A commodity trader closes a long-term supply agreement spanning London, Sydney, and a third-market buyer. The contract contains a sanctions clause drafted to an OFSI standard. Six months later, Australian counsel flags that the clause does not meet the requirements the Australian Autonomous Sanctions Act imposes. Renegotiation is expensive. A delayed shipment is worse. The divergence between two close-law-family regimes – the United Kingdom's and Australia's – is not theoretical. It decides how a contract performs under stress.
Sanctions clauses in contracts serve a defined purpose: they allow a party to suspend or terminate a transaction, and withhold payment, without breaching the agreement when compliance with applicable sanctions law would otherwise require performance. Under OFSI, the clause must engage with the UK financial-sanctions prohibition as it applies to the contracting parties and the subject matter. Under Australia's autonomous-sanctions regime, administered by the Department of Foreign Affairs and Trade (DFAT), the drafting obligation is analytically distinct and the enforcement posture is different. The two regimes share a common goal but diverge on scope, trigger language, and the consequences of an inadequate clause.
This analysis maps the key divergences, identifies the risk flags that practitioners encounter in cross-border agreements, and sets out what a business should do before signing.
What is the legal basis for sanctions clauses in contracts under each regime?
A sanctions clause in a contract derives its necessity from the underlying prohibition regime: without a contractual off-ramp, performance of a sanctioned transaction can simultaneously constitute a breach of the agreement and a breach of sanctions law, leaving the performing party exposed on both fronts. The clause is not a creature of statute in either jurisdiction; it is a risk-allocation mechanism that responds to statutory prohibition.
Under OFSI, the governing authority is the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA") and the relevant thematic regulations made under it. OFSI administers financial-sanctions enforcement in the United Kingdom and publishes enforcement guidance that, while not itself binding contract law, informs what adequate due diligence and preventive controls look like. A well-drafted OFSI-responsive clause must address: the prohibition on making funds or economic resources available to, or for the benefit of, a designated person; the ownership-and-control test under which a non-listed entity controlled by a designated person is itself caught; and the requirement to report knowledge or reasonable cause to suspect a sanctions breach to OFSI.
Australia's autonomous-sanctions regime operates through the Autonomous Sanctions Act 2011 and the regulations and legislative instruments made under it. DFAT administers the regime. The prohibitions broadly track the UN Consolidated List and Australia's own autonomous designations. The critical structural difference is that Australian law does not draw the same distinction between "ownership" and "control" in the same mechanical way as OFSI. The Australian instrument focuses on prohibited dealings with designated persons and entities, and the drafting of a sanctions clause must reflect that distinct prohibition language rather than importing OFSI or OFAC language wholesale.
In our cross-border practice, we regularly encounter agreements where one counterparty has lifted a clause from an OFSI-compliant precedent and applied it without modification to an agreement governed by Australian law. That approach creates a gap: the clause may excuse performance under UK law while failing to engage with the Australian prohibition at all.
How does the ownership-and-control trigger differ between OFSI and DFAT?
The ownership-and-control test is the most technically significant point of divergence for contract drafters. OFSI applies a dual test: a party or counterparty is treated as subject to the financial-sanctions prohibition if a designated person owns or controls it. Ownership under the UK regime follows an aggregation principle – 50 percent or more aggregate ownership by designated persons triggers the prohibition. Control under UK law extends further and is assessed by reference to whether a designated person can direct or materially influence the decisions of an entity, even where formal ownership falls below the 50-percent threshold.
An OFSI-responsive sanctions clause therefore needs to address both ownership and control as triggers. A clause that references only listed counterparties – without also capturing entities owned or controlled by listed persons – will leave the contracting party exposed if a non-listed subsidiary of a designated person becomes the performing entity.
Australia's regime does not use identical language. DFAT focuses on prohibited dealings with designated persons and with entities that are themselves designated, rather than importing the same ownership-and-control architecture. Entities are designated in their own right under the Australian instrument. The practical consequence for contract drafters is that a clause written to the UK ownership-and-control standard will be over-inclusive in some respects and under-inclusive in others when applied to an Australian context: it will catch scenarios that DFAT does not prohibit, and it may not engage with the specific designation language that triggers the Australian prohibition.
The drafting response is to construct a clause that runs two parallel limbs: one addressing the UK test (ownership, control, and OFSI designation) and one addressing the Australian test (DFAT designation and prohibited dealings under the applicable legislative instrument). A single unified clause attempting to serve both functions will almost always compromise one or the other unless it is carefully structured.
The position above covers the standard commercial-contract case. Your facts – the governing law, the counterparties' location, the goods or services, the payment structure – change the analysis materially. For a review of the sanctions-clause architecture in a specific agreement, contact Calder & Vance at info@caldervance.com.
What reporting and notification obligations does each regime impose, and how should a clause reflect them?
A sanctions clause that addresses only suspension and termination rights – and omits the reporting obligations that each regime imposes on contracting parties – is incomplete. Both regimes require action when a party identifies a potential breach or a designated counterparty; the timing and the recipient of that report differ.
Under OFSI, a person who knows or has reasonable cause to suspect that a counterparty is a designated person, or that a transaction involves funds or economic resources that are subject to the financial-sanctions prohibition, is required to report that suspicion to OFSI. The reporting obligation runs to OFSI directly and is separate from any contractual notice obligation. An OFSI-responsive clause should therefore include a provision requiring the identifying party to notify the other contracting party that reporting to OFSI may be imminent or has occurred, while also including a confidentiality carve-out to prevent a tip-off that would itself breach OFSI or anti-tipping-off rules.
Australia's regime does not impose the same statutory reporting obligation in identical terms. DFAT's enforcement posture focuses on the prohibition itself. However, businesses operating in sectors subject to Australian AML/CTF regulation will also face reporting obligations under the AML framework when a sanctions issue surfaces in a transaction. A sanctions clause in an Australian-law-governed agreement should therefore cross-reference the AML/CTF reporting obligation where relevant to the sector and the counterparty profile, rather than relying on OFSI-style language that references a regulator that has no jurisdiction over the Australian party.
The practical implication for cross-border agreements is this: a single-limb notification clause that names OFSI as the reporting recipient will be legally accurate for the UK party but operationally meaningless for the Australian party, which must notify a different authority and potentially its own AML/CTF reporting chain. The clause should address each party's obligations separately, by reference to the law applicable to that party.
Where do the payment-suspension and termination mechanics diverge?
The payment-suspension limb of a sanctions clause is where divergence has the sharpest commercial consequences. Under the OFSI standard, a clause typically provides that a payment obligation is suspended for the duration of a sanctions impediment, with interest accruing during the suspension period and the obligation reviving once the impediment is lifted or a licence is obtained. The clause must also address whether the licence-application obligation falls on the payer, the payee, or both, and what happens if a licence is refused.
Under OFSI, a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) is available for a defined range of purposes. A well-drafted clause will include a licence-pursuit obligation, a defined timeframe for that pursuit, and a termination trigger if the licence is not obtained within a specified period. In our experience, the most common drafting failure is a clause that suspends payment but includes no mechanism for pursuing a licence and no termination trigger – leaving the agreement in contractual limbo for an indefinite period.
Australia's licensing architecture operates through DFAT's permit system. The permit process, the permissible grounds, and the timelines differ from OFSI's. A clause drafted around the OFSI licensing-pursuit model will not map cleanly onto the Australian system. In particular, the grounds on which a permit is available under the Australian regime are defined by the relevant legislative instrument, and they do not mirror the OFSI licensing grounds.
Where an agreement is subject to both regimes – because the parties are respectively UK and Australian, or because goods or services cross both jurisdictions – the clause should include a licence-pursuit provision that is separately articulated for each regime. This adds length but is not drafting excess: it is the only way to ensure that both parties' obligations are clearly defined under the applicable law.
If a transaction has already been flagged as potentially sanctioned, or if a payment has been suspended and no route to resolution has been identified, early legal review preserves options that narrow significantly with time. Contact Calder & Vance at info@caldervance.com for an assessment of the position.
What are the common drafting errors and risk flags?
Four drafting errors appear repeatedly in cross-border agreements that attempt to address both OFSI and Australian sanctions exposure. Identifying them at the review stage is significantly less costly than addressing a live dispute about whether a payment suspension was lawful.
The first error is single-regime sourcing. A party's legal team drafts the clause from a precedent bank built for one jurisdiction and applies it without modification. An OFSI-sourced clause will reference UK-specific instruments, OFSI as the reporting authority, and OFSI licensing grounds. None of those references carry operative legal effect in Australia.
The second error is blanket-list drafting. The clause defines "sanctioned person" by reference to a list of screening databases – the OFAC SDN List, OFSI's Consolidated List, the UN Consolidated List – but omits the DFAT consolidated list of designated persons and entities. The Australian prohibition does not depend on OFAC or OFSI designation; a party may be designated by DFAT without appearing on any of the US or UK lists.
The third error is failure to address the control limb separately from ownership. Under OFSI, an entity controlled by a designated person is caught even if formal ownership sits below 50 percent. A clause that triggers only on ownership – or only on list-based designation – will miss the control scenario entirely.
The fourth error is asymmetric termination rights. In some precedents, only the paying party has the right to suspend payment and terminate. The receiving party – which may itself be subject to a sanctions investigation or a regulator's inquiry – has no corresponding right to exit an agreement that has become a sanctions risk for it. This asymmetry can leave the receiving party unable to terminate without breaching the agreement, even when continuing the relationship creates a compliance exposure.
A related risk flag, rather than a drafting error, is the choice-of-law and choice-of-forum clause. Where a contract is governed by English law but performance occurs primarily in Australia, there is a risk that an Australian court, applying Australian conflict-of-laws rules, treats the sanctions-clause question differently from an English court applying OFSI principles. The interaction between the governing-law clause and the sanctions clause should be addressed explicitly, not left to implication.
How does the Australian regime interact with the UN Consolidated List and with OFAC extraterritoriality?
Australia's autonomous sanctions regime incorporates UN Security Council designations through the relevant legislative instrument, meaning that entities listed by the UN Consolidated List are also prohibited-dealing counterparties under Australian law. A sanctions clause for an Australian-party agreement should therefore reference the UN Consolidated List in its definition of sanctioned parties, in addition to the DFAT autonomous-designation list.
The interaction with OFAC is more complex. OFAC's secondary-sanctions architecture can impose consequences on non-US persons for conduct that has no US nexus in the traditional sense – transactions in US dollars, US-origin goods, or US financial institutions in the clearing chain. An Australian company settling a transaction in US dollars through a US correspondent bank is within scope of OFAC's transactional jurisdiction, even if both contracting parties are non-US. A sanctions clause that addresses only Australian and UK obligations will not adequately protect an Australian party that uses US-dollar clearing.
In our practice, we advise that cross-border agreements with a US-dollar clearing element should include a separate US-dollar-settlement limb in the sanctions clause, addressing the OFAC position. This is not a question of importing US law into an Australian or English-law contract: it is a factual acknowledgment that one method of performance – dollar payment – carries its own jurisdictional exposure. The clause need not concede OFAC jurisdiction; it need only address the consequences if US-dollar settlement becomes legally impossible.
The practical conclusion is that a multi-regime sanctions clause for an OFSI-and-Australia cross-border agreement should address at minimum four bodies of law: UK financial-sanctions law (OFSI), Australian autonomous sanctions (DFAT), the UN Consolidated List (which both regimes implement), and the OFAC transactional position where US-dollar settlement is used. Each limb should be separately defined, separately triggered, and separately remedied.
A common misconception about sanctions clauses in contracts
A persistent myth in cross-border contract negotiation is that a clause drafted to OFAC standards will adequately cover both OFSI and Australian exposure, because all three regimes broadly prohibit dealings with the same target lists. The reasoning goes: if the counterparty is not on the OFAC SDN List, the transaction is clean for all regimes.
That reasoning is incorrect in three distinct ways. First, OFSI and DFAT maintain their own autonomous designation lists. A party designated by OFSI or DFAT only – and not by OFAC – will not appear on the SDN List. Screening only against OFAC lists will miss that designation entirely. Second, the OFSI control test and the Australian prohibition language are structurally different from the OFAC 50-percent rule. An entity that is not itself designated, and is not 50-percent owned by a designated person, may still be caught by OFSI's control test or by the specific language of the Australian legislative instrument. Third, the licensing and permit routes differ. Even if a transaction is licensed by OFAC, that licence carries no effect under OFSI or DFAT; separate authorisation from the relevant regulator is required in each jurisdiction.
The operational consequence is that a business relying on OFAC-compliant screening and OFAC-standard contract language is carrying sanctions risk in the UK and Australia that it is not measuring. We regularly advise clients who have made exactly this assumption – and who discover the gap only when a counterparty raises a sanctions-clause dispute or a regulator makes an enquiry.
Related practices
- Compliance audit and testing – Australia – mapping and testing your sanctions controls against Australian DFAT requirements
- Sanctions clauses in contracts: UAE analysis – how UAE sanctions requirements affect cross-border agreement drafting
- Sanctions risk assessment: BIS and EAR – US export-control risk and how it interacts with transaction structuring