A European distributor signs a long-term supply agreement with a trading company in a third market. Months later, the trading company's parent appears on the EU Consolidated List. The distributor's legal team asks: does the existing contract breach EU sanctions? Can payments continue? Can the goods still ship? These are not academic questions. They decide whether the relationship can survive and what the distributor must report.
EU sanctions prohibit dealing with listed persons and entities, and with companies they own or control, under the relevant Council Regulations and associated Council Decisions. As of mid-2026, the EU operates multiple autonomous sanctions regimes covering a wide range of counterparties, sectors, and transaction types. A contract clause alone does not create a safe harbour – but well-drafted sanctions provisions alert parties early, allocate risk clearly, and preserve optionality when a designation occurs.
This guide walks through the drafting process step by step: the governing authority, the core clause types, the ownership-and-control test that defines who is caught, cross-regime comparison with OFAC and OFSI, risk flags, and when to involve sanctions counsel.
Step 1 – Understand who administers EU sanctions and what authority they carry
EU sanctions derive from Council Regulations, which are directly applicable in all EU Member States without domestic transposition. They bind EU persons and entities, EU-incorporated companies and their subsidiaries, and anyone conducting business within EU territory – including non-EU firms with EU-nexus operations.
The EU Consolidated List, maintained by the European External Action Service, is the reference database for asset freezes and dealing prohibitions. Each designation is underpinned by a Council Decision and given binding legal effect through the corresponding Council Regulation. Breaching a freeze or a dealing prohibition is a criminal or administrative offence in each Member State, and enforcement sits at national level: there is no single EU enforcement authority comparable to OFAC or OFSI.
That decentralised enforcement structure matters for contract drafting. The standard governing which Member State applies its criminal provisions – and how that state investigates breaches – can differ meaningfully. A clause that refers only to "applicable sanctions law" without specifying the relevant regime and jurisdiction may not trigger the right review process when a screening hit appears. In our cross-border practice, we regularly see contract language that tracks OFAC definitions but fails to incorporate the EU ownership-and-control standard, leaving a gap that only surfaces in enforcement.
Parties should also note the EU Blocking Regulation, which prohibits EU persons from complying with certain third-country sanctions that the EU does not recognise. A contract clause that obliges an EU-established party to comply with all sanctions regimes worldwide – without carving out this prohibition – may inadvertently require that party to breach EU law. This is one of the most consequential drafting errors we encounter in cross-border supply and finance agreements.
Step 2 – Map the ownership-and-control test before drafting the clause
Under EU sanctions, the dealing prohibition extends beyond listed persons themselves to entities they own or control – and the test goes further than a simple ownership threshold. An entity is caught if a listed person owns 50 percent or more of its shares or voting rights, or if a listed person can otherwise exercise decisive influence over its management or direction.
That control limb is decisive. A listed person may hold less than half the equity of a company but still control it through board appointment rights, veto mechanisms, or contractual arrangements. EU law looks through the ownership structure and at the substance of the relationship. This differs from the OFAC test under IEEPA, which is purely mechanical at the 50 percent ownership threshold without a separate control prong – though OFAC has, in practice, addressed control through blocking orders in specific programmes.
What does this mean for contract drafting? A representations and warranties clause that asks a counterparty to confirm it is not on the EU Consolidated List is necessary but not sufficient. The clause also needs to cover entities owned or controlled by listed persons – and ideally require the counterparty to represent that it has conducted a reasonable ownership investigation, not merely screened its own legal name. We have acted for buyers in supply chains where a second-tier supplier was controlled by a subsequently listed individual; the deal-breaking question was whether the primary contract had allocated that risk.
Aggregation matters here too. Two listed persons each holding a minority stake may together reach the ownership threshold. A counterparty's representation that no single listed person holds a controlling interest does not resolve the aggregation question. Drafting should address aggregate holdings of multiple sanctioned persons, not only individual holdings. This is a recurring gap in standard template language.
Step 3 – Draft the core clause types in the correct sequence
Effective sanctions provisions in commercial contracts under EU law typically comprise four linked elements: a representation, a covenant, a termination right, and an indemnity or cost-allocation mechanism. They should be drafted in that sequence, because each element builds on the last.
Representations. Each party represents, as of the date of signing and on each date a payment or delivery occurs, that: it is not on the EU Consolidated List; it is not owned or controlled by a listed person within the meaning of the applicable Council Regulation; and no national-level restriction in any EU Member State prevents it from performing the contract.
Covenants. Each party undertakes to notify the other promptly – and in any event within the reporting window required under applicable law – if it becomes aware that the representation has ceased to be true, or that a designation has occurred affecting either party or any material subcontractor or intermediary. "Promptly" is not sufficient on its own; the clause should specify that the duty to notify is not conditional on legal advice being obtained first.
Termination rights. If a party becomes a listed person, or if performance of the contract would require a payment, transfer of funds, or supply of goods or services to or for the benefit of a listed person (directly or through an ownership chain), the non-affected party should have an immediate right to suspend performance and, after a short cure or consultation period, to terminate without liability. Termination without liability is not automatic in most civil-law systems; it must be expressly stated.
Cost allocation. The clause should specify who bears the costs of suspension, unsold inventory, return of deposits, and any administrative investigation triggered by the designation event. Without this, the defaulting-party analysis under the applicable governing law will apply – and that outcome may not match either party's expectation.
The position above covers the standard commercial agreement. Your facts – the sector, the counterparty location, the nature of the goods or services, and the EU regime in play – can change the analysis significantly. To discuss how these clause types apply to your specific contracts, contact Calder & Vance at info@caldervance.com.
Step 4 – Address the EU Blocking Regulation and dual-regime conflicts
The EU Blocking Regulation is a standing obligation, not an optional compliance choice. It prohibits EU-established persons and companies from complying with specified third-country measures – most relevantly, certain US secondary-sanctions extraterritorial provisions – and requires them to notify the European Commission if their interests are affected.
For contract drafting, the practical implication is this: a clause that requires the EU party to comply with "all applicable sanctions law worldwide" may put that party in a direct conflict between its EU obligation not to comply with a third-country measure and a contractual duty to do so. Courts in various Member States have treated such conflicts in different ways. The safer approach in EU-law-governed contracts is to list the specific regimes that the compliance covenant covers, and to include an explicit carve-out for obligations that would violate the EU Blocking Regulation.
Where a contract involves parties on both sides of the Atlantic, we regularly advise on structuring the sanctions compliance clause so that each party's obligation tracks the regime that actually applies to it. The US party's obligation can reference OFAC and BIS; the EU party's obligation references the Council Regulations and Member State enforcement; and a conflict provision addresses what happens if the two regimes diverge on a specific transaction. This approach is more complex to draft but far less likely to produce paralysis when a designation occurs mid-contract.
What about UK-established counterparties post-Brexit? OFSI's ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person) is materially similar to the EU standard but is applied by a single central authority – OFSI – rather than 27 national enforcement bodies. For a supply chain that crosses the EU–UK boundary, both the Council Regulation and the relevant UK thematic regulations may apply simultaneously. A clause that covers only one regime may leave the other party's obligations unaddressed.
If a transaction has already triggered a screening flag, or if a counterparty has received a formal inquiry from a national competent authority, an early review of the contract clause position can preserve options that narrow quickly. Contact us at info@caldervance.com to discuss.
Step 5 – Build in screening, escalation, and record-keeping obligations
A well-drafted sanctions clause is not a one-time check at signing. It operates as an ongoing mechanism that requires each party to screen at defined intervals, escalate promptly when a hit is identified, and maintain records that demonstrate compliance in the event of a regulatory inquiry.
Screening obligations in the contract should specify: the lists to be screened (the EU Consolidated List as a minimum; the UN Security Council Consolidated List for cross-border transactions; the relevant Member State national lists where applicable); the frequency (at minimum at signing, on each drawdown or delivery, and on any material change in ownership); and the standard of the screen (fuzzy matching, not exact-match only, to catch transliteration variants of listed persons' names).
Escalation procedures should designate a named function or role within each party's organisation – typically the compliance officer or general counsel – as the escalation point when a potential match is identified. The clause should make clear that escalation does not require the match to be confirmed before the notification duty arises. A probable match, not a confirmed one, should trigger the process.
Record-keeping is an obligation, not merely good practice. The applicable Council Regulations and national implementing measures typically impose record-keeping requirements on entities subject to EU sanctions. In our experience, the single most common gap in business-to-business contracts is the absence of any reference to documentary retention – which means that when a national authority asks to review the screening history for a transaction, neither party has a contractual right to demand that history from the other. The clause should require each party to retain screening records for at least the period required under the applicable regime, and to make those records available on request for the purpose of demonstrating compliance.
Step 6 – Recognise the risk flags that require counsel before signing
Not every commercial contract raises the same sanctions exposure. But certain features of a transaction consistently mark a higher-risk profile that warrants sanctions counsel review before the clause is finalised – or before any waiver of the clause is agreed.
Consider the following indicators:
- The counterparty is incorporated in, or has significant operational exposure to, a jurisdiction subject to an EU comprehensive or thematic sanctions programme.
- The goods or services are dual-use items, or items subject to EU strategic export controls, where sanctions and export-control obligations overlap.
- The contract involves intermediaries – agents, distributors, brokers – whose ownership structure has not been fully mapped, raising the risk that a listed person exercises control further up the chain.
- The governing law is not EU law, and the counterparty's legal system does not recognise the EU Blocking Regulation, creating a conflict risk if the clause is drafted for both regimes simultaneously.
- The contract is a long-dated agreement – more than 12 months – where the designation risk is higher simply because the regulatory environment may shift during the term.
- A material subcontractor, bank, or freight carrier involved in the performance chain operates under a different sanctions regime and may have independent obligations that do not align with the EU compliance timeline.
The myth that a standard boilerplate sanctions clause is sufficient for any commercial transaction is one we address regularly. In practice, generic language – typically a single representation that neither party is on "any applicable sanctions list" – does not capture the EU ownership-and-control standard, does not address the Blocking Regulation conflict, does not specify escalation timing, and does not allocate the costs of a designation event. When a designation does occur, the party holding the boilerplate clause typically discovers it in the middle of a transaction freeze, with limited time to negotiate a resolution. That is the wrong moment to find a drafting gap.
Related practices
- Sanctions compliance audit and testing – stress-testing screening programmes and mapping control gaps across regimes
- Sanctions clauses in contracts – OFAC guide – parallel analysis for US-governed agreements under OFAC
- Sanctions clauses in contracts – OFAC guide (part 2) – deeper OFAC coverage including secondary-sanctions risk and the Blocking Regulation conflict from the US perspective