A trading house in Sydney finalises a distribution agreement with a counterparty in South-East Asia. The contract is signed, the goods are ready to ship, and then the compliance team discovers that the buyer's parent company appears on Australia's Consolidated List of designated persons and entities. The deal is frozen. Who bears the cost of that freeze? What does the contract actually say about it? These are not hypothetical questions for cross-border B2B businesses operating under the Australian autonomous sanctions regime.
Sanctions clauses in contracts under Australian law are the contractual mechanism by which parties allocate the risk that a sanctions event – a new designation, a change in applicable law, or the discovery of a pre-existing exposure – will prevent performance. The governing authority is the Department of Foreign Affairs and Trade (DFAT, which administers the Autonomous Sanctions Act and its implementing regulations) and, where applicable, the UN Security Council Consolidated List as given domestic effect. A well-drafted clause does more than suspend performance: it defines who triggers the clause, what notice is required, and whether termination or renegotiation follows.
This guide walks through the process in practical steps: understanding the legal environment in Australia, identifying what a sanctions clause must cover, drafting and testing the key provisions, managing the cross-border divergences that arise when an Australian contract also touches US or EU counterparties, and maintaining the clause through the life of the contract.
Step 1: Understand the Australian autonomous sanctions regime and why it drives contract design
The Australian autonomous sanctions regime operates under the Autonomous Sanctions Act and a series of thematic regulations made under it, with DFAT as the administering authority. Understanding its structure is the necessary first step before a single word of a sanctions clause is written.
The regime imposes prohibitions on dealing with designated persons and entities – those appearing on the Australian Consolidated List – and on targeted goods, services, and activities covered by country-specific or thematic measures. The prohibitions are strict-liability in character. There is no general-intent defence for inadvertent dealings. That strictness drives the contractual need: a party that performs under a contract notwithstanding a sanctions prohibition does not escape civil or criminal exposure simply because the contract required performance.
Two structural features of the Australian regime matter most for contract drafting. First, the Consolidated List is a living instrument. Designations are added, amended, and removed. A counterparty that passes screening today may appear on the list tomorrow. A clause that operates only at signing provides no ongoing protection. Second, the Australian regime interacts with the UN Security Council Consolidated List, which Australia gives domestic effect. A transaction blocked at the UN level is blocked under Australian law regardless of the state of the domestic Consolidated List. Your clause must cover both.
In our practice, the most common structural error we see in Australian-law contracts is a sanctions clause drafted to cover only the Australian Consolidated List. The moment that contract has a US, UK, or EU counterparty – or a good with a US-origin component – the clause is functionally incomplete.
Step 2: Map the sanctions risk profile of the specific contract
Before drafting, map what sanctions risks the specific contract actually carries. A contract for domestic professional services between two Australian entities carries a different risk profile from a long-term supply agreement for dual-use goods delivered across multiple jurisdictions.
The mapping exercise addresses four questions. First, who are the counterparties, and have they been screened against the Australian Consolidated List, the UN Consolidated List, and – where applicable – the OFAC SDN List (OFAC's list of Specially Designated Nationals and blocked persons), the EU restrictive-measures lists, and OFSI's list? Second, what is the subject matter of the contract – goods, services, financial arrangements, technology transfers – and does any of it fall within a category-specific prohibition under the Australian regulations? Third, over what period does the contract run, and how frequently will re-screening be required? Fourth, does the contract involve sub-contractors, agents, or distributors who could themselves become a sanctions exposure mid-contract?
The answers to these questions shape the clause. A short, low-value contract between well-known domestic counterparties may need only a basic representations-and-warranties structure. A multi-year supply agreement with a foreign counterparty that involves dual-use goods, staged payments, and third-party logistics will require a materially more detailed clause covering ongoing compliance obligations, information rights, suspension, termination, and allocation of loss.
The position above covers the standard analysis. Your facts – the goods, the counterparty's ownership chain, the route of delivery, and the jurisdictions whose laws might apply – change the clause you need. To discuss how to map the risk profile for a specific contract, contact Calder & Vance at info@caldervance.com.
Step 3: Draft the core representations and ongoing warranties
The representations and warranties section of a sanctions clause performs two functions: it allocates risk at the point of signing, and it creates the factual baseline for any subsequent claim that a party was in breach at the time it entered the contract.
At signing, each party should represent, to the best of its knowledge after reasonable enquiry, that it is not a designated person or entity under the Australian Consolidated List, the UN Consolidated List, or any other sanctions list that the parties agree to include. For high-risk contracts, the representation should extend to the party's direct owners and, depending on the counterparty's corporate structure, to the ultimate beneficial owner. The Australian regime does not import the US 50 percent rule (OFAC's mechanical rule treating entities owned 50 percent or more in the aggregate by blocked persons as themselves blocked) in exactly the same form, but a party controlled or substantially owned by a designated person will typically be caught by a broader prohibition on dealings. Drafting a representation that covers only listed persons and ignores controlled entities is an under-protective approach.
Beyond the point-in-time representation, consider a continuing warranty: a promise that the representing party will promptly notify the other if, at any time during the contract, it becomes or becomes aware that it has become subject to a sanctions designation. The continuing warranty converts a static snapshot into a live obligation. It also creates the factual trigger for the suspension and termination provisions discussed in the next step.
In our experience, continuing warranties are routinely omitted from Australian-law commercial contracts because the drafters treat sanctions clauses as a one-time compliance tick-box. That omission is where enforcement risk concentrates.
Step 4: Draft the suspension, termination, and loss-allocation provisions
What happens when a sanctions event actually occurs? This is where most Australian-law contracts are silent or inadequate. The representations are there; the consequences are not.
A well-structured sanctions clause provides a clear sequence. Upon a party becoming aware of a potential sanctions event – a new designation, a change in applicable law, or a credible compliance concern about the counterparty – the affected party should have the right to suspend performance immediately, without liability for breach, for a defined review period. The review period allows the party to assess whether the event actually engages the sanctions prohibition, take legal advice, and determine whether a licence or other authorisation is available.
DFAT has the power to grant permits authorising conduct that would otherwise constitute a contravention of the autonomous sanctions regulations. The licensing process is not instantaneous, and the clause should accommodate the reality that an application may be pending while performance is suspended. Where a licence or permit is obtainable, the clause should require the parties to use reasonable endeavours to obtain it. Where it is not – or where the review period expires without resolution – the clause should provide a termination right, without default or penalty, for either party.
The loss-allocation question is often contentious. One commercial approach allocates costs of the sanctions event to the party that triggered it – typically the designated party or the party whose breach of the continuing warranty caused the event. Another approach treats sanctions events as force majeure, with each party bearing its own costs. Neither approach is universally correct. The right answer depends on the bargaining position of the parties, the nature of the goods or services, and the relative probability of a sanctions event affecting one side more than the other. What is not acceptable, legally or commercially, is a contract that simply voids all payment obligations on a sanctions event without addressing the position of work already performed or goods already delivered.
Step 5: Address the cross-border dimension – where Australia diverges from OFAC, OFSI, and the EU
For a business whose contracts touch more than one jurisdiction, the Australian clause is only part of the picture. The cross-border dimension is not optional: it is where the greatest practical risk sits.
Consider how Australian treatment of ownership and control (the test for whether a non-listed entity is caught through a listed person) compares with the position in other regimes. The US OFAC 50 percent rule is mechanical: aggregate ownership at or above the threshold, and the entity is blocked, regardless of whether it is actually controlled in any functional sense. The UK OFSI and EU positions are broader in one respect and narrower in another. OFSI and the EU each apply an explicit control test alongside an ownership threshold, meaning that an entity majority-owned by a clean party but effectively controlled by a designated person may still be caught, while an entity owned just below the threshold but not controlled may escape. Australian domestic law does not use identical language, but the practical effect of its prohibition on dealings with designated persons and entities can extend to entities acting on behalf of or at the direction of a designated person. A clause drafted for OFAC compliance will not automatically be adequate for Australian law, and vice versa.
A second cross-border divergence concerns the scope of applicable law. If a contract is governed by Australian law but a payment flows through a US correspondent bank, OFAC's reach is engaged by the US-dollar clearing, irrespective of what the Australian-law clause says. The clause should acknowledge this: a representation that the contract complies with all applicable sanctions laws – not only Australian law – protects both parties in a multi-regime environment. In our cross-border practice, we regularly advise on contracts where the Australian-law clause and the OFAC position produce different obligations on the same fact pattern, and the gap between them is where the exposure sits.
Similarly, if a European counterparty is subject to EU restrictive measures, the EU regulations may apply to the European party's conduct regardless of the governing law of the contract. The Australian-law clause cannot neutralise EU obligations for the EU party. Where a contract involves an EU counterparty, we advise building in an explicit acknowledgment that each party complies with the sanctions laws applicable to it specifically, not only the governing-law jurisdiction.
If a transaction has already been flagged under one of these overlapping regimes – or a prior contract has been reviewed and found to be incomplete – an early legal review can preserve options that narrow with time. Contact Calder & Vance at info@caldervance.com for a confidential assessment.
Step 6: Build in the screening, record-keeping, and periodic review obligations
A sanctions clause is not self-executing. The contractual provisions are only as effective as the compliance process that supports them. Step 6 addresses the operational mechanics that keep the clause alive through the contract term.
Screening obligations should appear in the contract itself, not only in internal compliance manuals. A straightforward provision requires each party to maintain a programme for screening its counterparties – including sub-contractors and agents engaged to perform obligations under the contract – against the Australian Consolidated List and the UN Consolidated List at intervals proportionate to the contract's risk profile and duration. For high-risk contracts, screening at each payment milestone is a reasonable standard. For lower-risk contracts, annual re-screening may suffice. The clause should state who bears the cost of the screening programme and what the party must do with the results.
Record-keeping is a legal requirement, not merely good practice. Under the Australian regime, parties involved in regulated activities are required to maintain records sufficient to demonstrate compliance. Although the precise legislative record-keeping requirements vary by activity type, an internal compliance standard of retaining sanctions-related records for five years is consistent with the approach adopted across the major regimes – OFAC, OFSI, and the EU – and provides a defensible baseline. The contract clause should specify the record-keeping standard and confirm that each party will make its records available to the other if a compliance review is triggered.
Periodic review provisions address the reality that the legal environment changes. Sanctions regulations are updated, new designations are issued, and sometimes entire new thematic programmes are created. A contract clause that requires the parties to review the sanctions provisions at defined intervals – or upon a material change in applicable law – ensures that an outdated clause does not create a false sense of security.
Step 7: Address common myths and risk flags before finalising the clause
One common assumption in Australian commercial practice is that a standard force majeure clause provides adequate protection against a sanctions event. It does not. Force majeure clauses are designed for events outside the parties' control that make performance impossible. A sanctions prohibition is a legal restriction, not a force majeure event in the traditional sense, and many Australian-law force majeure clauses explicitly exclude legally mandated restrictions or require the party invoking the clause to have taken reasonable steps to avoid the event. A business that failed to screen its counterparty before signing cannot credibly invoke force majeure when it discovers mid-contract that the counterparty is designated.
A second risk flag arises in acquisition finance and project finance structures, where the sanctions clause is often a standard bank-form provision rather than a tailored commercial provision. Bank-form sanctions clauses are drafted primarily to protect the lender's position. They may impose obligations on the borrower that exceed what the underlying commercial contract requires, or they may define sanctions events by reference to lists that do not correspond to the lists relevant to the borrower's actual business. We have acted for borrowers who discovered, mid-project, that their bank-form sanctions clause required compliance with a list they had no independent monitoring process for. The practical fix is to review the bank-form clause alongside the commercial contract, not in isolation.
A third flag is beneficial-ownership opacity. The Australian autonomous sanctions regime, like its counterparts, is concerned with the economic reality of ownership and control, not the formal legal structure. A counterparty that presents a clean corporate registration may be substantially owned or controlled by a designated person at a layer not visible in public filings. The contract clause cannot substitute for proper due diligence, but it should impose on each party an obligation to disclose any material change in its beneficial ownership during the contract term. That provision both deters concealment and creates a contractual basis for termination if concealment is later discovered.
Related practices
- Sanctions compliance audit and testing – Australia – testing screening logic, ownership mapping, and programme design under the Australian regime
- Sanctions clauses in contracts – BIS / EAR guide – US export-control and sanctions clause considerations under the EAR and OFAC