A trading house with suppliers in Asia, buyers in the Gulf, and financing from a European bank signs a long-term supply agreement. Three months later, a counterparty on one leg of the transaction appears on a designation list. The contract contains a boilerplate "sanctions clause" cut from a previous deal. Does it work? Does it protect the trading house? Does it actually comply with every regime that touches the transaction?
Sanctions clauses in contracts are a primary line of defence for businesses operating across multiple jurisdictions. No single clause text satisfies every regime simultaneously: the trigger events, the termination rights, the notification obligations, and the representations required differ between OFAC, OFSI, the EU, and the regimes of Singapore, the UAE, and Australia. A cross-border business that drafts to one regime and ignores the others carries live exposure in every gap.
This guide walks through the procedure for designing effective multi-regime sanctions clauses, maps the principal points of divergence between the major regimes, and sets out the risk flags that most frequently produce enforcement or deal failure.
Step 1: Identify every regime that governs your contract
Before a single clause is drafted, the first task is a jurisdiction map: list every sanctions regime whose rules can bite on the specific transaction. This is not a question of where the contract is signed or which governing-law clause says. It is a question of nexus – and that question has a broader answer than most non-specialist counsel assume.
US sanctions administered by OFAC apply whenever a transaction involves a US person, US-origin goods or technology, a US financial institution, or US-dollar clearing. That extraterritorial reach means a contract between two non-US parties, for goods that never touch US soil, may still engage OFAC rules if payment routes through a US correspondent bank. BIS export-control rules under the EAR add a separate layer whenever items subject to US jurisdiction – including software and technology – are transferred, re-exported, or incorporated into downstream products.
UK sanctions administered by OFSI apply to UK persons and to conduct taking place in the United Kingdom. The UK Sanctions and Anti-Money Laundering Act ("SAMLA") and the thematic regulations under it operate on a strict-liability basis for civil penalties: whether a party knew it was dealing with a designated person is relevant to the penalty quantum, not to whether a breach occurred. That strict-liability posture is a material drafting consideration when allocating risk between contracting parties.
EU Council regulations apply to EU persons and to conduct within the EU. The EU ownership-and-control test extends the prohibition to entities that a designated person owns or controls, even where the entity itself is not listed. Crucially, "control" under EU rules is a broader concept than the mechanical fifty-percent ownership threshold OFAC uses. A party that passes an OFAC screen may still be caught under EU rules if a listed person exercises decisive influence over it.
In our cross-border practice, we regularly see contracts that name one regime in the sanctions clause and ignore two or three others that are equally operative on the facts. The clause then fails precisely when the business needs it.
Practical steps for the jurisdiction map:
- Identify the nationalities of all contracting parties and their ultimate beneficial owners.
- Identify the currency and route of payment.
- Identify the origin and classification of the goods, technology, or services being supplied.
- Identify the jurisdictions of any financial institutions, freight forwarders, or intermediaries.
- For each nexus, identify the applicable regime and the administering authority.
Where the map produces four or more regimes, the clause architecture needs to address each one, either expressly or through a "most restrictive regime" sweep provision.
Step 2: Draft the core representations and warranties
Once the jurisdiction map is complete, the clause must contain representations and warranties that mirror the legal tests of each applicable regime – not the generic statement "the parties are not subject to sanctions".
The representation must capture not only the party itself but the chain of ownership. Under OFAC, the 50 percent rule (OFAC's rule treating entities owned fifty percent or more, in the aggregate, by blocked persons as themselves blocked) means that a counterparty can be constructively blocked even without appearing on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons). A representation that covers only named-list status will miss this. The clause should require the representing party to warrant that no blocked person owns it fifty percent or more, directly or indirectly.
Under OFSI and the EU, the representation must extend to ownership and control (the UK and EU test for whether a non-listed entity is caught through a designated person's ownership or decisive influence). A counterparty can be subject to the prohibition even if no listed person owns more than fifty percent, where a listed person exercises control through voting rights, board influence, contractual rights, or other means.
Cross-regime representation language therefore needs to capture at minimum:
- The party is not itself designated under any applicable regime.
- The party is not owned fifty percent or more, in the aggregate, by any person designated under any applicable regime.
- The party is not controlled by any person designated under any applicable regime, within the meaning of the applicable regime's ownership-and-control test.
- The party is not incorporated or established in a jurisdiction subject to comprehensive sanctions under any applicable regime.
- No proceeds of the contract will be transferred to, or benefit, any designated person.
The last point matters for transactions involving supply chains or sub-contracting. A manufacturing contract that routes sub-contract payments through a chain of affiliates can produce a prohibited transfer of value several steps downstream, even if the face of the contract looks clean.
The position above covers the standard case. Your facts – the counterparty's ownership structure, the goods, the jurisdictions in play, the payment route – change the analysis materially. To discuss the drafting of multi-regime representations for a specific contract, contact Calder & Vance at info@caldervance.com.
Step 3: Define the trigger events clearly
A sanctions clause that does not define its trigger events with precision creates more risk than it removes. Vague formulations – "if a party becomes subject to sanctions" – produce disputes about whether the trigger has actually fired, at exactly the moment when speed matters most.
Trigger events worth defining with precision include:
- Designation of a party, its affiliates, or its beneficial owners under any applicable regime.
- Addition of a party, its goods, or its technology to any applicable export-control list (the Entity List under BIS, or equivalent national lists).
- Imposition of new or expanded sanctions on a jurisdiction material to the contract.
- The party's reasonable belief that continued performance would require an authorisation that it does not currently hold.
- A change in applicable law that makes performance unlawful.
The fourth trigger is frequently omitted and frequently significant. A transaction that was lawful at signing can require a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) following a new designation or a change in the scope of a general licence. A party that continues performance while waiting for a licence it has not yet applied for is in breach of the prohibitions, not merely in breach of contract. The clause should address what each party must do in that window – suspend, notify, apply – and who bears the cost of the delay.
Divergence between regimes on trigger timing also matters. OFAC designations take effect immediately on publication. EU designations are published in the Official Journal and generally take effect on the date of publication. OFSI designations under SAMLA can take effect immediately by way of an urgent designation. A clause that defines "designation" without specifying the regime can produce ambiguity about exactly when the obligation to suspend performance arose.
How does the termination right differ across regimes?
Termination mechanics are where cross-regime drafting diverges most sharply, and where disputes most frequently arise when a sanctions event actually occurs.
Under OFAC, once a blocked-person nexus is confirmed, performance is prohibited. The US person cannot take any action that provides a service, transfers value, or gives a benefit to the blocked party – including, in many cases, the act of terminating the contract in a way that involves paying a termination fee or returning advance payments, without an authorisation. This creates a practical problem: the "clean" commercial exit may itself require a licence. In our experience, the most effective approach is to build a step-by-step suspension-and-notice procedure into the clause that precedes any termination decision, to preserve optionality while the parties seek guidance.
Under UK OFSI rules, the obligation is to freeze assets and to cease making funds or economic resources available. There is no automatic right to terminate at common law simply because a sanctions clause exists: the clause needs to create that right expressly. SAMLA-based regulations impose a reporting obligation on persons who hold or receive frozen assets, and that reporting obligation runs to OFSI separately from any contractual mechanism. The clause does not discharge the regulatory obligation; it runs alongside it.
Under EU regulations, the prohibition on making funds and economic resources available is similarly strict. EU law also imposes an obligation on persons who hold frozen assets to notify the competent national authority. EU contracts governed by a Member State's law may be subject to additional national-level procedural requirements for handling frozen assets or for seeking authorisation from the national competent authority.
The practical implication: a well-drafted cross-border sanctions clause separates the regulatory obligation (which is fixed by law and cannot be altered by contract) from the contractual obligation (which can be structured to minimise exposure at the moment of a trigger event). Drafting them as though they are the same thing produces clauses that are neither legally effective nor practically usable.
If a transaction has already been flagged, or a filing has been refused, early legal review can preserve options that narrow quickly. For a confidential assessment of your position, contact Calder & Vance at info@caldervance.com.
What are the notification and reporting obligations that must be built in?
Notification clauses are the mechanism by which a sanctions clause activates in practice – and they must align with the regulatory reporting obligations, not merely with commercial convenience.
Each major regime imposes its own reporting timeline and route. Under OFAC, a US person that holds blocked property must report that property to OFAC within a short statutory window. Under OFSI, a person who knows or suspects that a person is a designated person, and that they hold frozen assets on their behalf, must report to OFSI. Under EU regulations, the obligation to report to the relevant national competent authority applies to any person who holds or controls frozen assets or economic resources belonging to a designated person.
These regulatory obligations exist independently of whatever the contract says. The sanctions clause must work alongside them. It should do at minimum three things:
- Require each party to notify the other promptly – with a defined timeframe, not just "as soon as practicable" – if it becomes aware that a trigger event may have occurred.
- Require each party to cooperate in making any required regulatory filing, including providing information the other party needs to make that filing.
- Make clear that nothing in the contractual notification procedure delays or replaces the obligation to comply with the regulatory reporting requirement.
The cooperation obligation on regulatory filings is frequently absent from standard boilerplate clauses. In a cross-border deal, the filing obligation may fall on the party that is resident in the sanctioning jurisdiction, not the party that first identifies the trigger event. That party may need information from its counterparty to complete the report accurately and within the applicable deadline. Without a contractual basis for requiring that cooperation, the filing party is in a difficult position.
Record-keeping is a related and equally under-drafted obligation. Regulatory expectations on documentation span multiple years in most regimes. A sanctions clause should require each party to maintain, for the duration of any applicable retention period, all records relevant to the parties' performance of their obligations under the clause, including screening records, ownership-verification documentation, and any communications with regulatory authorities.
Step 4: Address the common risk flags before signing
Several patterns in cross-border contracts consistently produce sanctions exposure, regardless of whether a competent sanctions clause is in place. We address each of these in due-diligence and advisory work; they are equally relevant at the drafting stage.
Boilerplate copied from a domestic deal. A clause drafted for a single-regime transaction – for example, a US-domestic supply agreement referencing only OFAC – does not work for a cross-border transaction that also engages OFSI and EU regulations. The representations will be under-inclusive, the trigger definitions will miss non-OFAC designation events, and the termination mechanics will not address EU or UK regulatory obligations. This is the single most common failure mode we encounter.
The "applicable sanctions" sweep clause without a defined list. Some contracts attempt to address multi-regime exposure by defining "applicable sanctions" to mean all sanctions programmes applicable to either party. This can create unexpected obligations for a party that did not intend to bind itself to the full extraterritorial reach of every regime to which the other party is subject. A Singapore counterparty agreeing to comply with all sanctions applicable to a US party may inadvertently be accepting obligations that extend well beyond Singapore's own autonomous sanctions programme. The defined list should be negotiated, not left to a sweep formulation.
Secondary-sanctions risk under OFAC. US secondary sanctions – restrictions that can apply to non-US persons for activity that does not involve a US nexus – are a particular concern in cross-border contracts. They do not operate as a direct prohibition in the same way as primary sanctions, but the risk of designation or of being cut off from the US financial system is a real commercial and legal concern for non-US parties. The clause should acknowledge and allocate this risk, particularly in transactions that involve sectors or jurisdictions where secondary-sanctions measures are in force.
Change-in-law provisions that are too narrow. Standard force majeure and change-in-law clauses are often drafted with physical impossibility or commercial impracticability in mind. They may not trigger on the imposition of new sanctions that make performance legally prohibited rather than physically impossible. An express sanctions-specific change-in-law mechanism – covering both the imposition of new measures and the expansion of existing ones – should be included alongside the general provision.
Export controls as a parallel obligation. Contracts for the supply of goods, software, or technology with potential dual-use applications need to address export-control obligations alongside sanctions obligations. An ECCN (Export Control Classification Number under the US Commerce Control List) determination affects not only whether a licence is required to export the item but also whether re-export or transfer to a third country requires a separate authorisation. A clause that handles sanctions but is silent on export controls leaves a significant gap in the compliance architecture of the contract.
In a recent matter, a manufacturing business in the energy sector was party to a long-term supply agreement that contained a well-drafted OFAC compliance clause but made no provision for BIS export-control obligations. When the buyer on one transaction was added to the Entity List, the seller had no contractual mechanism to suspend supply, seek an authorisation, or allocate the cost of the resulting delay. We assisted in restructuring the contractual arrangement and in engaging with the relevant regulatory authority. The matter illustrated why export controls and sanctions obligations should be addressed in the same clause architecture, not as separate issues.
Related practices
- Compliance audit and testing (Australia) – stress-testing sanctions programmes against the Australian autonomous sanctions regime and neighbouring OFAC/OFSI obligations.
- Sanctions clauses in contracts – EU guide – detailed treatment of EU Council regulation obligations in commercial contracts and the competent-authority authorisation process.
- Sanctions clauses in contracts – EU guide 2 – extended EU regime analysis covering ownership and control, asset freezes, and the reporting obligations of financial institutions.
When must a sanctions clause address the most restrictive regime?
Where two or more regimes apply to the same transaction and their requirements diverge, the practical question is whether the parties should draft to the highest common standard or allow each party to comply with its own applicable regime. The answer depends on the transaction structure, the parties' respective nexuses, and the commercial risk allocation that they are willing to accept.
The general principle across the major regimes is that where national law imposes a stricter prohibition, that stricter prohibition governs the party subject to it. A contract cannot instruct a party to do something its own national law forbids. But a contract can – and often should – require the party subject to the stricter standard to notify its counterparty promptly if compliance with that standard requires a departure from the agreed contractual terms.
The EU Blocking Regulation creates a particular complication for EU persons in contracts with US-nexus counterparties. The EU Blocking Regulation restricts EU persons from complying with certain US secondary-sanctions measures, creating a direct tension between the US-side contractual obligation and the EU-side legal prohibition. In our cross-border practice, we advise clients to flag this conflict at the drafting stage and to build in a procedure for managing it, rather than leaving it unresolved in the boilerplate.
Do Singapore, UAE, or Australian counterparties need specific clause language? Yes, with caveats. Singapore's autonomous sanctions programme, administered under the applicable national regime, covers a defined set of listed persons and programmes. The UAE's autonomous sanctions regime similarly maintains its own list. Australia's autonomous sanctions programme, administered by DFAT, imposes prohibitions on transactions with designated persons and entities. Each of these regimes operates alongside, but separately from, the major OFAC and OFSI obligations that may also apply to the transaction. A clause that covers only the "big three" – OFAC, OFSI, and EU – may miss an autonomous-regime obligation that is directly applicable to one contracting party.
Is there a single clause that covers every regime? In practice, no single clause text satisfies every regime simultaneously. But a well-structured multi-regime clause can do most of the work by: defining "applicable sanctions authorities" to cover each relevant administering body by name; building representations, trigger events, and notification obligations that reflect the most demanding test across those authorities; and including a saving provision that preserves each party's ability to comply with its own mandatory legal obligations even if that requires departure from the commercial terms.