A multinational trading house is mid-negotiation on a supply agreement spanning three jurisdictions. Its legal team has drafted the commercial terms. The sanctions clause is a single boilerplate sentence carried over from a domestic template. Then a counterparty in the chain is designated under one of the major regimes. The deal freezes. The boilerplate offers no exit, no notice mechanism, and no allocation of the resulting loss. That scenario plays out in cross-border commerce every month.
Sanctions clauses in contracts are the contractual provisions that govern what the parties must do – and what either party may do – when a sanctions event affects the transaction. In a cross-border arrangement touching OFAC, OFSI, EU Council regulations, or more than one of those regimes simultaneously, a single undifferentiated clause will almost certainly leave one party exposed. As of mid-2026, the divergence between the major regimes on ownership tests, licensing obligations, and reporting windows has made multi-regime drafting the expected standard for any agreement with genuine cross-border reach.
This guide walks through the key steps: understanding what a sanctions clause must cover, how the major regimes treat the same contractual scenarios differently, where standard drafting fails, and how to build a clause set that holds under scrutiny from more than one regulator. Each step pairs the primary analysis with a comparator regime so the cross-border practitioner sees both sides of the table.
Step 1: Understand what a sanctions clause is actually doing
A sanctions clause in a contract performs three distinct legal functions simultaneously: it allocates risk between the parties, it creates a contractual exit right on a sanctions trigger, and it establishes the representation and warranty baseline against which post-signing discoveries are measured.
Those three functions pull in different directions. The risk-allocation function favours specificity – you want to name the regimes, the lists, and the trigger events with precision. The exit-right function favours breadth – the clause needs to fire before a party commits an offence, which typically means the trigger is a legal risk rather than a confirmed designation. The warranty function requires accuracy – a warranty that a party is not, and is not owned or controlled by, a Specially Designated National (SDN, OFAC's list of Specially Designated Nationals and blocked persons) must be accurate at the date of signing, not merely at the date of a later screen.
In our experience, the clauses that generate disputes are those drafted as single-function instruments: a pure force-majeure provision that ignores the ownership question, or a warranty that does not carry a repeat-at-closing mechanism. Cross-border agreements require all three functions to be present and internally consistent.
The applicable governing instrument differs by regime. OFAC's rules flow from IEEPA and the relevant programme regulations. OFSI's obligations rest on the Sanctions and Anti-Money Laundering Act and the relevant thematic sanctions regulations. EU restrictions operate through Council Regulations with direct effect in all Member States. None of those instruments dictates the content of a private contract, but each creates the offence that the clause must help the parties avoid.
Step 2: Map the regime footprint before you draft
Before a single clause is written, the drafter must map which regimes have potential jurisdiction over the transaction – because the clause architecture follows the regime map, not the other way around.
Regime jurisdiction is not simply a question of where the parties are incorporated. OFAC's rules apply to US persons worldwide, to transactions that touch the US financial system, and – through secondary-sanctions risk – to certain non-US persons dealing with specified counterparties. BIS export-control rules apply wherever US-origin technology or software is re-exported, regardless of where the re-exporter is based. The EU Blocking Regulation creates a separate layer: it prohibits EU persons from complying with certain third-country sanctions measures, which means that a clause structured around OFAC compliance may itself breach EU law when the counterparty is an EU entity.
The UK regime is now fully autonomous from the EU. OFSI administers financial sanctions through SAMLA and the programme regulations. The ownership-and-control test under the UK regime differs from OFAC's mechanical 50 percent rule (OFAC's rule treating entities owned 50 percent or more by a blocked person as themselves blocked) in that UK law also catches entities controlled by a designated person even where the ownership threshold is not met. EU law similarly captures both ownership and control. That divergence matters for how the clause defines a "sanctioned person": an OFAC-only definition will not cover entities caught by OFSI or EU tests without explicitly extending to the control limb.
Practically, the regime footprint mapping produces a short register: which regimes apply, under which factual nexus, to which party. That register drives the structure of the clause set. A deal with US persons, EU-incorporated counterparties, and UK-based settlement will require at minimum three regime columns in the analysis before the drafting begins.
The position above covers the standard case. Your facts – the parties' nationalities, the goods or services, the payment route, and the applicable programmes – change the analysis. For a confidential review of a specific transaction's regime footprint, contact Calder & Vance at info@caldervance.com.
Step 3: Draft the warranties and representations – and understand their limits
The warranty and representation provisions are the clause's first line of defence: each party warrants that it is not a designated person and is not owned or controlled by one, that it will not use the contract proceeds for a prohibited purpose, and that performance of the contract will not violate any applicable sanctions regime.
Getting the definition of "sanctioned person" right is where most standard templates fall short. An OFAC-only definition will miss persons designated only under OFSI or EU programmes. A definition confined to list-based designations will miss entities caught by the ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person's ownership or control) under the applicable regime. A definition that looks only to the SDN List will miss persons on the EU Consolidated List, the UK Consolidated List, and the UN Security Council Consolidated List – all of which may independently bite depending on the parties' nexus.
The warranty should also carry a "repeat at closing" mechanism for long-dated agreements, requiring each party to re-confirm the representations at signing, at any drawdown or delivery, and at any point at which a party becomes aware of a change. That is not mere formalism. Designations happen mid-contract. A warranty that was true on day one can become false on day ninety if a shareholder is added to a list.
We regularly advise counterparties negotiating these provisions that the warranty alone is not a compliance control. It is a contractual remedy in the event of a breach already identified. The real compliance work – ownership-chain screening, beneficial-ownership verification, and ongoing monitoring – must sit alongside the clause, not inside it.
Step 4: Build the termination and suspension trigger – correctly
The termination or suspension trigger is the mechanism by which a party exits the contract, or suspends performance, when a sanctions event occurs or appears likely. Getting this trigger right is arguably the most operationally consequential element of the clause set.
The trigger must fire at the right moment. Under OFAC, a US person who continues performing after a counterparty becomes a blocked person is already in violation; the contract cannot be the instrument that authorises continued performance pending investigation. The trigger therefore needs to operate on a "reason to believe" or "appears to be" standard rather than requiring a confirmed, final designation. Under OFSI's rules, a similar imperative applies: once a business suspects that dealing would breach the financial-sanctions regime, continuing without a licence is the risk.
Under the EU regime, the trigger design is more nuanced. Council regulations prohibit the making available of funds or economic resources to designated persons. The control test means that a trigger drafted only around listed entities may not catch subsidiaries or affiliates that are indirectly captured. The clause should extend the trigger to any entity that a party "knows or reasonably suspects" is owned or controlled by a designated person – language that tracks the Council regulation's own formulation.
One further complexity arises in the cross-border context. A clause that gives Party A an immediate termination right upon any OFAC designation of Party B's shareholders may create a right that Party B cannot contract around if Party B is an EU entity subject to the EU Blocking Regulation. Counsel for both sides need to address this before the clause is finalised. The solution is usually a "good faith consultation" mechanism: a short window – often a matter of days, which must be assessed in context and may be shorter than the applicable reporting window under the relevant regime – during which the parties consult on whether a licence, general authorisation, or other remedy is available before the exit right crystallises.
If a transaction has already been flagged, or a filing has been refused, an early review of your contractual position can preserve options that narrow with time. Reach us at info@caldervance.com.
Step 5: Address the licensing and authorisation question in the clause
A sanctions clause that ignores licensing is incomplete. When a sanctions trigger fires, the relevant question is not only whether the parties must stop, but whether a specific licence (a case-by-case authorisation from the relevant authority to conduct an otherwise-prohibited transaction) or a general licence (a standing authorisation permitting a defined category of transactions without a separate application) might permit continued performance or an orderly wind-down.
OFAC maintains a body of general licences permitting certain wind-down activities even after a designation takes effect; the scope and duration of those authorisations are programme-specific and change over time. OFSI similarly has a licensing regime under the relevant thematic regulations, including licences for activity in the basic needs category and for legal fees. EU Council regulations provide for derogations that competent authorities in Member States can activate. None of these authorisations is automatic; each requires prompt action by the party seeking to rely on it.
The contract clause should address who bears the obligation to apply for a licence, which party bears the cost, and what happens to the contract during a pending application. Leaving these questions unanswered creates scope for dispute at exactly the moment when the parties' interests are most likely to diverge. In our practice, we have seen deals fall apart not because no licence was available, but because the contract was silent on who was obliged to seek one and the timeline ran out while the parties argued.
The clause should also address the record-keeping obligation that flows from any licence application or use of a general authorisation. Under most regimes, records must be maintained for a defined period – verify the current period under the applicable regime before the contract is executed – and the clause can usefully require each party to confirm that its own record-keeping obligations are being met.
Step 6: Handle reporting, notice, and cooperation obligations
Sanctions clauses often stop at termination and warranty. They rarely address the reporting and cooperation obligations that apply once a suspected violation is identified. That gap becomes critical under cross-border arrangements.
Under OFSI's rules, a relevant firm that holds or controls funds belonging to a designated person is subject to a reporting obligation. Under OFAC's regime, blocking reports must be filed within a short statutory window after property is blocked – the applicable deadline is programme-specific and should be verified against current OFAC guidance before the contract is signed. Under EU law, Member State competent authorities are the point of notification, and requirements differ across Member States even within the same Council regulation.
A well-constructed sanctions clause set includes a notice provision requiring each party to give prompt written notice to the other if it becomes aware of a fact that might constitute a sanctions event, a breach of the warranties, or a potential violation. That notice provision serves two purposes. First, it triggers the other party's own internal escalation process in time for that party to meet its regulatory deadlines. Second, it creates a contemporaneous record – relevant to a subsequent assessment of whether the notifying party acted promptly and in good faith.
The cooperation provision should require each party to provide information the other reasonably needs to assess its regulatory position, make licence applications, or prepare a VSD (voluntary self-disclosure to the relevant regulator). VSD programmes exist under both OFAC and OFSI and can, in appropriate cases, result in a reduced penalty outcome – though no particular outcome is guaranteed. The contract should not prevent a party from fulfilling its regulatory reporting obligations, even where those obligations require disclosure of information the other party might regard as commercially sensitive.
Step 7: Anticipate the cross-regime conflict and build a resolution mechanism
The hardest clause to draft correctly is the one that deals with the situation where compliance with one regime places a party in breach of another. That is not a hypothetical risk in cross-border commerce. It is a recurring practical reality, and the contract should address it.
The EU Blocking Regulation is the most common source of this conflict for European businesses. It prohibits compliance with certain extraterritorial measures adopted by third countries, which means that an EU person instructed by its US counterpart to cease performance on the basis of OFAC secondary-sanctions risk may face conflicting legal imperatives. The clause cannot resolve that legal conflict – only the applicable law and, ultimately, the courts can do that. But the clause can do three useful things: first, acknowledge the conflict risk explicitly; second, require the parties to cooperate in seeking guidance or authorisations from the applicable authorities; and third, prevent either party from treating a conflict as an automatic basis for termination without first exhausting the cooperation and consultation mechanism.
Choice-of-law and governing-jurisdiction provisions interact with sanctions clauses in ways that practitioners often underestimate. A choice of English law does not eliminate OFAC's extraterritorial reach over a US person who is a party to the contract. A choice of New York law does not prevent the EU Blocking Regulation from applying to an EU counterparty. The sanctions clause must function across the governing law, not defer to it.
Where the cross-regime conflict risk is material – and in our experience it is material in any arrangement involving both US and EU parties, or any party with a significant US-dollar clearing exposure – the clause set should be reviewed by counsel familiar with both sides of the relevant regime divide before execution.
Common drafting failures and risk flags
The most consistent failure in sanctions clause drafting is the adoption of boilerplate without a regime-footprint analysis. A clause built for a domestic US contract does not automatically work for a cross-border arrangement. A clause built around OFAC alone does not address OFSI's control test or the EU Blocking Regulation's prohibition on compliance with third-country measures.
Several other risk patterns recur in our review work:
- Definitions of "sanctioned person" that track only one list, or that are frozen to a single regime's current published criteria without a mechanism for updating as regimes evolve.
- Warranty provisions that are not repeated at closing, at drawdown, or on an ongoing basis during long-term supply or financing arrangements.
- Termination triggers that require a "final" designation before firing, creating a window in which performance continues during the very period when a VSD or blocking report should be filed.
- Silence on who applies for a licence, who bears the cost, and what governs the contract during a pending application.
- No notice or cooperation provision, leaving each party to discover a sanctions event independently and race to the regulator without the other party's knowledge.
- Governing-law provisions that are treated as a complete substitute for regime-specific analysis, when they are not.
One further pattern merits emphasis: the myth that a sophisticated counterparty's inclusion of a standard clause means the clause is adequate. In our experience, the party with the stronger negotiating position often imports its domestic template unchanged. The weaker party assumes that the stronger party's lawyers have got it right. Neither assumption is safe in a cross-border transaction touching more than one major regime.
Related practices
- Sanctions compliance audit and testing (Australia) – structured testing of screening programmes and compliance controls under the Australian autonomous-sanctions regime.
- Sanctions clauses in contracts: advanced cross-border drafting – deeper analysis of specific clause mechanics and multi-party arrangements.
- Sanctions clauses in contracts: EU guide – clause-by-clause analysis of the EU Council regulation obligations and the Blocking Regulation conflict risk.