserwill bemadeavailable to U.S.personnel

conductingEUMverication.

2.8AnyosetarrangementisstrictlybetweenthePurchaserandtheU.S.defensecontractor.The

U.S.GovernmentisnotapartytoanyosetagreementsthatmayberequiredbythePurchaser

inrelationtothesalesmadeinthisLOA.TheUSGassumesnoobligationtoadministerorsatisfy

any oset requirementsor bear any of the associated costs. Although osets, as dened in

theDefenseFederalAcquisitionRegulationSupplement,arenotwithinthescopeoftheDOD

contracts entered into to fulll the requirements of this LOA, oset costs may be recovered

throughsuchcontracts.Indirectosetcostsmaybedeemedreasonablewithoutfurtheranalysis

inaccordancewiththeDefense FederalAcquisition RegulationSupplement.If thePurchaser

wishestoobtaininformationregardingosetcosts,thePurchasershouldrequestinformation

directlyfromtheU.S.defensecontractor.

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Introduction to Security Cooperation

Section 2 outlines certain rights and obligations of the international partner associated with the case.

Section 2.1 International Partner Right to Cancel

In Section 1.5, the USG retains the right to cancel or suspend part or all of the case under unusual

or compelling circumstances when in the U.S.’s national interest. Similarly, this section provides the

international partner the right to change their mind. Simply because the international partner accepted

the case at one point does not mean they are locked into that decision. The international partner is a

voluntary participant and can cancel the entire LOA or delete specic items prior to delivery.

If the international partner chooses to exercise this right, they are nancially liable for all the

associated termination costs. Termination costs are incurred to cancel work that is already underway

to execute the case. Most termination costs relate to payments to contractors arising from contract

cancellations. Generally, contractors are entitled to certain payments when contracts are unilaterally

cancelled prior to normal contract completion. Depending on how much work is already in progress,

the termination cost to cancel or delete items may be substantial. Because this condition provides the

right to cancel, termination liability is a factor calculated into the case payment schedule on the LOA.

The calculation of termination liability ensures that, at any point in the case execution, the U.S. should

have collected sufcient funds in advance from the international partner to cover all outstanding

liabilities in the event the international partner elects to cancel part or all of the case. More information

on termination liability is contained in Chapter 12 of this textbook, “Financial Management.”

Section 2.2 End-Use Purposes

The rst sentence of this section represents the most recent change to the standard terms and

conditions: “The international partner notes its obligations under International Humanitarian Law

and Human Rights Law.” This sentence highlights the role of humanitarian and human rights law

associated with the case. However, this text does not impose any new obligations on the international

partner and cannot be the basis of a section 3 violation in and of itself.

This condition also stipulates that the international partner will only use the materiel or services

purchased under the case for certain purposes, referred to as end use. The list of acceptable end uses

is drawn from the AECA. At rst, it may appear unfair that the USG attaches end-use limitations

to the sale, but we must remember that the USG is selling defense articles and services rather than

consumer products. Additionally, as discussed in Section 1.1, this is often the same materiel used

by U.S. military forces. As such, the USG has valid concerns over how these articles or services are

used by the international partner. More information on end use is contained in Chapter 18, “End-Use

Monitoring and Third-Party Transfers.”

Section 2.3 Reports Verication

Section 2.3 establishes the right of the USG to verify any reports that defense articles or services

are being used for purposes other than as specied in Section 2.2. The incorporation of this language

into the terms and conditions of the LOA establishes the USG the right to investigate any reports of

violation to the use provisions of the case. These conditions are also typically contained in international

agreements with international partners pursuant Section 505 of the FAA.

Section 2.4 Third-Party Transfers

Section 2.4 restates the obligations imposed on the international partner under the AECA. Although

the international partner actually becomes owner of the materiel, the USG requires, as a condition of

the sale, that the international partner agrees to not resell or transfer possession of the purchased items

without rst obtaining written USG consent.

This condition does not mean that the international partner can never sell the materiel or turn over

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Introduction to Security Cooperation

possession for maintenance to a third country. It simply means that the USG is very concerned about who

has access to and possession of this defense materiel. Before offering the LOA, the USG determined that

it was in its best interest to permit the international partner to possess this materiel. The USG wants to

ensure that possession of this defense materiel by a prospective third party is also in the USG’s best interest.

More information on third-party transfers is contained in Chapter 18, “End-Use Monitoring and Third-

Party Transfers.”

This condition also requires the international partner to respect the proprietary rights of U.S.

contractors. U.S. industry has often made signicant investments in defense technologies that enable

the rm to compete both commercially and in the defense sector. This condition protects the intellectual

property of U.S. contractors from misuse.

This section also specically identies conditions related to Cyprus. It does appear unusual that

provisions regarding Cyprus would be included in the standard terms and conditions used with all

FMS cases. This is an example of the political inuences that impact FMS. Congress was concerned

about unauthorized transfers of defense articles to Cyprus. As a result, Congress specically addressed

this concern within the language of the FAA. Given these conditions relative to Cyprus are contained

within the law, these same requirements are included in the standard terms and conditions used with

all FMS cases.

Section 2.5 Missile Technology Control Regime

Section 2.5 alerts the SC partner not to divert articles and services provided under the case for

purposes other than for which they were furnished. This specically excludes any use that would

support the acquisition, design, development or production of a missile as dened in the AECA. This

section also alerts the international partner that the USG may act to control export or transfer under the

Missile Technology Control Regime.

Section 2.6 Security Requirements

The USG is very concerned about preserving the security of classied materiel transferred under

FMS. This condition requires the international partner to maintain security measures equivalent to

those used by the USG. This does not mean the international partner must use the same USG security

procedures. It means that the end result of the international partner’s security process will achieve

a level of security that is equivalent to the security level provided by the USG. Additionally, the

international partner is responsible for security not only when the item is in government possession,

but also when it is provided to the international partner’s domestic contractors or when it is in the

transportation pipeline. More information on security controls is contained in Chapter 7, “Technology

Transfer, Disclosure, Export Controls, and International Programs Security.”

Section 2.7 End-Use Monitoring

Section 2.7 states the USG retains the right to conduct end-use monitoring (EUM) verication of

articles and services transferred under the case. The international partner agrees to permit scheduled

inspections or physical inventories upon request and make accountability records available to USG

EUM personnel. This implements an AECA requirement. A more detailed explanation of EUM is

contained in Chapter 18, “End-Use Monitoring and Third-Party Transfers.”

Section 2.8 Offset Arrangements

Section 2.8 noties the international partner that the USG is not a party to any offset arrangements

and assumes no obligation to administer or satisfy any offset requirements. Although offsets are not

within the scope of DOD contracts used to execute the case, offset costs may be recovered through such

contracts. In addition, Section 2.8 noties the international partner that offset costs shall be determined

or deemed reasonable in accordance with the DFARS Subpart 225.73. A more detailed explanation of

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Introduction to Security Cooperation

offsets is contained in Chapter 9, “Foreign Military Sales Acquisition Policy and Process.”

Section 3 Indemnication and Assumption of Risks

Section 3 begins by reminding the international partner that the USG’s purpose in the case is not

for nancial gain. Obviously, the USG believes the sale is in its best interest, but nancial prot is

not the motivating factor. In recognition of this fact, this condition states that the international partner

indemnies the USG. This means that the international partner agrees to accept the risks of nancial

liabilities that may arise in the execution of the case.

At rst, the requirement for indemnication may seem unfair and appear that the USG is placing

undue risk upon the international partner. However, we must remember that the USG is conducting

business on behalf of the international partner in the same manner that the USG conducts business

for itself. As a normal business practice, the USG exposes itself to a certain degree of risk. Given

the broad range of risks the USG faces, it is less expensive to absorb the occasional loss than it

is to purchase insurance to insulate against all these risks. In procurements, the USG may include

limitation of liability clauses to relieve contractors from certain liabilities (like acts of God). The

reason for limitation of liability contract clauses is to reduce overall procurement costs. If contractors

were required to cover all potential risks, they would demand a higher contract price in compensation

for being exposed to greater risk.

When it comes to executing cases, the USG faces certain risks just like it does while conducting

business for itself. Under the case, the USG is simply requiring the international partner to absorb the

risks that the USG would absorb if the actions were conducted in support of a USG requirement. So,

in reality, the USG is not asking the international partner to be exposed to an extraordinary degree of

risk. The USG is only requiring the international partner to stand in the USG’s place to face the same

level of risk that the USG normally faces in conducting business for itself.

Under Section 3, there are two indemnication provisions: (1) International partner indemnies

and holds harmless the USG, its agents, ofcers and employees and (2) International partner relieves

3.1ThePurchaserrecognizesthattheUSGwillprocureandfurnishtheitemsdescribedinthis

LOAonanon-protbasisforthebenetofthePurchaser.ThePurchaserthereforeundertakesto

indemnifyandholdtheUSG,itsagents,ocers,andemployeesharmlessfromanyandallloss

orliability(whetherintortorincontract)whichmightariseinconnectionwiththisLOAbecauseof:

3.1.1InjurytoordeathofpersonnelofPurchaserorthirdparties,

3.1.2Damagetoordestructionof(a)propertyofDODfurnishedtoPurchaserorsuppliers

specicallytoimplementthisLOA,(b)propertyofPurchaser(includingtheitemsorderedby

PurchaserpursuanttothisLOA,beforeorafterpassageoftitletoPurchaser),or(3)property

ofthirdparties,or

3.1.3Infringementorotherviolationsofintellectualpropertyortechnicaldatarights.

3.2Subjecttoexpress,specialcontractualwarrantiesobtainedforthePurchaser,thePurchaser

agreestorelievethecontractorsandsubcontractorsoftheUSGfromliabilityfor,andwillassume

theriskof,lossordamageto:

3.2.1Purchaser’sproperty(includingitemsprocuredpursuanttothisLOA,beforeorafter

passageoftitletoPurchaser),and

3.2.2PropertyofDODfurnishedtosupplierstoimplementthisLOA,tothesameextentthat

theUSGwouldassumeforitspropertyifitwereprocuringforitselftheitemsbeingprocured.

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Introduction to Security Cooperation

the USG’s contractors and subcontractors of liability. The rst indemnication sections are much

broader in coverage than the second. The rst indemnication section (3.1) indemnify for injury

or death of international partner’s personnel, damage or destruction of DOD property, international

partner or third-party property, and infringement of intellectual property. Section 3.2, coverage for

USG contractors and subcontractors, extends to damage or loss of international partner’s property and

DOD property furnished to implement the case.

Liability Illustration

Suppose, under an FMS case, an international partner wanted to purchase an excess aircraft and

have that aircraft’s avionics upgraded prior to delivery. Following case acceptance, the U.S. awarded

a contract for the upgrade, removed the aircraft from storage, and transported it to a contractor for

upgrade work. After the contractor completed the work, the contractor’s test pilot ew the aircraft on

a functional check ight. During the check ight, a catastrophic problem developed, which caused

the aircraft to crash and be destroyed, also causing signicant property damage on the ground at the

crash site.

In this hypothetical scenario, who is nancially liable for the costs? The answer is that it depends.

The USG would investigate the crash to determine the cause. In the investigation, the contractor’s

contractual responsibility would be examined to determine if contractor non-performance or negligence

contributed to the accident. If the contractor would have held some nancial responsibility in the case

the work was being done for the benet of the USG, then the contractor would also be held to the same

degree of nancial responsibility if the work was being performed for an international partner.

If, at the conclusion of the investigation, it was found that the contractor had fullled all its

contractual requirements and the accident cause was in an area where the USG normally accepts the

liability risk, this LOA condition states that the international partner will assume this nancial liability

rather than the USG or the contractor. Again, this provision simply informs the international partner

that they should be prepared to be exposed to the same degree of nancial risk that the USG exposes

itself to in the normal course of business.

Section 4 Financial Terms and Conditions

4.1ThepricesofitemstobeprocuredwillbebilledattheirtotalcosttotheUSG.Unlessotherwise

specied,the cost of items to beprocured,availability determination, payment schedule,and

deliveryprojectionsquotedareestimatesbasedonthebestavailabledata.TheUSGwilluseits

besteortstoadvisethePurchaseroritsauthorizedrepresentativesof:

4.1.1Identiablecostincreasesthatmightresultinanoverallincreaseintheestimatedcosts

inexcessoftenpercentofthetotalvalueofthisLOA,

4.1.2Changesinthepaymentschedule,and

4.1.3Delayswhichmightsignicantlyaectestimateddeliverydates.USGfailuretoadvise

oftheabovewillnotchangethePurchaser’sobligationunderallsubsectionsofSection4.4.

4.2TheUSGwillrefundanypaymentsreceivedforthisLOAwhichprovetobeinexcessofthe

naltotalcostofdeliveryandperformanceandwhicharenotrequiredtocoverarrearageson

otherLOAsofthePurchaser.

4.3ThePurchaser’sfailuretomaketimelypaymentsintheamountsduemayresultindelaysin

contractperformancebyDODcontractors,claimsbycontractorsforincreasedcosts,claimsby

contractorsforterminationliabilityforbreachofcontract,claimsbyUSGorDODcontractorsfor

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storagecosts,orterminationofcontractsbytheUSGunderthisorotheropenLettersofOer

andAcceptanceofthePurchaseratthePurchaser’sexpense.

4.4ThePurchaseragreestothefollowing:

4.4.1TopaytotheUSGthetotalcosttotheUSGoftheitemsevenifcostsexceedthe

amountsestimatedinthisLOA.

4.4.2Tomakepayment(s)bycheckorwiretransferpayableinU.S.dollarstotheTreasurer

oftheUnitedStates.

4.4.3IfTermsofSalespecify“Cashwithacceptance,”toforwardwiththisLOAacheck

orwiretransferinthefullamountshownastheestimatedTotalcost,andagreestomake

additionalpayment(s)uponnoticationofcostincrease(s)andrequest(s)forfundstocover

such increase(s).

4.4.4IfTermsofSalespecifypaymenttobe“Cashpriortodelivery,”topaytotheUSGsuch

amountsatsuchtimesasmaybespeciedbytheUSG(includinginitialdeposit)inorder

tomeetpaymentrequirementsforitemstobefurnishedfromtheresourcesofDOD.USG

requestsforfundsmaybebasedonestimatedcoststocoverforecasteddeliveriesofitems.

Paymentsarerequired90daysinadvanceofthetimeDODplanssuchdeliveriesorincurs

suchexpensesonbehalfofthePurchaser.

4.4.5IfTermsofSalespecifypaymentby“DependableUndertaking,”topaytotheUSG

such amounts at such times as may be specied by the USG (including initial deposit)

inorderto meetpayments requiredbycontractsunderwhich itemsarebeingprocured,

andany damages and costs that may accruefromtermination ofcontractsbytheUSG

becauseof Purchaser’scancellation ofthisLOA.USGrequestsfor fundsmaybe based

uponestimatedrequirementsforadvanceandprogresspaymentstosuppliers,estimated

terminationliability,deliveryforecasts,orevidenceofconstructivedelivery,asthecasemay

be.Paymentsarerequired90daysinadvanceofthetimeUSGmakespaymentsonbehalf

ofthePurchaser.

4.4.6IftheTermsofSalespecifyForeignMilitaryFinancing(FMF),thePurchaserwillpayto

theUSGsuchcostsasmaybeinexcessoftheapprovedFMFfundingamount.

4.4.7IfTermsofSalespecify“Paymentondelivery,”thatbillsmaybedatedasofthedate(s)

ofdeliveryoftheitems,oruponforecastsofthedate(s)thereof.

4.4.8Thatrequestsforfundsorbillingaredueandpayableinfullonpresentationor,ifa

paymentdateisspeciedintherequestforfundsorbill,onthepaymentdatesospecied,

evenifsuchpaymentdateisnotinaccordwiththeestimatedpaymentschedule,ifany,

containedinthisLOA.WithoutaectingPurchaser’sobligationtomakesuchpayment(s)

when due, documentation concerning advance and progress payments, estimated

terminationliability,orevidenceofconstructivedeliveryorshipmentinsupportofrequests

for funds or bills will be made available to the Purchaser by DOD upon request. When

appropriate, the Purchaser may request adjustment of any questioned billed items by

subsequentsubmissionofadiscrepancyreport.

4.4.9Topayinterestonanynetamountbywhichitisinarrearsonpayments,determinedby

consideringcollectivelyallofthePurchaser’sopenLOAswithDOD.Interestwillbecalculated

onadailybasis.Theprincipalamountofthearrearagewillbecomputedastheexcessof

cumulative nancial requirements of the Purchaserover total cumulative payments after

quarterlybillingpaymentduedates.Therateofinterestpaidwillbearatenotlessthana

ratedeterminedbytheSecretaryoftheTreasurytakingintoconsiderationthecurrent

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Introduction to Security Cooperation

Section 4 states the international partner’s nancial obligation and liability when purchasing items

or services through FMS. Chapter 12 of this textbook, “Financial Management,” provides greater

detail regarding FMS nancial processes.

averagemarketyieldonoutstandingshort-termobligationsoftheUSGasofthelastdayofthe

monthprecedingthenetarrearageandshallbecomputedfromthedateofnetarrearage.

4.4.10TodesignatetheProcuringAgencyandresponsiblePayingOceandaddressthereofto

whichtheUSGwillsubmitrequestsforfundsandbillsunderthisLOA.

4.4.11Anyarticles,equipment,materials,supplies,goods,orothercommoditiespurchasedwith

USGassistancefundsappropriatedandallocatedpursuanttoforeignoperations,exportnancing,

andrelatedprogramsappropriationsactsinsupportofthisLOA,whetherprovideddirectlybythe

USGorthroughprocurementcontractsorotherwiseinsupportofthisLOA,shallbeexemptfrom

allvalueaddedtaxesandcustomsdutiesimposedbytherecipientcountryorthefullamountof

thetaxorcustomsdutymustbereimbursedbythePurchaser.Thisexemptionisinadditionto

anyothertaxexemptionprovidedbythePurchaserthroughseparateagreementsorothermeans.

Section 4.1 Recovery of Cost

This section reiterates that the LOA data reects a best estimate of costs and delivery dates. The

LOA estimates may be subject to change. In accordance with the AECA, this section obligates the

international partner to pay the USG the total cost for the items or services. FMS is often characterized

as a “no prot, no loss” nancial agreement. This section reiterates the “no loss” aspect.

Section 4.2 Refunds

The USG will refund payments that are in excess of the total case cost unless there are other unpaid

nancial requirements on other cases with the same international partner. In this situation, the excess

payments from one case may be applied toward the delinquent amount due on another case. While

Section 4.1 serves as the “no loss” condition, this section reafrms the “no prot” condition stated in

Section 3.1.

Section 4.3 Payment Delays

Any delay in making the case payments by the international partner may result in the USG directing

the contractor to stop work, which, in turn, may lead to additional or increased costs, storage costs, and

delayed delivery. Failure to make payments could also result in contract terminations that may require

the international partner to pay for contract termination liability costs.

Section 4.4 Terms of Sale

The international partner agrees to pay the total cost incurred under the case even if the nal

amount exceeds the estimated costs provided earlier. The international partner agrees to make payments

in accordance with the applicable terms of sale specied on the LOA. Chapter 12 of this textbook,

“Financial Management,” gives a more detailed explanation of the specic terms of sale.

Section 5 Transportation and Discrepancy Provisions

Section 5 delineates the transportation obligations and requirements of the international partner,

denes the role of the USG in arranging for transportation, and describes the process for submitting

discrepancy claims to the USG.

Section 5.1 Title Transfer and Delivery Point

Section 5.1 identies where title transfers and delivery occur. Title represents ownership. This

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condition states that the international partner becomes the owner of materiel at the initial shipping

point. Delivery, in this context, does not mean the materiel has arrived at the nal international

partner’s destination. Delivery refers to the point where transportation responsibility transfers from

the USG to the international partner. The delivery term code applied to each LOA line will indicate

where the international partner becomes responsible for transportation. Under certain delivery term

codes, the USG may arrange for transportation in various increments up to and including movement

to an inland location within the international partner’s country. Regardless of when the international

partner assumes transportation responsibility, the title will still transfer at the initial shipping point.

This means that the USG will not be nancially liable for items damaged in transit, even if USG

arranges or provides the transportation.

This condition should not be interpreted to mean that the international partner’s nancial liability

does not begin until title transfer. Per Section 3, the international partner’s liability begins with case

acceptance. As the USG initiates actions towards fullling the case requirements, nancial liabilities

5.1TheUSGagreestodeliverandpasstitletothePurchaserattheinitialpointofshipment

unlessotherwisespeciedinthisLOA.WithrespecttoitemsprocuredforsaletothePurchaser,

thiswillnormallybeatthemanufacturer’sloadingfacility;withrespecttoitemsfurnishedfrom

USGstocks,thiswillnormallybeattheU.S.depot.Articleswillbepacked,crated,orotherwise

preparedforshipmentpriortothetimetitlepasses.If“PointofDelivery”isspeciedotherthan

theinitialpointofshipment,thesupplyingU.S.DepartmentorAgencywillarrangemovement

ofthearticlestotheauthorizeddeliverypointasareimbursableservicebutwillpasstitleatthe

initialpointofshipment.TheUSGdisclaimsanyliabilityfordamageorlosstotheitemsincurred

afterpassageoftitleirrespectiveofwhethertransportationisbycommoncarrierorbytheU.S.

DefenseTransportationSystem.

5.2ThePurchaseragreestofurnishshippinginstructionswhichincludeMarkForandFreight

ForwarderCodesbasedontheOerReleaseCode.

5.3The Purchaserisresponsiblefor obtaininginsurancecoverage andcustomsclearances.

ExceptforarticlesexportedbytheUSG,thePurchaserisresponsibleforensuringthatexport

licenses are obtained prior to export of U.S. defense articles. The USG incurs no liability if

exportlicensesarenotgrantedortheyarewithdrawnbeforeitemsareexported.

5.4ThePurchaseragreestoacceptDDForms645orotherdeliverydocumentsasevidencethat

titlehaspassedanditemshavebeendelivered.Titletodefensearticlestransportedbyparcel

postpassestothePurchaseratthetimeofparcelpostshipment.StandardForm364(Supply

DiscrepancyReport(SDR))willbeusedinsubmittingclaimstotheUSGforoverage,shortage,

damage, duplicate billing, item deciency, improper identication, improper documentation,

ornon-shipmentofdefensearticlesandnon-performanceofdefenseservices.TheStandard

Form 364 will be submitted promptly by the Purchaser. The USG will disallow any claim,

includingaclaimforshortageornonperformance,receivedmorethan1yearafterdeliveryor

morethan1yearafterpassageoftitletothedefensearticles,whichevercomesrst,orreceived

morethan1yearaftertheendofthescheduledperiodofperformancefordefenseservices,

unlesstheUSGdeterminesthatunusualandcompellingcircumstancesinvolvinglatentdefects

justifyconsiderationoftheclaim.Claimsfornon-shipmentornon-receiptofanentirelotwillbe

disallowedbytheUSGifsuchclaimsarereceivedmorethan1yearafterthescheduleddelivery

dateorinitialbilling,whicheverislater.ThePurchaseragreestoreturndiscrepantarticlestothe

USG’scustodypromptlyinaccordancewithanydirectionprovidedbytheUSG.ThePurchaser

maysubmitSDRsfordocumentationpurposesregardlessofthedollarvalue,butonlySDRs

valuedat$200ormorewillbereviewedforpossiblecompensationregardlessofthetypeof

discrepancy. This minimum valueincludesthe value of theitemplusany transportation and

handling costs.

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Introduction to Security Cooperation

begin to accrue. In Section 3, the international partner agrees to indemnify the USG and its contractors.

Additionally, in Section 2, the international partner agrees to be liable for termination costs if they elect

to delete items or to cancel the case.

Section 5.2 Shipping Instructions

Section 5.2 describes the international partner’s obligation to provide the required transportation

information so that items are shipped through the appropriate channels to arrive at the correct

international partner’s destination. The international partner provides this information at the bottom

of the rst LOA page as part of the LOA- acceptance process. The freight forwarder code identies

the commercial freight company employed by the international partner to accomplish overseas

transportation. The mark-for code identies the ultimate in-country destination address. Chapter 11 of

this textbook, “Security Cooperation Transportation Policy,” provides a more detailed description of

FMS transportation procedures.

Section 5.3 Insurance and Export Licenses

Given the fact that the international partner bears the risk of any damage that may occur during

shipment, the international partner is responsible for obtaining any desired insurance coverage.

Additionally, the international partner is responsible for completing the necessary documents to clear

customs. Most international partners delegate the task of coordinating customs paperwork to their

freight forwarder for FMS cases. More information on export licensing is contained in Chapter 7 of this

textbook, “Technology Transfer, Disclosure, Export Controls, and International Programs Security.”

Section 5.4 Delivery Documents and Claims

Section 5.4 delineates the international partner’s obligation to accept certain USG documentation

as evidence that title transfer and delivery have occurred. Additionally, this section outlines the process

and conditions under which the international partner can submit claims for discrepancies. Although the

USG would like the FMS enterprise to operate error-free, in reality, things sometimes go wrong. The

international partner has an avenue request reimbursement for shipping or billing discrepancies. This

process is called the supply discrepancy reporting. More information on supply discrepancy reporting

process is contained in Chapter 10 of this textbook, “Logistics Support of Security Cooperation

Materiel Transfers.”

Section 6 Warranties

Section 6 describes the warranty provisions of the LOA. Under FMS, the international partner

is purchasing from the USG, rather than from a commercial company. This section denes what

warranties the USG provides on FMS materiel. Section 6.1 discusses warranty provisions for items

obtained from procurement, and Section 6.2 concerns items delivered from DOD inventory.

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Introduction to Security Cooperation

Section 6.1 Procurement Warranties

For items supplied from procurement, the USG does not provide any type of performance warranty.

The USG only warrants clear title of the materiel to the international partner. This simply means that

there will be no nancial claim or lien against the materiel delivered.

This does not mean that the international partner has no method of recourse if an item from

procurement does not function properly. International partners with defective items from procurement

should submit a Supply Discrepancy Report (SDR) to the USG. The USG may be able to rectify the

problem by seeking resolution through the contractor under the provisions of the USG procurement

contract.

This condition also provides the international partner the option of identifying specic warranty

requirements when they request an item via the FMS process. Based on the international partner’s

specic warranty request, the USG will attempt to procure the desired warranty from the vendor in

conjunction with the procurement of the materiel or service. The international partner will pay any

additional costs necessary to acquire the desired warranty. The USG agrees to exercise the warranty

rights on behalf of the international partner. Section C6.3.8 of the SAMM requires that the IA must

inform the international partner, either in the LOA note or by documentation such as a technical bulletin

accompanying the item when shipped, of any steps necessary to maintain or exercise rights under these

additional warranties. The international partner must submit an SDR within the time limitations of a

warranty applicable to an item.

Section 6.2 Warranties from Stock

This condition states that the U.S. will repair or replace damaged or defective items delivered

6.1TheUSGdoesnotwarrantorguaranteeanyoftheitemssoldpursuanttothisLOAexcept

as providedin Section 6.1.1.DOD contracts include warranty clauses only on an exception

basis.IfrequestedbythePurchaser,theUSGwill,withrespecttoitemsbeingprocured,and

upontimelynotice,attempttoobtaincontractprovisionstoprovidetherequestedwarranties.

TheUSGfurtheragreestoexercise,uponthePurchaser’srequest,rights(includingthosearising

underanywarranties)theUSGmayhaveundercontractsconnectedwiththeprocurementof

theseitems.Additionalcostsresultingfromobtainingspecialcontractprovisionsorwarranties,

ortheexerciseofrightsundersuchprovisionsorwarranties,willbechargedtothePurchaser.

6.1.1 The USG warrants the title of items sold to the Purchaser hereunder but makes

no warranties other than those set forth herein. In particular, the USG disclaims liability

resultingfrominfringementorotherviolationofintellectualpropertyortechnicaldatarights

occasionedbytheuseormanufactureoutsidetheU.S.byorforthePurchaserofitems

suppliedhereunder.

6.1.2TheUSGagreestoexercisewarrantiesonbehalfofthePurchasertoassure,tothe

extent provided by the warranty, replacement or correction of such items found to be

defective,whensuchmaterielisprocuredforthePurchaser.

6.2Unlesstheconditionofdefensearticlesisidentiedtobeotherthanserviceable(forexample,

“as-is”),DODwillrepairorreplaceatnoextracostdefensearticlessuppliedfromDODstocks

whicharedamagedorfoundtobedefectiveinrespecttomaterielorworkmanshipwhenitis

establishedthatthesedeciencies existedprior topassage oftitle,orfoundto bedefective

indesigntosuchadegreethattheitemscannotbeusedforthepurposeforwhichtheywere

designed.QualiedrepresentativesoftheUSGandofthePurchaserwillagreeontheliability

hereunderandthecorrectivestepstobetaken.

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Introduction to Security Cooperation

from DOD inventories when it can be determined that the defect or damage existed prior to shipment.

This can be a difcult determination. The IAs have SDR ofces that evaluate SDR claims and make

decisions regarding the appropriate corrective action. More information on the supply discrepancy

process is contained in Chapter 10 of this textbook, “Logistics Support of Security Cooperation

Materiel Transfers.”

Section 7 Dispute Resolution

This section explains the method by which disputes will be resolved.

Section 7.1 explains that all activities the USG undertakes to execute the case, such as procurement

contracts, are subject to U.S. federal procurement law.

Section 7.2 provides for the resolution of case disagreements by a bilateral consultative process. The

international partner agrees not to seek redress from any international tribunal such as the international

court or a third party.

changes to the Letter of offer and acceptance

An international partner’s requirements and the conditions and circumstances of the accepted LOA

may change during the course of implementation and execution. Examples of changes include the

following:

• Increased or decreased costs of LOA items

• Revised delivery dates

• Additional items required

• Changes in system conguration

To authorize these changes and establish an audit trail, proper documentation must be prepared

for accurate and complete case management. The decision to use a new LOA, an amendment, or a

modication to implement a change will be shaped by the special conditions surrounding each change.

FMS interests are best served through use of the document that best safeguards U.S. and international

partner’s interests while most efciently accomplishing the needed program change. The scope of the

case is a key issue to consider in deciding whether to prepare an Amendment, Modication, or new

LOA. A scope change takes place when the original purpose of a case line or note changes. This may

be reected through either an increase or decrease in dollar value, quantity, or lead-time.

Specic details on identifying the correct document to use and on complying with the necessary

administrative requirements of review and/or countersignature by DSCA are found in SAMM, Section

C6.7. A case manager who has doubt as to which document is appropriate after reviewing the SAMM

guidance should consult the Implementing Agency SC policy ofce and/or DSCA.

Major Changes in Scope—New Letter of Offer and Acceptance

Revisions that signicantly change original requirements are normally considered to be major

changes in scope. Examples are the addition or deletion of Signicant Military Equipment (SME) or

a substantial expansion of a program. Major changes normally require the preparation of a new LOA.

7.1ThisLOAissubjecttoU.S.lawandregulation,includingU.S.procurementlaw.

7.2 The USG and the Purchaser agree to resolve any disagreement regarding this LOA by

consultationsbetweentheUSGandthePurchaserandnottoreferanysuchdisagreementto

anyinternationaltribunalorthirdpartyforsettlement.

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Introduction to Security Cooperation

New LOAs for major changes to an ongoing program will cross reference the previous LOA. While

new LOAs are preferred for major scope changes, under certain exceptional conditions, an amendment

may be more advantageous. Use of an amendment for a major scope change requires approval

by DSCA.

Minor Changes in Scope—Amendment

Changes to an ongoing program that are not categorized as major change of scope make up this

category. An LOA amendment represents a bilateral change to the case. By virtue of being bilateral,

an amendment will not become effective unless the international partner accepts the change. The

international partner has a choice to either accept or reject an amendment offered by the USG.

Acceptance of the change is signied by the international partner signing the amendment. Some

amendments may require initial deposits, and these will not be implemented until sufcient payments

have been received to cover the current nancial requirements, including termination liability. Rejection

of the change is signied by declining to sign the amendment. Examples of minor scope changes are

outlined in the SAMM C6.T7 and Table 8-1.

Table 8-1 Amendment Examples

SAMM C6.T7

1.Realigningorredistributingfundsamongcaselines.Theonlyexceptionismovingfundsfromlines

onacasethathaveexcessfundstootherlinesonthesamecasethathaveincurredpriceincreases.A

modicationmaybeusedinthisscenarioonly.

2. Adding case lines

3.Deletingcaselines(exceptforcaseclosure)

4.Quantityincreasesordecreasestodenedorderlines

5.Dollarvalueincreasesordecreasestoblanketorderlineswiththeexceptionofpriceincreasesor

decreases

6.Additionordeletionorrequirements

7.Extendingaleadtime,periodofperformance,oravailabilityofservicesforadditionalcoverageevenif

there is no charge in dollar value

8.ChangeinDeliveryTermCodetoadd/deletetransportationrequirement

9.Revisinglineitemdescriptionsornotestoincreaseordecreasescope

10.ChangingaMilitaryArticlesandServicesList(MASL)thathasacorrespondingcongurationorscope

change

A sample amendment may be viewed in the Bandarian Security Cooperation Sample Case

Documents, a DSCU course publication. This publication is available online through the DSCU

website under publications.

Changes Not Affecting Scope—Modication

Changes to existing cases that do not impact the scope of the case are accomplished via modications.

When the SC partner accepts the original LOA, they agree to accept the provisions of the standard

terms and conditions. Section 4 of the standard terms and conditions permits the U.S. to make changes

to the case under certain circumstances. An LOA modication is the document the U.S. uses to inform

the international partner of these unilateral changes. Because the international partner already agreed

to such unilateral modications by the USG in the standard terms and conditions of the LOA, the

international partner is not required to accept a modication. A modication becomes effective upon

issuance by the USG. A modication does have a signature block for the international partner to sign

but, in this instance, the signature simply acknowledges receipt rather than signifying acceptance.

Examples of changes implemented by a modication are outlined in the SAMM C6.T8 and Table 8-2.

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Introduction to Security Cooperation

Table 8-2 Modication Examples

SAMM C6.T8

1.Priceincreaseordecreaseonadenedorderline

2.Increasingordecreasinglinevaluesforcaseclosure

3. Increases due to over commitments

4.Leadtimeslippagescausedbysourceofsupplyimpacts(e.g.,delaysincontractawardormateriel

deliveries)

5.Revisingsource,linemanager,oerrelease,ortypeofassistancecodes

6. Correcting accessorial charges

7.Minoradministrativechangessuchastypographicalerrors

8.Revisingpaymentschedules

9.RevisingtheTermsofSale

10.CorrectingtheFMSAdministrativeSurcharge

11.ChargesforValueAddedTaxandotherinternationalrequirementsleviedontheU.S.thatmustbe

fundedbytheFMScase(consideredapriceincrease)

12.ToaddchargesforstorageandotherU.S.requirementsalreadyreceivedthatmustbefundedonthe

FMScase

13.ConcurrentModicationsaretheexceptionforaddinglimitedscope

A sample modication may be viewed in the Bandarian Security Cooperation Sample Case Documents.

The modication also plays a critical role in nancial management by the U.S. security assistance

community. Per the LOA standard terms and conditions, Section 4.1, the U.S. is committed to apply

its best efforts to provide the international partner a modication when estimated total costs change,

payment schedule changes, or signicant delivery delays occur. A modication should also be provided

for cost reductions, even if relatively minor, when all items are on order and prices are reasonably rm.

More information on nancial management is contained in Chapter 12 of this textbook, “Financial

Management.”

Pen and Ink Changes

A pen and ink change refers to a minor change that is authorized after an LOA or LOA amendment

is offered to the international partner but is made prior to the international partner’s acceptance. Pen and

ink changes are generally used to correct minor administrative or arithmetic errors. The IA authorizes

the international partner to make any pen and ink changes by issuing a message or memorandum.

Examples are a small arithmetic change that does not increase total value and administrative changes

such as an address correction, initial deposit or payment schedule adjustment, or extension of the offer

expiration date. Pen and ink changes made by the international partner without prior authorization by the IA

are considered a counteroffer and are not valid.

Pen and ink changes to modications are not authorized. The reason for this is that a modication is

a unilateral document and becomes effective upon issuance by the USG without requiring international

partner acceptance. Any required changes to a modication must be accomplished by issuing another

modication.

Lease of defense artIcLes

Normally, the USG makes defense articles available to international partners by FMS under the

AECA. However, there are instances where a lease, rather than sale, to eligible international partners

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Introduction to Security Cooperation

is appropriate. Leases are authorized under the AECA, Section 61, when it is determined that there are

compelling foreign policy and national security reasons for leasing rather than selling and the articles

are not needed for USG use during the proposed lease period. In addition, impact of the lease on the

national industrial base must be considered, including whether a lease reduces the opportunity of U.S.

industry to sell new equipment to the leasing international partner. For example, a international partner

may desire to obtain a defense article for a short period under a lease for testing purposes to assist

it in determining whether to procure the article in quantity. As another example, the USG may only

be able to respond to an urgent foreign requirement for defense property by making it available from

inventory, but, for national defense reasons, cannot sell the property and must require its return to the

inventory after a specied term. Attachment 8-1 provides a sample lease. Section C11.6 of the SAMM

provides lease policy.

Approval

DOD components must obtain DSCA concurrence before indicating to an international partner or

international organization that a lease is being favorably considered or is an available option. The DOD

component will provide a determination and forward a memorandum written in the format specied in

the SAMM, starting at Figure C11.F5, along with the draft lease. A detailed rationale must be provided

for any proposed lease outlining the reasons why the defense articles are being leased rather than sold.

Security Cooperation Organization Responsibility

The Security Cooperation Organization (SCO) or Defense Attaché Ofce (DAO) where no SCO is

assigned in the international partner’s country should receive a copy of each lease entered into with the

respective international partner’s country where they serve. The SCO should assist DOD components

in monitoring the use of USG-owned equipment in the international partner’s country.

Lease Format

Leases are prepared using the Defense Security Assistance Management System (DSAMS).

Attachment 8-1 illustrates the basic lease format. Additional provisions may be added with the

concurrence of the appropriate legal ofce of the DOD component concerned and with DSCA approval.

The lease will be signed by the appropriate IA and provided to DSCA for countersignature.

A separate case will be used for packing, crating, handling, and transportation (PCH&T), and the

sale of associated articles and services, including any refurbishment of the defense article(s) required

prior to, during, or after the lease period. The case will also be used to recover applicable costs if the

article is lost, damaged, or destroyed during the lease period.

Lease Identication

Using DSAMS, the IA assigns a unique designator to each lease. The lease designator is composed

of the country code, the IA code, and a three-position code assigned by the IA. The lease designator

is included on each lease page, including schedules, appendices, and accompanying documents. FMS

cases associated with leases must reference the lease designator.

Duration

Leases may be written for a maximum of ve years with an additional specied period of time

required to complete major refurbishment work prior to delivery. Leases may include multiple items

with different lease duration periods. The shortest lease period is one month and the longest lease

period is sixty months. Leases of one year or more require congressional notication in accordance

with the AECA, Section 62(a)(22 U.S.C. 2796(a). Leases shall provide that, at any time during the

lease period, the USG may terminate the lease and require the immediate return of the defense article.

Leases of less than ve years may be extended via an amendment, but the total period under a specic

lease may not exceed ve years plus the time needed for refurbishment.

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Introduction to Security Cooperation

Amendments

Lease amendments may be used to extend or change existing leases. Such changes include variations

to payment schedules, Schedule A items, or periods of performance. Each amendment includes the

original lease designator and undergoes the same stafng process as the original lease. If a lease for

less than one year is amended so that the total period of the original lease and the amendment equals

or exceeds one year, Congress must be notied of the amendment before it can be offered.

Loss, Destruction, or Damage

The international partner must agree to pay the costs of restoration or replacement if the articles are

lost, damaged, or destroyed while leased. In this case, the international partner is charged the replacement

cost (less any depreciation) if the U.S. intends to replace the articles or the actual article value (less any

depreciation) if the U.S. does not intend to replace the articles. These charges are recouped under an FMS

transaction via an case.

Lease Payment

The lessee must agree to pay in U.S. dollars all costs incurred by the USG in leasing articles,

including reimbursement for depreciation (rent) of articles while leased. The rental payment is

calculated in accordance with DOD 7000.14-R, Volume 15, Chapter 7. Rental payments do not include

an administrative charge. The requirement to pay all lease costs does not apply to leases for purposes

of cooperative research or development, military exercises, or communications or electronics interface

projects. Depreciation may be waived where the leased defense article has passed 75 percent of its

service life.

Schedule A of each lease identies the replacement costs of the items being leased and the schedule

for rental payment due to the USG. Billings to the international partner are based on this schedule of

payments and are included on a separate DD Form 645, “Foreign Military Sales Billing Statement.”

Defense Finance and Accounting Service (DFAS) deposits receipts from lease rental payments in the

Miscellaneous Receipts Account 3041 (FMS Recoveries, DOD Lease Costs) in accordance with the

Treasury Financial Manual, Supplement to Volume 1.

The use of Foreign Military Financing may be authorized by DSCA (Business Operations and Operations

Directorates), FMF or MAP Merger funds may be used to fund cases for services associated with a lease, but the

AECA does not allow their use for rental payments for leases made pursuant to AECA, section 61 (22 U.S.C.

2796), except for leases of aircraft for counternarcotics purposes pursuant to FAA, section 484 (22 U.S.C.2291c).

In such instances, the total lease cost (including any renewals) is an initial, one-time payment of an amount

equivalent to the aircraft price as if it were sold on a case. Questions regarding proper sources of funding for leases

should be directed to DSCA (Business Operations Directorate).

Report on Equipment Usage

The overall responsibility for all aspects of lease administration, including monitoring equipment

while leased, belongs to the DOD component having logistics responsibility for the leased equipment.

IAs are required to update the status of each active lease not later than thirty days after the end of each

quarter. This update is made in the DSAMS.

United States Naval Vessels

For leases of U.S. Naval vessels, the guidance in the SAMM, Section C11.6.3.1, applies. Naval

vessel leases are subject to additional requirements contained in 10 U.S.C. 7307, which requires specic

statutory authorization for the lease of naval vessels in excess of 3000 tons or less than 20 years of age,

and Congressional notication for other naval vessels. AECA, Subchapter VI requirements also apply to

naval vessel leases unless the separate legislation expressly provides otherwise.

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Introduction to Security Cooperation

Loans

Under the Arms Export Control Act (AECA), section 65 (22 U.S.C. 2796d), the Department of

Defense (DOD) may lend materiel, supplies, and equipment to NATO and major non-NATO allies for

research and development purposes. Loans that support cooperative research, development, test, and

evaluation (RDT&E) programs, strengthen the security of the United States and its allies by promoting

standardization, interchangeability, and interoperability of allied defense equipment. Policy regarding

loans is contained in the SAMM, Section C11.7.

InternatIonaL agreements

For most sales of defense articles and services, the FMS case LOA document is sufcient to

establish the rights and obligations of each party to the agreement. However, in exceptional instances,

it may be in the USG’s interest to negotiate and conclude an international agreement before, concurrent

with, or after conclusion of the case. The SAMM, Section C4.4.5, provides guidance on the use of

international agreements involving commercial or government coproduction.

An international agreement generator has been adopted by the Secretary of Defense and the IA

legal advisors to establish a standard and uniform format for DOD-wide application. International

agreements are further described in Chapter 13 of this textbook, “Systems Acquisition and International

Armaments Cooperation.” IAs that are considering negotiating and concluding an international

agreement are strongly encouraged to consult with their supporting counsel well in advance of need,

as justication documents, draft text, and approvals, including Department of State involvement, can

be arduous and time consuming.

summary

The basic contractual instrument used in FMS cases is the LOA document. The LOA standard

terms and conditions establish specic rights and obligations for both the USG and the SC partner.

These standard terms and conditions are used in all FMS cases regardless of the international partner;

however, the standard terms and conditions do not apply to BPC cases. Major changes in case

scope require a new LOA. Minor changes of scope within a case are accomplished through an LOA

amendment. Non-scope changes to the case are unilaterally notied to the international partner through

an LOA modication.

Leases and loans of defense articles may also be made to international partners. For complex FMS

programs, an international agreement may be required to dene how issues beyond the scope of the

case will be handled.

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Introduction to Security Cooperation

references

DOD Directive 5530.3. International Agreements.

DSCA Manual 5105.38-M. Security Assistance Management Manual (SAMM). Chapters C5, C6, and

C11. http://www.samm.dsca.mil/.

Financial Management Regulation (FMR) DOD 7000.14, Volume 15.

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Introduction to Security Cooperation

Figure C11.F6. Sample Lease

Lines and data are included for illustration purposes only.

BN-Q-ZAA B

Page 1 of 6

LEASE OF MAVERICK SUPPORT EQUIPMENT

BETWEEN

THE UNITED STATES GOVERNMENT

AND

THE GOVERNMENT OF BANDARIA

BN-Q-ZAA

This LEASE, made as of 01 Oct 2003, between the United States Government (hereinafter

called the "Lessor Government") represented by its DSCA and the Government of Bandaria,

(hereinafter called the "Lessee Government") represented by its LTC Morgan, Embassy of

Bandaria.

WITNESSETH

WHEREAS, The Lessor Government has determined that the twenty four month lease of

AGM-65-G Missile Navigational System Test Set and, if applicable, all associated nonexpendable

support equipment as listed in Schedule A of this lease (including but not limited to tools,

ground support equipment, test equipment, and publications) (hereinafter referred to as the

"Defense Articles") are not for the time needed for public use, and

WHEREAS, The Lessor Government has determined that there are compelling foreign

policy and national security reasons for providing such Defense Articles on a lease basis rather

than on a sales basis under the Arms Export Control Act, and

WHEREAS, The Lessor Government has considered the effects of the lease of the articles

on the technology and industry base, particularly the extent, if any, to which the lease reduces

the opportunity of entities in the national technology and industrial base to sell new

equipment, and

WHEREAS, This lease is made under the authority of Chapter 6 of the Arms Export Control

Act,

NOW THEREFORE, The parties do mutually agree as follows:

1. In consideration of a rental charge as indicated in Schedule A, and the

maintenance and other obligations assumed by the Lessee Government, the

Lessor Government hereby leases to the Lessee Government and the Lessee

Government hereby leases from the Lessor Government the Defense Articles for

the period of twenty four (24) months commencing on the date first above written

(unless otherwise agreed under terms of this lease) and under the terms and

conditions set forth in the General Provisions hereto annexed.

2. The Lessor Government shall deliver the Defense Articles to the Lessee

Government at such time and place as may be mutually agreed upon. Such

delivery may be evidenced by a certificate of delivery.

IN WITNESS WHEREOF, Each of the parties has executed this lease as of the day and year

first above written, unless otherwise agreed under terms of this lease.

Attachment 8-1

Sample Lease Agreement

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Introduction to Security Cooperation

Figure C11.F6. Sample Lease

Lines and data are included for illustration purposes only.

BN-Q-ZAA B

Page 2 of 6

THE GOVERNMENT OF BANDARIA

THE UNITED STATES GOVERNMENT

Typed

Name

Typed

Name

Title

Date

COUNTERSIGNATURE

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Name

Title

Date

8-26

Introduction to Security Cooperation

Figure C11.F6. Sample Lease

Lines and data are included for illustration purposes only.

BN-Q-ZAA B

Page 3 of 6

GENERAL PROVISIONS

1. Operations and Use

a. Except as may be otherwise authorized by the Lessor Government and except for the

purposes of transfer from and return to the Lessor Government, the Lessee Government

shall keep the Defense Article in its own possession, custody, and control. The Lessee

Government shall not transfer title to or possession of the Defense Articles to anyone

not an officer, employee, or agent of the Lessee Government and shall not permit any

encumbrance or other third party interest in the defense articles.

b. The Lessee Government shall, except as may be otherwise mutually agreed in writing,

use the items leased hereunder only:

1. For the purposes specified in the Mutual Defense Assistance Agreement, if any,

between the Lessor Government and the Lessee Government;

2. For the purposes specified in any bilateral or regional defense treaty to which the

Lessor Government and Lessee Government are both parties, if subparagraph (1) of

this paragraph is inapplicable.

3. For internal security, individual self-defense, and/or civic action, if subparagraphs (1)

and (2) of this paragraph are inapplicable.

c. To the extent that any Defense Articles may be classified by the Lessor Government for

security purposes, the Lessee Government shall maintain a similar classification and

employ all measures necessary to preserve such security, equivalent to those employed

by the Lessor Government, throughout the period during which the Lessor Government

may maintain such classification. The Lessor Government will use its best efforts to

notify the Lessee Government if the classification is changed.

2. Initial Condition. The Defense Articles are leased to the Lessee Government on an ''as is,

where is" basis without warranty or representation concerning the condition or state of

repair of the Defense Articles or any part thereof or concerning other matters and without

any agreement by the Lessor Government to alter, improve, adapt, or repair the Defense

Articles or any part thereof.

3. Conditioning and Transfer Cost. The Lessee Government shall bear the cost of rendering the

Defense Articles operable and transferable and of transferring the Defense Articles from the

United States or other point of origin and back to the place of redelivery. In the event the

Defense Articles are transported by vessel, only U.S. flag vessels may be used, unless waived

by the Lessor Government.

4. Inspection and Inventory. Immediately prior to the delivery of the Defense Articles to the

Lessee Government, an inspection of the physical condition of the Defense Articles and an

inventory of all related items may be made by the Lessor Government and the Lessee

Government. A report of the findings shall be made which shall be conclusive evidence as to

the physical condition of said Defense Articles and as to such items as of the time of

8-27

Introduction to Security Cooperation

Figure C11.F6. Sample Lease

Lines and data are included for illustration purposes only.

BN-Q-ZAA B

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delivery. A similar inspection, inventory, and a report may be made by the Lessor

Government upon the termination or expiration of this Lease. The findings of that report

shall be conclusive evidence as to the physical condition of the Defense Articles and as to

such items as of the date of termination or expiration of this Lease. At the election of the

Lessor Government, the Lessee Government at its own cost shall either promptly correct

any deficiency or rebuild, replace, or repair any loss of or damage to the Defense Articles or

compensate the Lessor Government for the restoration or replacement value (less any

depreciation in the value as determined by the Lessor Government) of such correction,

rebuilding, replacement, or repair. At the Lessor Government's choice, the Lessee

Government at its own cost will remove any alterations or additions to the Defense Articles

or pay the Lessor Government the cost of such removal, as determined by the Lessor

Government. In the absence of removal by the Lessee Government, title to any such

alterations or additions shall vest in the Lessor Government.

5. Maintenance. The Lessee Government shall maintain the Defense Articles in good order,

repair, and operable condition and except as provided in paragraph four, shall upon

expiration or termination of this Lease return the Defense Articles in operable condition and

in as good condition as when received, normal wear and tear excepted.

6. Risk of Loss. All risk or loss of or damage to the Defense Articles during the term of this

Lease and until their return to the place of redelivery shall be borne by the Lessee

Government.

7. Indemnification. The Lessee Government renounces all claims against the Lessor

Government, its officers, agents, and employees arising out of or incidental to transfer,

possession, maintenance, use, or operation of the Defense Articles or facilities and will

indemnify and hold harmless the Lessor Government, its officers, agents, and employees or

any such claims of third parties and will pay for any loss or damage to Lessor Government

property.

8. Alterations. The Lessee Government shall not make any alterations or additions to the

Defense Articles without prior consent of the Lessor Government. All such alterations or

additions shall become the property of the Lessor Government except items paid for by the

Lessee Government, which can be readily removed without injury to the Defense Articles

and are removed by the Lessee Government prior to redelivery of the Defense Articles. As a

condition of its approval of any alteration or addition, the Lessor Government may require

the Lessee Government to restore the Defense Articles to their prior condition.

9. Termination. This Lease may be terminated without cost to the Lessor Government:

a. By mutual agreement of the parties;

b. By the Lessee Government on 30-days written notice; or

c. By the Lessor Government at any time.

The Lessee Government shall immediately return the leased Defense Articles at the

direction of the Lessor Government. Termination will be subject to the Lessee

Government's residual responsibilities hereunder (such as, duty to return leased Defense

8-28

Introduction to Security Cooperation

Figure C11.F6. Sample Lease

Lines and data are included for illustration purposes only.

BN-Q-ZAA B

Page 5 of 6

Articles promptly, to pay costs required hereunder, and to indemnify and hold harmless the

Lessor Government).

10. Place of Redelivery. Upon expiration or termination of this lease, the Defense Articles shall

be returned to the Lessor Government at Kryst-Mallett Air Force Station, Harris,

Pennsylvania, or as mutually agreed.

11. Title. Title to the Defense Articles shall remain in the Lessor Government. The Lessee

Government may, however, place the Defense Articles under its Flag, or display its national

insignia when appropriate.

12. Reimbursement for Support. The Lessee Government will pay the Lessor Government for

any services, packing, crating, handling, transportation, spare parts, materiel, or other

support furnished for the Defense Articles by the Lessor Government pursuant to a Letter of

Offer and Acceptance under the Arms Export Control Act. (FMS Case BN-Q-BMB applies).

13. Covenant Against Contingent Fees. The Lessee Government warrants that no person or

selling agency has been employed or retained to solicit or secure this Lease upon an

agreement or understanding for a commission, percentage, brokerage, or contingent fee.

14. Officials Not to Benefit. No members of or Delegate to Congress of the United States, or

Resident Commissioner of the United States shall be admitted to any share or part of this

Lease or to any benefit that may arise there from.

15. Proprietary Rights. The Lessee Government will ensure, by all means available to it,

protection of proprietary rights in any Defense Article and any plans, specifications, or

information furnished, whether patented or not.

16. Reports. Any testing of articles and/or services provided under this lease must be

specifically authorized by the lease. Lessee testing is subject to limitations stated in the

lease. Authority to test does not excuse the Lessee from compliance with all terms and

conditions of the lease. When the Lessee Government performs tests and evaluations on

the leased Defense Articles and prepares a formal report of the resulting data to be

released to a third party, the Lessee Government will allow the Lessor Government to

observe the test and evaluation and to review the report. The Lessee Government will

obtain Lessor Government approval of any release to a third party.

17. Cost of Lessor Government. The Lessee Government agrees to pay in United States dollars

all costs incurred by the Lessor Government in leasing the Defense Articles covered by this

Lease including, without limitation, reimbursement for depreciation of such Defense

Articles while leased. The Lessee Government also agrees to pay the costs of restoration or

replacement, less any depreciation in the value during the term of the lease, to the Lessor

Government under the Lessor Government's foreign military sales procedures. The rental

charge shown in Schedule A is based on costs identified at the time of signature of this

Lease and does not relieve the Lessee Government from liability for other costs in

accordance with the provisions of this Lease.

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Introduction to Security Cooperation

Figure C11.F6. Sample Lease

Lines and data are included for illustration purposes only.

BN-Q-ZAA B

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SCHEDULE A

TO LEASE AGREEMENT BETWEEN

THE UNITED STATES GOVERNMENT, DSCA (LESSOR)

AND THE GOVERNMENT OF BANDARIA (LESSEE)

I. This Lease Agreement authorizes the use of U.S. Government property identified herein:

Item

Nbr

Description

Qty

Line

Duration

Replacement Costs

Rental Charge

(Including

Depreciation)

Per Month

Unit Value

Total

001

AGM-65-G Missile

Navigational System

Test Set

1234-01-567-9810

$1,500,000.00

$9,469.70

Total Value

$1,500,000.00

$9,469.70

II. Rental Payment

Payment Period

Date Due

Amount Due

Initial Payment

Due upon signature

$56,820

3rd Qtr FY 2004

15 Mar 2004

$28,410

4th Qtr FY 2004

15 Jun 2004

$28,410

1st Qtr FY 2005

15 Sep 2004

$28,410

2nd Qtr FY 2005

15 Dec 2004

$28,410

3rd Qtr FY 2005

15 Mar 2005

$28,410

4th Qtr FY 2005

15 Jun 2005

$28,403

Total Rental

$227,273

Signed Copy Distribution:

1. Upon acceptance, the Lessee Government should return one signed copy of this lease to

Defense Finance and Accounting Service - Indianapolis ATTN: Security Assistance

Accounting, DFAS-JAX/IN 8899 E. 56th Street Indianapolis, IN 46249-0230.

Simultaneously, wire transfer of the initial deposit or amount due with acceptance of

this lease document (if required) should be made to ABA# 021030004, U.S. Treasury

NYC, Agency Location Code: 00003801, Beneficiary: DFAS-JAX/IN Agency, showing

"Payment from Bandaria for BN-Q-ZAA", or check for the initial deposit, made payable

to the US Treasury, mailed to Defense Finance and Accounting Services, ATTN:

Disbursing Operations-FMS Processing Col 135D, 8899 E. 56th Street, Indianapolis, In

46249-0230, showing "Payment from Bandaria for BN-Q-ZAA. Wire transfer is

preferred.

2. One signed copy should be returned to the Defense Security Cooperation Agency, ATTN:

DBO/CFM. 201 12

Street, Suite 303, Arlington, VA 22202-4306.

III. Related FMS Case Designator: BN-Q-BMB