A Canadian technology company signs a distribution agreement with a European partner. Midway through the contract term, GAC updates its designations list. The European distributor now has a subsidiary linked to a newly listed entity. The Canadian company has no termination right and no suspension mechanism in the agreement. The deal continues. The company continues to perform. That is a compliance failure – and, under Canada's sanctions regime, it can carry serious consequences.
Sanctions clauses in contracts under Canada govern how counterparties allocate, manage, and exit sanctions risk across the life of a commercial agreement. The governing authority is Global Affairs Canada (GAC), which administers Canada's autonomous sanctions under the Special Economic Measures Act ("SEMA") and the Justice for Victims of Corrupt Foreign Officials Act. A well-drafted clause creates the contractual levers – representations, undertakings, a suspension right, and a termination trigger – that SEMA itself does not supply.
This guide walks through the drafting steps, the cross-border pressure points, and the risk flags that tell a compliance team it needs counsel.
What legal regime governs sanctions clauses in Canadian contracts?
Canada's autonomous sanctions obligations arise primarily under SEMA and its associated regulations, administered by GAC, which maintains the list of designated persons and entities. A Canadian party to a commercial agreement is prohibited from dealing in the property of, or providing services to, a designated person. That prohibition is statutory. The contract clause does not create the obligation; it manages the risk that performance will trigger it.
SEMA operates alongside Canada's obligations under United Nations Security Council resolutions, which are implemented through the United Nations Act. Both instruments can catch the same counterparty. A Canadian business must therefore check both the SEMA-based designations and the UN Consolidated List before signing. The UN list is a floor; Canada's autonomous list frequently reaches further.
GAC does not publish a standardised contract clause. That is a deliberate gap. The obligation to comply falls on the party performing the contract. How that obligation is managed as between the contracting parties is left to commercial negotiation. In our experience, the absence of official standard wording leads many businesses to copy clauses from US or UK templates – which do not map cleanly onto Canada's statutory structure. SEMA's prohibitions and the available licences differ from the OFAC and OFSI regimes in ways that matter when a dispute arises.
Step 1 – Screen before you sign
The first step in managing sanctions risk in a Canadian contract is to screen the counterparty, its known affiliates, and its beneficial owners before execution. A representation made at signing is only as good as the screening that precedes it. If the screening is not documented, the representation is undefended.
Canada does not codify a precise ownership threshold in SEMA equivalent to OFAC's 50 percent rule (the rule under which entities owned 50 percent or more in aggregate by blocked persons are themselves treated as blocked). GAC guidance adopts a facts-and-circumstances approach to control and ownership. That makes the pre-contractual screening more demanding, not less. A party must consider not only direct ownership but also indirect control, management rights, and the practical ability of a listed person to direct the entity's actions.
This is where Canadian contracts diverge from many US-law agreements. Under OFAC practice, the ownership test is mechanical. Under the Canadian and EU approaches, the analysis turns on whether a designated person controls or directs the entity, regardless of the precise shareholding. We regularly advise clients that a counterparty passing a mechanical 49-percent threshold check may still require a deeper control analysis before a Canadian lawyer is comfortable with the representation.
Practically: retain a dated record of the screening, identify which lists were checked (SEMA designations, UN Consolidated List, and any relevant multilateral designations your business is also subject to), and attach that record to the deal file. It is the first document a regulator will ask for.
Step 2 – Draft the representation and warranty block
The representation block should do three things: state what the representing party is warranting, fix the point in time at which the warranty is given, and confirm that the warranty is repeated – or is at least bringdown-capable – at closing and, where the contract is a long-term arrangement, on a continuing basis.
A Canadian-law sanctions representation typically covers: that neither the party nor any person it controls is a designated person under SEMA or the United Nations Act as applicable; that no proceeds from the transaction derive from property that is subject to a Canadian or UN sanctions prohibition; and that the party's performance under the agreement will not require or involve a breach of Canada's sanctions obligations.
The third limb is the one most frequently omitted from first drafts. It is also the most useful. It captures the scenario where neither party is itself listed, but the transaction – the routing, the financing, the sub-supply chain – involves a step that would breach SEMA. Do your heads-of-terms cover all the operative parties, or only the signatories?
Cross-regime pressure arises immediately here. A UK or EU counterparty will have its own sanctions obligations under OFSI and the relevant EU Council regulations. Those regimes also reach into the ownership and control of the counterparty. A multi-regime representation – one that covers each party's obligations under its own applicable regime – is more defensible than a clause that names only Canada. In our practice, we advise clients to identify which regimes apply to each party and to draft a representation set that is additive rather than regime-specific.
Step 3 – Include an undertaking and a continuing-compliance obligation
A representation is a statement of fact at a point in time. An undertaking is a promise of future conduct. Both are necessary in a commercial agreement with a meaningful duration. The undertaking should require each party to maintain a screening programme adequate to detect a change in sanctions status, to notify the other party promptly upon becoming aware of a potential breach, and to co-operate in any remediation the law requires.
The notification trigger matters. Some clauses are drafted to require notification only when a party is itself designated. That is too narrow. The notification should also be triggered when the party becomes aware that a sub-contractor, an affiliate, or a key beneficial owner has been designated, or when the party has reasonable grounds to suspect that continuing performance would breach Canada's sanctions rules. Reasonable-grounds language is consistent with GAC's own published guidance on the standard applicable to Canadian businesses.
In a recent matter, a financial services business had a long-form supply agreement that required notification only of the party's own designation. When a key subcontractor of the counterparty was designated mid-term, the notification clause did not fire. The business continued to receive services. We advised on the steps required to remediate the position and to consider a voluntary disclosure. A broader notification trigger would have surfaced the problem earlier, when more options were available.
The undertaking should also address the parties' obligations where a licence is available. SEMA provides for ministerial permits (Canada's licensing mechanism) that can authorise otherwise prohibited transactions in defined circumstances. If a transaction requires a licence, the clause should specify which party is responsible for obtaining it, the timeframe for application, and what happens to the contract if the licence is refused.
Step 4 – Draft the suspension and termination triggers
This is the clause that gives the compliance structure its teeth. A party that discovers mid-performance that its counterparty has been designated, or that continuing performance would breach SEMA, needs a contractual right to suspend and, if the breach is not remediated, to terminate – without that action itself constituting a breach of contract.
The suspension right should be exercisable without notice or with very short notice (hours, not weeks) and should take effect immediately upon the trigger event. The trigger event should be defined to include: designation of the counterparty or any person whose interest would cause a prohibited dealing; the discovery that a representation was false or misleading; a change in the applicable sanctions rules that would make continued performance unlawful; and, where relevant, a designation by a regime other than Canada's to which the suspending party is also subject.
That last point – multi-regime triggers – is where Canadian contracts serving international businesses require particular care. A Canadian exporter with EU operations is subject to both SEMA and the relevant EU Council regulation. If the EU designates a person not yet designated by GAC, the EU-law obligation still bites. The contract clause must allow the Canadian party to suspend under either trigger without breaching the agreement. Failure to include multi-regime triggers is one of the most common drafting gaps we encounter.
The termination right should follow if the suspension continues beyond a defined cure period and the underlying sanctions problem is not resolved. It should also operate on a no-fault basis: if the designation or the legal prohibition is the cause, neither party should be exposed to a termination-for-cause claim. A force-majeure provision can complement the termination clause, but force majeure is not a substitute for a specific sanctions-termination right. Force-majeure clauses are frequently contested; sanctions termination triggers, if drafted precisely, are not.
How does Canada compare with the UK and US regimes on contract clauses?
Canada, the United Kingdom, and the United States each impose sanctions obligations on their nationals and businesses, but the statutory structure and enforcement posture differ in ways that affect contract drafting.
Under OFAC practice, the 50 percent rule provides a mechanical ownership threshold for determining whether a non-listed entity is itself blocked. US-law contracts frequently include a clause specifically referencing that rule. Under SEMA, the control test is broader and less mechanically defined. A Canadian-law clause should not simply import OFAC language; it should reflect the facts-and-circumstances approach that GAC applies.
Under OFSI – the UK's financial-sanctions authority – the enforcement posture has shifted materially in recent years. OFSI can impose civil monetary penalties and has published detailed enforcement guidance. UK contracts in regulated sectors frequently include sanctions-related reporting obligations that go further than the statutory minimum. The UK's ownership and control test (under which a non-listed entity can be caught if it is owned or controlled by a listed person) tracks the EU approach more closely than the OFAC rule, making UK/EU cross-referencing in multi-regime clauses simpler than UK/US cross-referencing.
The EU Council regulations operate through directly applicable prohibitions. In our cross-border practice, we see EU counterparties insisting on their own sanctions-clause template when contracting with Canadian parties. Those templates are frequently drafted for EU legal certainty rather than Canadian compliance. Negotiating a clause that satisfies both regimes requires understanding where the obligations genuinely overlap and where a party needs separate, additive protection.
Switzerland (administered by SECO), Australia (DFAT), and Japan each maintain their own sanctions lists. A Canadian business operating across those jurisdictions may need a clause that references multiple applicable regimes explicitly. The principle is the same: identify each regime that applies to each party, and ensure the clause creates obligations and exit rights corresponding to each.
What are the key risk flags in existing contracts?
Most compliance problems in sanctions-related contracts arise not from newly negotiated deals but from contracts that were signed before a designation event occurred or before the business expanded into a regulated sector. The risk flags in an existing contract portfolio are predictable.
First: no sanctions clause at all. A commercial agreement with a counterparty operating in or near a designated jurisdiction, signed before the business had a sanctions compliance programme, may have no contractual protection. SEMA's prohibitions still apply. The business cannot rely on the absence of a clause to excuse performance.
Second: a clause that references only one regime. A business that is subject to SEMA and also to OFAC or the relevant EU Council regulations needs multi-regime protection. A clause that covers only Canadian designations leaves the business exposed under other applicable law.
Third: a clause without a notification obligation. If the counterparty's sanctions status changes and the clause does not require notification, the business may continue performing in breach without realising it. The notification obligation is the early-warning mechanism.
Fourth: a clause without a suspension right that takes immediate effect. Some clauses require a cure period before suspension is available. During that cure period, performance continues. If performance constitutes a dealing in the property of a designated person under SEMA, the business is in breach of statute for the duration of the cure period.
Fifth: force-majeure reliance as a substitute. As noted above, force majeure is an uncertain remedy where sanctions are the issue. It is better than nothing, but it does not provide the clear contractual architecture that a dedicated sanctions clause supplies.
A common myth is that a well-designed compliance programme at the entity level makes contract-level sanctions clauses redundant. It does not. The compliance programme governs the business's internal conduct. The contract clause governs the commercial relationship. If the counterparty triggers a sanctions issue and the contract has no termination right, the business may face a choice between performing in breach of SEMA and terminating in breach of contract. That is a position no compliance programme can resolve after the fact. The clause must be in the agreement before the problem arises.
Related practices
- Sanctions compliance audit and testing – stress-testing screening logic and programme design across major regimes
- Sanctions clauses in contracts under Canada: advanced drafting – deeper drafting issues including boilerplate interaction and governing-law questions
- Sanctions clauses in cross-border contracts – multi-regime clause design for international commercial agreements