A commercial team at a European distributor signs a long-term supply agreement with a US counterparty. The US drafter inserts a standard sanctions termination clause. Legal reviews it and flags an immediate conflict: the EU Blocking Regulation may prohibit compliance with certain US-mandated contractual obligations. The clause that protects one party from OFAC exposure could expose the other to EU regulatory sanction. Which obligation governs? Which party bends?
Sanctions clauses in contracts under the EU regime are shaped by three interlocking bodies of law: the relevant Council regulations establishing prohibitions and licensing requirements, the EU Blocking Regulation restricting compliance with certain third-country extraterritorial measures, and the ownership-and-control test determining whether a non-listed counterparty is nonetheless caught. No single template clause serves all EU-governed transactions; the right drafting turns on the counterparty, the goods or services, and the regime in play.
This analysis maps the key divergences – between EU positions and those of OFAC and OFSI, between the Blocking Regulation's reach and the underlying prohibitions it protects, and between the contractual risk a seller carries versus a buyer. We address drafting approaches, common failure points, and when to involve counsel before signature.
What makes EU sanctions clauses structurally different from their US counterparts?
EU sanctions clauses operate within a regime that is Council-regulation driven, which means the prohibitions apply directly in every Member State without national implementing legislation. The operative legal text is the relevant thematic Council regulation – not a national statute – and any contractual clause must align with it, not merely approximate it.
US-origin clauses, by contrast, are typically drafted around OFAC's regulatory architecture: broad asset-freeze prohibitions, the 50 percent rule (OFAC's rule treating any entity owned 50 percent or more in the aggregate by one or more blocked persons as itself blocked), and termination or suspension triggers keyed to SDN-list status. These clauses assume a regime that is administrated by a single federal body and that applies to US persons and US-origin goods or services.
When a US-style clause is pasted into an EU-governed contract, three structural problems emerge. First, the ownership test diverges: OFAC's test is a fixed numerical threshold, whereas the EU ownership-and-control test – and the parallel OFSI test – asks whether a listed person owns or controls the entity, a question that includes de facto control even below 50 percent. Second, the licensing routes are different institutions, different timelines, and different substantive criteria. Third, the EU Blocking Regulation may prohibit a party from simply complying with the termination or suspension mechanism the US clause mandates.
In our cross-border practice, this mismatch is the single most common source of contractual dispute in sanctioned-counterparty situations. The parties reach the trigger event and discover they are reading the same clause against different legal obligations.
How does the EU ownership-and-control test change what a clause must cover?
The EU ownership-and-control test is the threshold question for any sanctions clause that turns on counterparty status. Under the relevant Council regulations, an entity is caught if it is owned or controlled by a listed person – and "control" extends beyond percentage holding to include the ability to direct decisions, influence governance, or exercise decisive influence through contractual arrangements, board composition, or operational dependence.
A clause drafted around SDN-list status alone will miss this. If a counterparty is not listed but is controlled by a listed person, the EU prohibition applies with full force. The contractual trigger must be broad enough to capture control, not only direct listing.
Practically, this means a well-drafted EU sanctions clause should include a representation that the counterparty is not owned or controlled by a designated person, a covenant to notify on any change in ownership or control affecting that representation, and a termination or suspension right keyed to both listing events and material changes in the ownership-and-control analysis. The clause also needs to address the position of the counterparty's own subsidiaries: the control test runs in both directions.
The divergence from OFAC is significant. OFAC's 50 percent rule is binary: either the threshold is met or it is not. EU analysis is qualitative. Have you mapped not just the shareholder register but the governance documents, the shareholder agreement, and the contractual relationships that might confer control without ownership?
What is the Blocking Regulation's effect on contractual obligations?
The EU Blocking Regulation prohibits EU persons from complying with certain designated third-country extraterritorial measures, and it applies to contractual obligations as much as to direct regulatory compliance. Where a contract clause requires an EU party to act in accordance with a measure listed in the Blocking Regulation's annex, that EU party faces a direct conflict: perform the contractual obligation and breach EU law, or refuse the contractual obligation and face contractual liability.
This is not a theoretical problem. In our experience, US counterparties drafting force majeure, termination, and representations-and-warranties clauses often anchor them to OFAC designations in a way that the Blocking Regulation squarely reaches. An EU-established party that receives notice of a designated counterparty under one of the listed US programmes may be legally prohibited from acting on that notice in the way the clause contemplates.
The practical implication for drafting is significant. A sanctions clause in a contract between an EU entity and a US entity – or in a contract governed by EU law even between non-EU parties – should not simply require one party to comply with the other's home-regime obligations. It should instead create parallel obligations: each party undertakes to comply with the sanctions laws applicable to it, and a termination or suspension right arises where performance by either party would cause the other to breach its applicable law. This formulation avoids the Blocking Regulation problem without requiring either party to subordinate its legal position to the other's.
A single-regime clause drafted by one side's counsel will almost always fail this standard. The drafting has to be built from the transaction outward, not from the home-regime playbook inward.
The position above covers the standard case. Your facts – the counterparty's jurisdiction of establishment, the nature of the goods or services, the regimes in play – change the analysis materially. For a confidential review of a specific agreement or clause, contact Calder & Vance at info@caldervance.com.
Where do EU and OFSI positions diverge on contractual sanctions risk?
EU and OFSI sanctions regimes share a common history – much UK sanctions law was transposed from EU Council regulations at the point of UK departure from the EU – but they have since diverged in enforcement posture, licensing practice, and the detail of the ownership-and-control test.
For contractual clauses, the key divergences are three. First, OFSI operates a monetary-value threshold for certain reporting obligations: relevant firms must report knowledge or reasonable cause to suspect that a person is a designated person or has committed a breach. The EU equivalent obligations run through the relevant national competent authorities and the form of reporting varies by Member State. A single clause that purports to cover both regimes cannot use a single reporting trigger without addressing this jurisdictional split.
Second, the licensing route. An EU specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) is granted by the relevant national competent authority of a Member State, not by a central EU body. OFSI grants specific licences under SAMLA and the relevant thematic regulations. A party seeking to rely on a licence to perform under an otherwise prohibited contract must identify the correct authority, satisfy the applicable criteria, and wait within different timescales across the two regimes. A clause that allows performance "subject to applicable licence" without specifying which regime's licence and which authority creates ambiguity in precisely the situation where speed matters.
Third, and most practically, OFSI has published detailed enforcement guidance setting out its assessment of penalty factors, including cooperation, voluntary disclosure, and the adequacy of the compliance programme. EU enforcement is Member-State-level: competent authorities apply different penalty scales, different aggravating and mitigating frameworks, and different timelines. A cross-border contract that spans EU and UK counterparties should address these differences explicitly in the representations and warranties rather than relying on a generic "sanctions compliance" covenant.
If a transaction has already been flagged, or if a filing has been refused, an early review can preserve options that narrow with time. Contact info@caldervance.com for an initial assessment.
What are the most common risk flags in EU-related sanctions clauses?
In our practice, five patterns recur in EU-related sanctions clauses that are later found to be inadequate or internally inconsistent.
First, a clause that defines "sanctioned person" by reference to a single list – typically the SDN List or the EU Consolidated List – without addressing the ownership-and-control test for non-listed entities. A counterparty that is not on any list but is controlled by a listed person is still caught by the EU prohibition. The clause's trigger is too narrow.
Second, a termination right that is automatic rather than conditional on a licensing assessment. Where a general or specific licence might permit the transaction to continue, automatic termination can itself cause a breach (of the implied duty of good faith in some EU Member State laws, or of the obligation to apply for a licence before terminating). The clause should require a licensing assessment before the termination right is exercised.
Third, representations that are given once at signing and are not repeated. Sanctions status changes: a person can be designated, and an ownership structure can change, at any point during the life of a long-term contract. The representation should be given at signing and repeated at each draw, delivery, or payment milestone that is material to the transaction.
Fourth, a non-liability clause for a party that refuses to perform based on its own sanctions assessment without independent verification. This formulation can create problems in EU-governed contracts where the assessment is self-serving and incorrect. The clause should specify the standard of assessment – reasonable grounds, verified by a named process – and the consequence of a wrong assessment.
Fifth, failure to address the Blocking Regulation at all. Many standard-form commercial contracts used by non-EU counterparties have no Blocking Regulation carve-out. For an EU party, this is a latent legal conflict that only surfaces at the worst possible moment.
What does your current template clause say about control, about licensing, and about the Blocking Regulation? If the answer is "nothing", the clause needs revisiting before the next signature.
A practical cross-border scenario: where three regimes pull in different directions
Consider an anonymised situation we have worked through with clients in the trading sector. A trading house established in an EU Member State enters a multi-year supply agreement with a US buyer. The agreement is governed by English law (post-Brexit). The goods are dual-use items classified under the EU dual-use regulation. The buyer's parent company is not listed, but a minority shareholder of the parent is designated under an OFAC programme that also appears in the EU's equivalent thematic regulation.
The US buyer's counsel inserts a standard OFAC termination clause. The EU trading house's counsel objects on Blocking Regulation grounds. The English governing-law clause does not resolve this: English courts will give effect to EU-law mandatory rules for an EU-established party where those rules apply to the performance of the contract.
The ownership analysis runs in parallel. Under OFAC, the minority shareholder holding below 50 percent does not, on its own, trigger the 50 percent rule – absent aggregation with other blocked persons. Under the EU and OFSI control tests, the same minority holding might still constitute decisive influence, depending on the shareholder agreement and the governance structure of the parent. The EU trading house and the US buyer are therefore working with different assessments of whether the parent is itself caught.
The practical steps we advised: first, commission an independent ownership-and-control analysis across all three regimes. Second, redraft the sanctions clause using a parallel-obligations structure: each party covenants compliance with its own applicable sanctions law, and a performance-suspension right (not automatic termination) arises where a licensing assessment confirms that performance cannot be made lawful within a defined window. Third, insert a Blocking Regulation carve-out for the EU party, with a reciprocal carve-out for OFAC for the US party. Fourth, add a repeating representation tied to each shipment.
The matter proceeded to signature. No guarantees of that outcome can be offered – each set of facts produces a different analysis.
When should a cross-border business involve sanctions counsel on contract clauses?
Sanctions counsel should be involved before signature on any cross-border contract where: at least one party is established in an EU Member State or is otherwise subject to EU Council regulations; the counterparty or its ownership chain has any connection to a listed person or to a jurisdiction subject to an active EU thematic sanctions programme; the goods or services have any dual-use classification; or the contract is long-term and the ownership structure of a counterparty may change during its life.
Retrospective involvement – after a listed party is identified, after a termination right has been exercised incorrectly, or after a competent authority inquiry has been received – is always more expensive and more constrained than upfront review. The options narrow with time.
A common misconception in this space is that a generic "sanctions compliance" representation protects both parties adequately. It does not. A representation that a party is not in breach of applicable sanctions law tells the counterparty nothing about the ownership-and-control analysis, nothing about the Blocking Regulation conflict, and nothing about how the licensing process works if a problem arises mid-contract. Representations need to be specific to the regime, the entity, and the transaction structure.
We regularly advise clients who have received a refusal or a query from a national competent authority on a transaction they believed was clean because the contract said it was. The contract clause does not determine the regulatory position; it only determines the contractual position between the parties.
Related practices
- Sanctions compliance audit and testing – stress-testing screening logic and ownership-chain mapping against multiple regimes
- Sanctions clauses under OFAC and BIS/EAR – the US-regime analysis, including the 50 percent rule and EAR-related contractual obligations
- Sanctions clauses under OFSI – the UK-regime analysis, including OFSI licensing, reporting, and the control test under SAMLA
Frequently asked questions: sanctions clauses in contracts under EU
Where do the regimes diverge on sanctions clauses in contracts?
The EU, OFAC, and OFSI regimes diverge in three principal areas affecting contractual drafting. The ownership-and-control test differs: OFAC uses a fixed 50 percent numerical threshold; EU and OFSI apply a qualitative control test that can catch entities below that threshold. Licensing routes differ by institution and timeline. And the EU Blocking Regulation creates an additional layer that can prohibit an EU party from complying with contractual obligations triggered by certain US-regime measures – a conflict that OFSI-only and OFAC-only clauses simply do not address.
Which regime is stricter on sanctions clauses in contracts?
Strictness varies by dimension. The EU Blocking Regulation creates obligations that have no OFAC or OFSI equivalent – it actively prohibits certain forms of compliance with listed extraterritorial measures. The EU ownership-and-control test is arguably broader than OFAC's 50 percent rule for entities where control exists without majority ownership. OFAC's extraterritorial reach through secondary-sanctions risk can, however, extend to non-US parties in ways that the EU regime does not directly replicate. No single regime is universally stricter; the binding obligation for a given party depends on its jurisdiction of establishment, the transaction's jurisdictional connections, and the regimes in play. Verify the current position before relying on any comparison.
What should a cross-border business do about sanctions clauses in contracts?
Before signature, commission an ownership-and-control analysis of the counterparty across each applicable regime. Review whether the Blocking Regulation applies to any party. Replace single-regime termination triggers with parallel-obligation structures, and ensure representations repeat at each material milestone. After a trigger event, assess licensing options before exercising any termination right. If a competent authority inquiry is received, involve counsel immediately. Generic compliance representations are not a substitute for regime-specific analysis. For a confidential review, contact Calder & Vance at info@caldervance.com.
About the author
Claire Dubois advises on EU sanctions, including Council-regulation analysis, ownership-and-control questions, and annulment actions before the EU General Court. Calder & Vance – International Sanctions & Export Control Counsel.
About Calder & Vance
Calder & Vance is an independent international sanctions and export-control boutique. We advise multinationals, financial institutions, exporters, and individuals on the major regimes – OFAC and BIS in the United States, OFSI and ECJU in the United Kingdom, the EU Council regulations and the EU General Court, the United Nations Consolidated List, and the regimes of Switzerland, Canada, Australia, the UAE, Singapore, and Japan. Our work is limited to lawful compliance, licensing, delisting, enforcement defence, and due diligence. To discuss a matter, contact info@caldervance.com.
Disclaimer: This material is general information, not legal advice, and is not a substitute for advice on your specific facts. Sanctions and export-control rules change frequently and differ by regime; verify the current position before relying on anything stated here. Calder & Vance does not advise on circumventing or evading sanctions. For advice on your situation, contact info@caldervance.com.