A multinational signs a distribution agreement. Midway through drafting, the counterparty's legal team inserts a clause permitting termination if either party becomes subject to "applicable sanctions laws." Counsel for each side reads the clause through a different regulatory lens. One is thinking about OFAC. The other is thinking about the EAR. They are not thinking about the same thing – and that gap, if unclosed, will produce a contract that functions differently in practice than either party intends.
Sanctions clauses in contracts governed or touched by United States law sit at the intersection of two distinct regulatory regimes: OFAC's economic-sanctions prohibitions and the BIS / EAR export-control system. Both regimes impose obligations that drafters try to capture in contractual language, but their scope, trigger conditions, and enforcement consequences diverge in ways that standard boilerplate rarely resolves. A clause adequate for one regime can be silent on the other – or, worse, can operate in ways that create compliance exposure rather than reducing it.
This analysis maps the key divergences across OFAC and BIS / EAR, explains how each regime's requirements translate into contractual drafting, and sets out the practical steps a cross-border business should take before signing.
What are sanctions clauses in contracts actually doing?
A sanctions clause in a contract serves three distinct functions: it allocates legal risk between the parties, it creates a mechanism to suspend or terminate a deal when a regulatory event occurs, and it provides a degree of contractual protection if a party performs an obligation that later proves to have been prohibited. Understanding which function a particular clause is serving – and for which regime – is the starting point for any analysis.
Under OFAC, the core prohibition is transacting with or for the benefit of a blocked person or a sanctioned jurisdiction. The clause a drafter writes to capture that prohibition typically covers: screening obligations before and during performance; a representation that neither party is a blocked person or owned 50 percent or more by a blocked person; a right to suspend or terminate if a party becomes designated; and a "no-benefit" obligation preventing performance that would flow economic benefit to a restricted person even indirectly.
Under the BIS / EAR, the equivalent concern is different. The regime governs the export, re-export, and transfer in-country of items subject to US export controls. A clause designed to address the EAR focuses on: end-use and end-user restrictions, the prohibition on supply to persons on the Entity List or the Denied Persons List, licence conditions that bind the transferee, and a prohibition on re-export to a restricted destination without authorisation. The clause is about goods, technology, and software – not primarily about persons holding blocked property.
Both functions matter. A contract that contains only an OFAC-style clause may say nothing about re-export restrictions or end-use certification. A contract that contains only a BIS-style clause may not address what happens if a counterparty becomes designated mid-performance. In our experience, this mismatch is common in supply-chain agreements drafted without input from sanctions counsel on both regimes.
How do the OFAC and BIS / EAR trigger mechanisms differ?
The trigger for an OFAC prohibition is status: a person's appearance on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons) or the fact that they are owned 50 percent or more by a blocked person, regardless of listing. The trigger is event-driven and, critically, applies automatically from the moment of designation. A counterparty can become a prohibited party overnight, with no warning and no transition period. The obligation runs to the nature of the person, not the nature of the goods.
The trigger for a BIS / EAR prohibition is generally item- and destination-driven: does this item, classified by its ECCN (Export Control Classification Number under the US Commerce Control List), require a licence for this end-use in this destination? An item classified as EAR99 – the residual category for items not specifically controlled – may still be prohibited if the transaction involves a restricted party on the Entity List or an embargoed destination, but the analysis begins with the item, not only the person.
What does this mean for contract drafting? It means that the representations, conditions precedent, and ongoing compliance obligations appropriate for each regime are structurally different. An OFAC clause typically requires a party to represent status and to maintain that status throughout performance – a continuing obligation. A BIS clause typically requires a party to confirm end-use and end-user, to flow down licence conditions, and to agree not to re-export without authority – obligations that are transactional and item-specific.
Conflating the two in a single generic "sanctions and export-control" clause is one of the most common drafting errors we see. It produces a clause that is too broad to be practically actionable and too thin to satisfy either regime's requirements in detail.
The ownership and control question: where OFAC, OFSI, and the EU diverge
A contract with cross-border reach – a choice-of-law clause selecting English law, a party incorporated in an EU member state, or a supply chain touching a UK entity – will engage sanctions regimes beyond OFAC and BIS. The ownership and control analysis differs materially across these regimes, and that divergence matters acutely for the representations a contract requires.
Under OFAC, the test is mechanical ownership: 50 percent or more aggregate ownership by blocked persons triggers blocked status, whether or not those persons exercise any control. The rule does not contain a control limb. A party can be entirely passive and still cause a company to be blocked.
Under OFSI (the UK's Office of Financial Sanctions Implementation) and the EU Council regulations, the equivalent test includes both ownership and ownership and control (the UK and EU test for whether a non-listed entity is caught through a listed person). Control can independently trigger the prohibition even where ownership sits below the threshold. The EU position further encompasses influence over an entity's decisions without necessarily holding a majority stake.
For a contract with an English-law clause that also touches OFAC-regulated activities, a representation that a party is not "50 percent or more owned by a blocked or sanctioned person" may satisfy OFAC's test while leaving open the control question under UK law. Counsel advising on cross-border agreements must ensure the representation captures both limbs, and must draft the termination trigger accordingly. Alternatively – and in some deals this is the cleaner approach – the clause can cross-refer expressly to the applicable regime by name and require compliance with its specific ownership and control test.
For further analysis of how OFSI handles sanctions clauses, see our analysis of sanctions contract clauses under OFSI.
The position above covers the standard case. Your facts – the counterparty's jurisdiction, the item being supplied, the route the goods will take – change the analysis considerably. For an assessment of your exposure under OFAC and the applicable regime, contact Calder & Vance at info@caldervance.com.
End-use and re-export clauses: a BIS / EAR-specific requirement
End-use and re-export clauses are obligations imposed by the EAR on exporters and re-exporters of controlled items, and a well-drafted contract must translate those obligations into binding representations and undertakings from the counterparty. OFAC clauses do not address this ground. It is entirely BIS / EAR terrain.
A licence issued by BIS will typically include conditions specifying the permitted end-use, the permitted end-user, and the destination. Those conditions do not simply apply to the named exporter – they run with the item. A distributor or downstream buyer who re-exports the item to a restricted destination or a restricted party violates the EAR. The exporter bears responsibility for maintaining compliance through the supply chain, which requires contractual mechanisms to operationalise that responsibility.
In practice, this means the contract must require the counterparty to: accept the licence conditions as binding; not re-export the item without the appropriate authorisation; notify the exporter if they receive a request to re-export to a restricted destination; and permit audit or certification in appropriate cases. These are substantive undertakings, not boilerplate. Their absence in an agreement covering controlled items creates a real enforcement gap.
It is worth pausing here for a practical point. Many distribution agreements in the technology and aerospace sectors are drafted without distinguishing between EAR99 items and ECCN-controlled items. The controls that apply to the former are lighter; the controls that apply to the latter are considerably more demanding. A blanket clause referencing "applicable export-control laws" captures both but operationalises neither. We regularly advise clients to tier their end-use and re-export provisions to match the control classification of each category of item covered by the agreement.
Termination rights, force majeure, and the suspension mechanism
When a counterparty becomes designated – or when a new sanctions measure renders existing performance prohibited – a contract without a well-structured termination or suspension clause leaves a party in an impossible position: performance is prohibited, but the contract may not provide a contractual exit. The result is exposure to breach-of-contract liability on top of the regulatory risk.
OFAC's position on contracts that were lawful when entered into but become prohibited by a subsequent designation is that performance is prohibited from the moment of designation. There is no grandfathering for existing contracts unless a general licence (a standing authorisation that permits a defined category of transactions without a separate application) or a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) provides it. An entity that continues to perform may engage OFAC's civil-penalty regime, even if the contract was signed in good faith and the designation was wholly unexpected.
The answer in drafting is a termination right triggered by designation – ideally drafted to operate automatically or by notice at the non-affected party's election, without requiring a court order. A well-drafted clause will also address: the treatment of sums already paid, the disposition of goods in transit, and whether partial performance can continue under a licence application.
Force majeure clauses are not a reliable substitute. Force majeure typically requires that the event be beyond the party's control and, in many common-law systems, that it render performance impossible rather than merely illegal in one jurisdiction. A US sanctions prohibition may not qualify as force majeure under an English-law governed contract in every case. The contractual analysis requires careful attention to the governing law, the definition of force majeure in the specific clause, and the specific prohibition at issue.
If a transaction has already been flagged – or a counterparty has been designated after signing – an early review can preserve options that narrow with time. Contact us at info@caldervance.com for a confidential review.
Flow-down obligations and supply-chain risk
Both OFAC and BIS / EAR create obligations that travel down the supply chain. The mechanism differs between the regimes, and contract drafters must address both.
Under BIS / EAR, flow-down is explicit: an exporter who holds a licence is responsible for ensuring that licence conditions bind downstream transferees. If a distribution agreement does not require the distributor to impose equivalent restrictions on its customers – and to require its customers to impose the same on theirs – the compliance chain is broken. BIS enforcement can and does reach back to the original exporter when downstream violations are attributable to inadequate controls at the point of export.
Under OFAC, the concern is subtler. The de-risking problem (a financial institution exiting a relationship to avoid sanctions exposure) is partly a flow-down problem: a bank that finances a transaction may require the parties to represent not only their own status but the status of their supply chain. An OFAC clause that covers the principal parties may not satisfy the bank's requirements if it does not also represent the sanctioned-status of material sub-contractors and sub-distributors.
In practice, we have seen disputes arise from inconsistencies between the representations given to a financing bank (which required a full-chain clean representation) and the representations obtained from downstream suppliers (which did not). The gap was discovered mid-financing. The transaction was delayed while the client obtained the necessary downstream certifications. The lesson is straightforward: map the supply chain before drafting, and design the clause to reach every party whose status or conduct is material to compliance.
For a detailed examination of how the Australian autonomous-sanctions regime and the OFSI regime interact on these flow-down questions, see our comparative analysis of OFSI and Australian sanctions clauses.
Common drafting failures and the risk flags to watch for
In our cross-border practice, five patterns of drafting failure appear with regularity in agreements that cross OFAC and BIS / EAR regulatory territory. Each creates a distinct compliance gap.
First: the single-regime clause. A clause drafted solely with OFAC in mind will not address end-use controls, re-export restrictions, or licence-flow-down requirements. A clause drafted solely with BIS in mind may not address the 50 percent ownership test or the automatic effect of an SDN designation mid-performance.
Second: the static representation. Representing that a party is not a blocked person as of the date of signing provides no protection against a designation that occurs six months into a three-year supply agreement. A robust clause requires a continuing representation – typically phrased as a warranty that repeats on each delivery or payment date.
Third: the undefined term. "Applicable sanctions laws" is a phrase that appears in most standard clauses. It is also a phrase that means different things to different lawyers in different jurisdictions. A contract governed by New York law and involving a UK seller and a Singapore buyer may generate three different readings of "applicable sanctions laws" depending on whose counsel is asked. Defining the term expressly – listing the regimes that are in scope and the lists that govern – is almost always preferable to leaving it open.
Fourth: no screening obligation. A representation that a party is not a blocked person is not the same as an obligation to screen. A representation is a snapshot. A screening obligation is an ongoing process. For supply agreements with long tenors, the clause should require periodic re-screening and immediate notification if a screening hit is identified.
Fifth: the absent VSD provision. A VSD (voluntary self-disclosure to a regulator) can materially affect the treatment of an apparent violation under both OFAC and BIS enforcement guidance. A well-drafted clause should address how the parties will cooperate if either discovers a potential violation, what information will be shared, and how the decision to make a VSD will be made. Leaving this question to be resolved in the heat of a potential enforcement matter is a significant risk.
AUDIENCE_MYTH correction: A common misconception is that a "standard" sanctions clause from a trade association template or a prior deal satisfies the requirements of both OFAC and BIS / EAR. It does not. Standard templates are written for the most common scenario; they are frequently outdated, and they are rarely tailored to the item classification, the counterparty's jurisdiction, or the route of the transaction. We advise clients to treat standard templates as a starting point, not a solution.
When to involve counsel and what counsel will do
Sanctions and export-control questions in commercial drafting are not a checklist exercise. The analysis turns on the specific facts: who the counterparty is, what is being sold, where it will go, which regimes are triggered by the governing-law clause and the parties' jurisdictions, and what the deal looks like from a compliance-programme perspective.
Engage counsel at the term-sheet or heads-of-terms stage. By the time a draft is in advanced negotiation, the commercial pressure to accept standard language is substantial, and material changes to the representations and termination mechanics become difficult to push through. Early engagement allows the clause to be designed rather than accepted.
In a recent matter, a technology distributor sought to sign a multi-year supply agreement for dual-use items with a regional partner in a market with secondary-sanctions sensitivity. The draft agreement contained a generic "sanctions compliance" representation but no end-use certification mechanism, no re-export restriction, and no screening obligation. We were engaged after the term sheet had been agreed. We redesigned the compliance provisions, introduced tiered end-use representations matched to the ECCN classifications of the items in scope, and negotiated a termination-at-election clause with a structured wind-down mechanism. The matter was resolved before signing, preserving the commercial relationship while closing the compliance gap.
What counsel will do, practically, is: classify the items in scope and identify the applicable BIS controls; map the counterparty's ownership chain against the SDN List and the Entity List; draft representations appropriate for each regime; design the termination and suspension mechanism; build in the screening and ongoing notification obligations; and advise on the VSD posture that the parties should adopt if a problem emerges during performance.
For guidance on compliance-programme design and testing across the applicable country regime and Australian autonomous sanctions, see our compliance audit and testing service page.
Related practices
- Sanctions Compliance Audit & Testing – Australia – programme testing and gap analysis for the Australian autonomous-sanctions regime
- Sanctions Contract Clauses Under OFSI – how UK financial-sanctions obligations translate into commercial drafting
- OFSI vs Australia: Sanctions Clauses Compared – comparative analysis of ownership and control tests across two regimes