A British technology company signs a multi-year software licensing agreement with a European distributor. Eighteen months in, the distributor's parent company is designated under a UK sanctions regime. The contract contains no sanctions clause. The technology company's compliance team asks: can payments continue, must the contract be suspended, and who bears the liability if it is not? These are the questions that a well-drafted sanctions clause would have pre-empted.
Sanctions clauses in contracts under OFSI – the Office of Financial Sanctions Implementation, which administers UK financial sanctions under the Sanctions and Anti-Money Laundering Act ("SAMLA") – govern what each party must do when a sanctions event touches the agreement. As of August 2026, OFSI's enforcement posture is active, and the absence of contractual protections leaves both parties exposed to strict-liability prohibitions that apply regardless of fault. A well-constructed clause identifies the trigger, the obligation to notify, the suspension or termination mechanism, and the allocation of loss between the parties.
This guide walks through the purpose of sanctions clauses in commercial contracts, the OFSI regime that sits behind them, the step-by-step drafting procedure, the common risk flags, and how the UK position diverges from OFAC and EU comparators.
Step 1: Understand what OFSI's financial sanctions regime requires
Before drafting a clause, a party needs to know what UK financial sanctions law prohibits and what it requires. OFSI administers financial sanctions under SAMLA and the relevant thematic regulations. The prohibitions are strict-liability: a party that makes funds available to a designated person, or to an entity owned or controlled (the test under UK rules – broadly, ownership of 50 percent or more of shares or voting rights, or the ability to exercise significant influence or control) by a designated person, commits a criminal offence regardless of intent.
The UK Consolidated List of Financial Sanctions Targets is maintained by OFSI and updated without advance notice. Designation can occur at any moment during the life of a contract. That is the core risk the clause must address. Two mandatory obligations flow from a designation event: cessation of prohibited activity and, critically, a reporting obligation. OFSI guidance requires a person who knows or suspects they hold funds or economic resources belonging to a designated person to report that information to OFSI. The reporting window is short – qualitatively measured in days rather than weeks – and missing it can itself constitute a breach distinct from the underlying transaction.
A party that has not drafted its contracts with these requirements in mind will find itself trying to improvise a response under time pressure, without contractual clarity on who does what and at whose cost.
Step 2: Identify the trigger events the clause must capture
The drafting question is not simply "what if a party is sanctioned?" Sanctions clauses need to capture a wider set of trigger events if they are to function in practice. In our experience, overly narrow trigger definitions are the single most common drafting failure in commercial contracts.
The relevant triggers for an OFSI-oriented clause include:
- Direct designation of a contracting party on the UK Consolidated List.
- Designation of a person who owns or controls a contracting party, such that the party itself becomes subject to the prohibitions through the ownership-and-control test.
- A relevant key individual – a director, authorised signatory, or beneficial owner – being designated, where that person's involvement in the contract would itself create OFSI exposure.
- A counterparty's bank or payment intermediary becoming designated, making the mechanics of payment under the contract impossible or prohibited.
- A change in the counterparty's corporate structure that brings a designated person into the ownership chain.
Each of these events creates different obligations and risks. The clause should define them separately and specify the response obligation for each. Does a change in the ownership structure of the counterparty trigger the same right to suspend as direct designation? In most well-drafted clauses, yes – but only if the drafting explicitly says so.
The cross-border angle matters here. A contract with a European counterparty may be caught by both OFSI and EU Council regulations simultaneously. If the counterparty is US-connected, OFAC's SDN List (OFAC's list of Specially Designated Nationals and blocked persons) and the 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked) may apply as well. A clause that captures only OFSI triggers may leave the party exposed under a parallel regime. We regularly advise clients to draft triggers that reference "any applicable sanctions" rather than a single regime – but that formulation requires careful definition to avoid ambiguity about which regimes are intended.
Step 3: Draft the notification and escalation procedure
The notification obligation is the operational heart of a sanctions clause. When a trigger event occurs, each party needs to know immediately, because the prohibited activity must stop before further transactions are processed. The drafting must specify: who identifies the trigger, how and to whom they communicate it, within what timeframe, and what happens in the interval before a formal suspension decision is made.
A functioning notification procedure typically runs as follows:
- Identification: the party that identifies a potential trigger – whether through its own screening or an external alert – must notify the other party promptly. The clause should state the method of notice (written, to a named representative, with a copy to the legal or compliance function) and the trigger for the clock starting.
- Verification: the notifying party or, in some structures, both parties jointly, verify whether the trigger event is genuine. Consolidated List entries can contain data errors, and name-match alerts do not always correspond to actual designations. A brief verification window – qualitatively, as short as practicable – should be built in before suspension is automatic.
- Escalation to counsel: where the trigger is confirmed or unresolved after initial review, the clause should provide for the matter to be referred to legal counsel before any irrevocable contractual step is taken. This is particularly important where the trigger involves the ownership-and-control test rather than direct designation, because that analysis requires legal judgment rather than a simple list check.
- Regulatory notification: separately from the contractual notification, the party holding funds or economic resources of a designated person must report to OFSI. The clause should acknowledge this obligation and confirm that it is not displaced by confidentiality provisions in the agreement.
Confidentiality clauses and non-disclosure obligations in commercial contracts can create a tension with the reporting duty. A well-constructed sanctions clause explicitly states that the reporting obligation to OFSI overrides any contractual duty of confidence to the counterparty. Failing to build this in can leave the reporting party arguing – under time pressure – about whether disclosure to OFSI constitutes a breach of the NDA.
The position above covers the standard commercial case. Your facts – the identity of the counterparty, the nature of the goods or services, the payment structure, and the jurisdictions involved – change the analysis. For a review of a specific contract or clause, contact Calder & Vance at info@caldervance.com.
Step 4: Specify the suspension and termination mechanics
A sanctions clause must provide a clear pathway from trigger to action. Suspension – the temporary halt of performance obligations pending resolution – and termination – the permanent ending of the contract – serve different purposes and carry different legal consequences under English law.
Suspension is appropriate where the trigger event may be temporary or may resolve: for example, where a designation is contested and a delisting application is in progress, or where an OFSI specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) is being sought. The clause should specify which obligations are suspended, whether the suspension is mutual or one-sided, and what conditions must be met before performance resumes.
Termination is appropriate where the trigger event is final, where no licence is available or obtainable, or where the commercial basis of the contract has fundamentally changed. The clause should make clear whether the termination right is discretionary or automatic, which party holds it, and whether it requires notice. Automatic termination clauses can create problems: an automatic termination on a false-positive screening alert could itself constitute a contractual breach. In our experience, a right to terminate – rather than an automatic termination – gives the parties the procedural space to verify the position before making an irreversible decision.
Force majeure clauses are sometimes relied on as an alternative to a dedicated sanctions clause. They are not a satisfactory substitute. Force majeure typically requires that performance be impossible, not merely prohibited by one party's regulatory environment. OFSI's prohibitions may make performance impossible for the UK party without necessarily satisfying the force majeure test under the governing law. A dedicated sanctions clause avoids this ambiguity entirely.
How does OFSI differ from OFAC and the EU on sanctions clauses?
The UK, US, and EU regimes share the same underlying logic – prohibit dealings with designated persons – but diverge in ways that directly affect how sanctions clauses should be drafted for cross-border contracts.
Under OFAC, the 50 percent rule is mechanical: if blocked persons own an entity 50 percent or more in the aggregate (directly or indirectly), the entity is itself blocked, regardless of control. The UK and EU tests are broader. Under OFSI and under EU Council regulations, a non-listed entity may be caught not only through ownership thresholds but also through ownership and control – meaning that even a minority shareholder who can exercise decisive influence may bring an entity within scope. This asymmetry means that a clause drafted for OFAC compliance may leave a gap under OFSI.
The licensing routes also diverge. Under OFAC, specific licences are applied for through OFAC directly, and OFAC has published a range of general licences (standing authorisations that permit a defined category of transactions without a separate application) that can authorise transactions without individual applications. OFSI's specific licence regime is the primary route for individual authorisations; OFSI has also issued general licences in certain thematic contexts. EU authorisations are issued by the competent authorities of member states. A cross-border contract may require parallel licence applications to multiple authorities, and the clause should anticipate that one application may succeed while another is pending.
On enforcement, OFSI operates a strict-liability civil penalty regime. A party can be penalised for a breach even where it did not know it was dealing with a designated person, though knowledge affects the penalty level. OFAC's enforcement framework similarly applies objective-liability analysis but gives credit for voluntary self-disclosure and for compliance-programme quality. The EU operates through member-state enforcement, which produces variation in penalty exposure across jurisdictions. A sanctions clause that allocates indemnity between the parties should reflect which regime is most likely to impose a penalty in the specific contract structure.
For contracts involving Australian, Singaporean, or Japanese counterparties, further local-regime requirements apply, and the applicable country regime may impose its own reporting or licensing obligations that the clause should address or at least not obstruct.
If a transaction has already been flagged, or a filing has been refused, an early review can preserve options that narrow with time. Contact us at info@caldervance.com.
What are the key risk flags in sanctions clause drafting?
Several patterns appear consistently in the contracts we review that have created real exposure for clients. Each is avoidable with careful drafting.
Regime-specific rather than regime-neutral triggers. A clause that refers only to "OFSI designations" or "UK sanctions" may not capture secondary-sanctions risk under OFAC for a US-connected counterparty, or EU Council regulation obligations for a European party. Broad, defined "Applicable Sanctions" language is usually safer – provided it is defined with precision.
No override of confidentiality for regulatory reporting. As noted above, a confidentiality clause that does not carve out reporting obligations to OFSI (or to other sanctions authorities) can create a false dilemma for the party with the reporting duty.
Warranty-only protection without ongoing obligation. A clause that requires the counterparty to warrant compliance at signing but imposes no ongoing obligation to notify of changes in its ownership structure provides only point-in-time protection. Designations and ownership changes happen throughout the life of a contract.
Failure to address the ownership-and-control question. A clause that asks only "are you on a sanctions list?" misses the OFSI and EU test entirely. The question must also be: "is any person who owns or controls you on a sanctions list?"
Indemnity allocation without a liability cap or carve-out. Where one party's sanctions exposure is caused by the other's failure to notify a designation, an indemnity clause without a cap or a knowledge qualifier can generate indeterminate liability. This is particularly acute in supply-chain contracts where a tier-two supplier failure cascades upward.
Treating the sanctions clause as boilerplate. In our practice, we regularly encounter sanctions clauses that were copied from a prior contract involving a different counterparty, a different regime, and a different commercial structure. The clause may be internally coherent but operationally unfit for its current purpose. There is no universal sanctions clause; drafting must reflect the specific parties, goods, services, payment flows, and regimes in play.
When should you involve sanctions counsel?
Not every commercial contract requires bespoke sanctions-clause drafting from specialist counsel. But the risk-cost calculation shifts quickly in certain situations.
Counsel involvement is clearly warranted where: the counterparty is incorporated in or connected to a jurisdiction subject to a comprehensive or thematic sanctions regime; the transaction involves goods or services that are also subject to export-control obligations under the EAR or the UK Export Control Order; the contract is long-term and the counterparty's ownership structure is likely to change; the payment structure involves multiple intermediaries across different jurisdictions; or the parties are subject to more than one sanctions regime simultaneously.
Is your standard template clause adequate for a ten-year joint-venture agreement with a counterparty that has shareholders in multiple jurisdictions? Probably not. The further the transaction is from a simple domestic commercial relationship, the more the standard clause creates a false sense of protection rather than genuine contractual coverage.
We also advise at the post-signing stage – reviewing existing agreements where a compliance audit has identified a gap, or where a designation event has arisen and the parties need to understand their contractual position before making any payment decision. A voluntary self-disclosure (VSD) to OFSI, where an apparent violation has already occurred, is a distinct process from the contractual analysis – but the two are often closely connected, and early legal involvement makes a material difference to how both are managed.
Related practices
- Sanctions compliance audit and testing – structured review of sanctions screening and compliance-programme design across regimes.
- Sanctions clauses in contracts under UN regimes – how UN Security Council Consolidated List obligations translate into commercial contract protection.
- Sanctions risk assessment under the Australian regime – practical guide to Australia's autonomous sanctions regime and its interaction with OFSI and OFAC.