Representations and warranties
The foundation of a sanctions clause is a set of representations and warranties: that the counterparty, its owners and controllers, and (where relevant) its directors and beneficial owners are not sanctioned, are not majority-owned by sanctioned persons, and are not located in or operating from a comprehensively sanctioned jurisdiction. Sensibly drafted, these are given at signing and repeated throughout the term, so that they bite if the position changes.
An ownership representation is the contractual counterpart of the OFAC 50% rule: it forces the counterparty to disclose and stand behind its ownership, shifting some of the tracing burden onto the party best placed to know. A breach of these representations should be an event that triggers the suspension and termination rights below.
Suspension and termination
Because sanctions usually suspend rather than discharge an obligation, the clause should say so expressly and give the parties a clear path. A common structure is a right to suspend performance immediately where continuing would breach sanctions, coupled with a right to terminate if the situation is not resolved within a defined period or if the counterparty becomes a sanctioned person. The trigger has to be defined with care - the case law turns on whether the clause is engaged by an actual prohibition, by a party's reasonable belief, or by mere risk - and each choice allocates the risk differently.
Drafters should also address the consequences of suspension: what happens to payments already due, to delivery, to confidential information and assets held, and to the running of time. A clause that suspends performance but says nothing about money or about when the right to terminate arises leaves the parties in exactly the uncertainty the clause was meant to remove.
The force majeure interaction
Sanctions clauses and force majeure clauses both deal with supervening events, and they have to be reconciled. If sanctions are left to a general force majeure clause, the result is often unsatisfactory: force majeure typically excuses delay and may allow termination after a long period, but it rarely deals with screening, ownership, or the precise question of unlawfulness. Conversely, if both clauses can apply, the parties need to know which governs.
The cleaner approach is a dedicated sanctions clause that takes priority over force majeure for sanctions events, with the two clauses cross-referenced so there is no gap and no overlap. The sanctions clause handles legality, suspension and termination; the force majeure clause handles the other supervening events. Leaving sanctions to be argued under a generic force majeure wording invites exactly the kind of dispute seen in the performance cases.
Export controls and the Blocking Statute
A modern sanctions clause should also carry the export-control obligations: end-use and end-user representations, a no-diversion covenant, the 'no re-export to Russia' clause for listed goods, and an allocation of responsibility for obtaining licences. These sit naturally alongside the sanctions representations and the termination rights.
One trap deserves special care. A clause that requires an EU operator to comply with all sanctions, including listed US extraterritorial measures, can itself breach the EU Blocking Statute (Council Regulation (EC) No 2271/96), which prohibits such compliance. Where an EU counterparty is involved, the clause should be drafted to avoid promising compliance with the blocked US measures - for example by limiting the compliance obligation to applicable law that the operator is lawfully permitted to observe - so that the clause does not create the very illegality it is trying to prevent.
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Practical checklist
- Take sanctions representations and warranties from the counterparty and repeat them throughout the term.
- Include an ownership representation as the contractual counterpart of the OFAC 50% rule.
- Provide a precisely-triggered right to suspend, and a right to terminate if unresolved or if the counterparty is sanctioned.
- Spell out the consequences of suspension - payments, delivery, assets, confidential information, and time.
- Give the sanctions clause priority over force majeure for sanctions events and cross-reference both.
- Add export-control obligations, and avoid a compliance promise that breaches the EU Blocking Statute.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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