A manufacturing group prepares to close a cross-border supply agreement. The legal team inserts a standard "sanctions clause" copied from a previous deal. Six months later, BIS opens an inquiry. The clause provided no end-use certification, no re-export restriction, and no right to audit. The deal is done; the exposure is live. Could better contract drafting have changed the outcome?
Sanctions clauses in contracts under the BIS / EAR are enforceable risk-allocation and compliance tools, not legal boilerplate. The Export Administration Regulations, administered by the Bureau of Industry and Security, impose obligations that travel with the goods and the technology – and a well-drafted clause makes those obligations visible to every counterparty in the chain. A poorly drafted one creates a false sense of protection while leaving the exporter fully exposed to civil and criminal enforcement.
This guide walks through the procedure for drafting effective BIS / EAR contract clauses, the cross-regime comparison a compliance counsel must run, and the risk flags that most frequently appear in our practice.
What do sanctions clauses in contracts under the BIS / EAR actually do?
A BIS / EAR contract clause serves a dual function: it allocates compliance risk between the contracting parties, and it documents the exporter's due diligence in the event of a regulatory inquiry. Under the Export Administration Regulations, the exporter of record retains primary liability regardless of what the contract says. The clause does not transfer that liability to the buyer. What it does is create a contractual obligation on the buyer to comply, a right to suspend or terminate the agreement if the buyer breaches that obligation, and a written record that the exporter sought assurances at the point of sale.
In our cross-border practice, we see exporters confuse contractual protection with regulatory protection. A buyer's signature on a compliance warranty does not insulate the exporter from a BIS enforcement action. It may, however, support a penalty-mitigation argument and demonstrate that the exporter acted in good faith. BIS and the Department of Justice look closely at what steps an exporter took before shipping. A well-constructed clause is one of those steps.
The position above covers the standard case. Your facts – the classification of the items, the destination, the end-user, and the route – change the analysis materially.
For an assessment of your export-control contract exposure under the BIS / EAR, contact Calder & Vance at info@caldervance.com.
Step 1: Classify the items and identify the licence requirement before drafting
Effective contract clauses cannot be drafted until the exporter knows the classification of the items and whether a licence is required for the destination, end-user, and end-use. The Export Control Classification Number (ECCN) – the alphanumeric identifier assigned to items under the US Commerce Control List – determines which controls apply. An item classified EAR99 (outside the specific CCL categories) carries a different contractual burden than a dual-use item on the CCL with licence requirements for multiple destinations.
The classification drives every downstream element of the clause. If the item requires a licence for the destination in question, the contract must confirm that a licence has been obtained, describe its scope and conditions, and impose obligations on the buyer to stay within those conditions. If the transaction relies on a licence exception, the clause must describe the exception and bind the buyer to its terms. Without this foundation, the clause is structurally incomplete.
Practitioners advising on BIS / EAR matters note that a classification error at this stage produces a cascade of downstream defects: the clause references the wrong controls, the end-use certificate asks the wrong questions, and the re-export restriction is either missing or misdirected.
Step 2: Draft the core clause elements – what must be present?
A BIS / EAR-compliant sanctions clause in a contract has five core elements, each serving a distinct function in the compliance record.
The first is the compliance warranty: the buyer warrants that it will comply with the Export Administration Regulations, will not re-export or transfer the items without the required authorisation, and will not divert items to a prohibited end-user or end-use. This warranty should track the language of the EAR directly, not paraphrase it. Paraphrase introduces gaps.
The second is the end-use and end-user certification. The buyer confirms the intended end-use of the items, identifies the end-user (if different from the buyer), and agrees to notify the exporter of any proposed change of end-use or end-user before it occurs. This is not a formality. BIS treats undisclosed diversion as a serious aggravating factor.
The third is the re-export and transfer restriction. The buyer acknowledges that re-export or in-country transfer of the items may require a separate US government authorisation and accepts responsibility for obtaining that authorisation before proceeding. Where the supply chain has multiple tiers – a distributor, a reseller, an integrator – this obligation should flow down to each tier by contract.
The fourth is the denied-party and screening obligation. The buyer confirms that it, its officers, and its known sub-buyers are not on the BIS Entity List or the BIS Denied Persons List. Where possible, the clause should require the buyer to repeat this confirmation on each shipment, not only at contract signature.
The fifth is the audit and cooperation right. The exporter reserves the right to inspect the buyer's records relating to the items on reasonable notice and to suspend shipments if it reasonably suspects a breach. This right is rarely exercised in practice, but its presence in the contract supports a diligence argument and creates a deterrent.
Step 3: Address re-export chains and downstream diversion risk
Re-export chains are where BIS / EAR exposure concentrates. A single shipment to a compliant first buyer can reach a prohibited end-user two or three steps downstream – and the original exporter's obligations do not end at the point of first sale. The EAR's re-export controls apply to US-origin items and, in some circumstances, to foreign-made items incorporating US-controlled technology above defined thresholds. This is the extraterritorial reach that distinguishes US export controls from most other regimes.
A BIS / EAR contract clause for a multi-tier supply chain should therefore do three things. It should require the buyer to impose equivalent restrictions on its sub-buyers. It should require the buyer to notify the exporter of any proposed sub-sale into a country that appears on a BIS restricted-country list. And it should give the exporter a right to refuse consent to a proposed sub-sale if the exporter has a reasonable compliance concern.
How does this compare to the EU dual-use regime? The EU framework requires end-use and end-user assurances in broadly similar ways, but the extraterritorial reach of the US rules is longer. A foreign manufacturer using US-origin controlled technology may need to comply with EAR re-export rules even if the goods never re-enter the United States. In our experience, this point surprises non-US buyers more than any other. They expect their domestic regime to govern; the EAR tells them it does not.
If a transaction has already been flagged, or a filing has been refused, an early review can preserve options that narrow with time. Contact Calder & Vance at info@caldervance.com for a confidential review.
How does the BIS / EAR approach differ from OFAC and other regimes?
The BIS / EAR and OFAC are complementary but distinct regimes, and their intersection in contract drafting creates complexity that a single "sanctions clause" rarely handles correctly. OFAC administers economic sanctions – asset freezes and transaction prohibitions aimed at designated persons, entities, and countries. BIS administers export controls – restrictions on the transfer of specific items, technologies, and software based on classification, destination, and end-use. A given cross-border contract may need to comply with both.
An OFAC-focused contract clause asks: is the counterparty a designated person or an entity owned or controlled by one? The relevant test under OFAC is the 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked, whether or not those entities appear on the SDN List). An OFAC clause therefore focuses on screening, beneficial-ownership disclosure, and a warranty that no blocked person has a relevant interest in the transaction.
A BIS / EAR clause asks different questions. It asks: what is the item? Where is it going? Who is the end-user? For what purpose? The analysis is item-specific and destination-specific, not primarily identity-based. The two types of clause need to co-exist in the same contract without creating internal contradictions – for example, a BIS clause that permits a re-export to a destination that an OFAC clause would prohibit.
The UK OFSI regime and the EU sanctions regulations follow an ownership-and-control test that differs from both OFAC and BIS in significant ways. OFSI's enforcement guidance addresses control as well as ownership, meaning that a non-listed entity can be caught even where a designated person holds less than a majority stake. EU regulations similarly extend to entities "owned or controlled" by designated persons, with control assessed on qualitative as well as quantitative grounds. A contract serving a cross-border supply chain must map these differences and produce a clause architecture that addresses each regime's specific requirements.
What are the most common risk flags in BIS / EAR contract clauses?
The most common risk flags are structural, not factual. They arise from what the clause omits rather than from what it says incorrectly.
The first flag is a generic sanctions clause that references "applicable sanctions laws" without specifying the BIS / EAR, the ECCN of the relevant items, or the licence exception being relied upon. Generality helps no one in an enforcement context. A BIS investigator reading a generic clause will not treat it as evidence of effective compliance management.
The second flag is a clause that covers screening but not re-export. An exporter who screens the immediate buyer and secures a clean denied-party check has done part of the job. Without a downstream re-export restriction, a clean first buyer can divert to a prohibited end-user without breaching the contract – and the exporter may still face enforcement exposure.
The third flag is a clause that is signed once and not revisited. BIS / EAR controls change. The Entity List is updated regularly. A buyer who was clean at contract signature may be listed by the time of the third shipment. Effective clauses include a continuing obligation on the buyer to disclose material changes in its ownership, its known downstream buyers, or its intended end-use – and a right for the exporter to re-screen at intervals.
The fourth flag is a clause that purports to indemnify the exporter against all regulatory consequences. An indemnity from a foreign buyer is not worth much when BIS or DOJ is at the door. The clause should be designed to prevent the breach, not to compensate for it after the fact.
A common myth among exporters is that inserting any sanctions clause, however brief, provides meaningful regulatory protection. It does not. A clause that does not reflect the actual classification, the actual destination controls, and the actual licence basis is worse than no clause at all in one respect: it creates a paper trail that implies the exporter understood the regime but chose not to comply with it.
When should you involve sanctions counsel, and what does the process look like?
Sanctions and export-control counsel should be involved at the contract-drafting stage, before the commercial terms are fixed. That is the point at which the classification can be confirmed, the licence requirement verified, and the clause architecture designed to reflect the actual transaction. Retrofitting a clause after the contract is signed is more expensive and less effective.
In a recent matter, a technology distributor shipping dual-use components across multiple jurisdictions asked us to review a standard-form contract it proposed to use for all export transactions. The clause referenced sanctions generally but said nothing about BIS classification, re-export obligations, or end-use certification. We identified the applicable ECCNs, confirmed the licence exceptions available for the primary destinations, and rewrote the clause to reflect the actual control basis. We also designed a downstream-flowdown template for the distributor's sub-resellers. The result was a contract architecture that reflected the EAR's actual requirements rather than a generic approximation of them.
The process for working with counsel typically runs in three stages. First, a classification review – confirming ECCNs and applicable controls for the specific items and destinations. Second, a clause design exercise – drafting the core elements, the re-export restriction, the screening obligation, and the audit right, each calibrated to the transaction. Third, a cross-regime check – confirming that the BIS / EAR clause does not conflict with any OFAC, OFSI, or EU obligation that applies to the same transaction. The three stages are sequential; each depends on the one before it.
We regularly advise on multi-jurisdiction contracts where the BIS / EAR regime intersects with EU dual-use controls and OFSI's asset-freeze obligations. Coordinating those regimes in a single contract requires a methodical approach: identify the strictest prohibition that applies to each element of the transaction, and design the clause to satisfy that standard.
Related practices
- Sanctions compliance audit and testing – stress-testing export-control programmes against BIS / EAR and cross-regime requirements
- Sanctions clauses in contracts: extended guide – deeper analysis of clause architecture for complex supply chains