A European trading group signs a long-term supply agreement with a distributor in a third market. The contract includes a broadly worded sanctions clause (a contractual provision permitting either party to suspend or terminate the agreement upon the occurrence of a sanctions event). Eighteen months later, the distributor's parent company is added to the EU consolidated sanctions list. The trading group's legal team reads the clause. It is silent on which sanctions regime applies, silent on who bears the cost of suspension, and silent on whether partial performance is permitted. The deal is now frozen – and neither side is sure who owes what.
Poorly drafted sanctions clauses create compliance risk and contractual deadlock simultaneously. Under the relevant EU Council regulations, a business that continues to perform obligations that benefit a designated person – even where no payment is made – may be in breach of the asset-freeze prohibition. A clause that does not identify the governing regime, the trigger event, the allocation of costs, and the procedure for partial or wind-down performance will leave both parties exposed.
This case comment sets out the legal questions that arose in this matter, analyses the EU regime that governed them, addresses the cross-border complications that emerged when a US counterparty was also involved, and draws practical lessons for drafting and reviewing sanctions clauses in commercial contracts.
The situation: what the contract said and what it did not say
The contract contained a standard boilerplate clause stating that neither party would be required to perform any obligation that would cause it to violate applicable sanctions laws. That is where the clause ended.
On its face, this reads as adequate protection. In practice, it generated four immediate problems when the designation event occurred.
First, the clause did not specify which sanctions regime's designations would trigger the suspension right. The distributor operated across jurisdictions. Its parent company appeared on the EU list but not on the OFAC SDN List (OFAC's list of Specially Designated Nationals and blocked persons) at the time of the event. The trading group's in-house team initially disagreed about whether EU law or US law governed the clause. That internal debate took several days to resolve. Time was lost.
Second, the clause said nothing about the effect of the suspension on ongoing shipments already in transit. Three consignments were en route. Were they to be held at port? Re-routed? Delivered? Nothing in the clause answered these questions. Under the relevant EU Council regulations, allowing delivery to a designated person's controlled warehouse could constitute making economic resources available to the designated party – a prohibited act. In our experience, this is precisely the operational gap that causes the most immediate commercial and regulatory exposure when a designation event occurs mid-performance.
Third, there was no mechanism for the non-affected party to seek a licence or authorisation before the suspension right crystallised. EU sanctions regulations provide for licensing routes that permit certain otherwise-prohibited transactions to proceed. A well-drafted clause creates space for a licensing enquiry before either party exercises a termination right.
Fourth, the cost-of-suspension and cost-of-termination provisions were silent. Each party claimed the other bore the commercial loss. There was no contractual basis for resolving this dispute.
The legal question: what the EU regime actually required
Under the applicable EU Council regulations, the asset-freeze prohibition bites on any person within EU jurisdiction who makes funds or economic resources available – directly or indirectly – to or for the benefit of a designated person. The question for this trading group was whether continued performance of the supply contract would constitute making economic resources available, even where the immediate counterparty (the distributor entity) was not itself designated.
The control test is the critical analytical step here. The relevant EU regulations apply an ownership and control test: where a designated person owns or controls a non-listed entity, dealing with that entity can engage the prohibition. Unlike the OFAC 50 percent rule (OFAC's mechanical rule treating entities owned 50 percent or more by blocked persons as themselves blocked), the EU test is broader. Control can arise through legal or de facto means, without meeting an ownership threshold. A designated person who directs the commercial strategy of a distributor – even without majority ownership – may bring that distributor within the scope of the prohibition.
In this matter, the designated parent company held a minority stake in the distributor but was the exclusive source of the distributor's financing and exercised approval rights over major contracts. Our analysis concluded that there was a credible risk that the distributor fell within the prohibition under the control limb. That conclusion changed the risk picture entirely.
The trading group had not considered the control test when drafting the original clause. Had the clause required a periodic ownership-and-control review of the counterparty and its affiliates, the risk would have been identified before designation, not after.
How did the cross-border dimension change the analysis?
The matter did not remain purely an EU question. A US-based affiliate of the trading group had countersigned the supply agreement and was named as an alternative delivery point. That brought OFAC into the picture.
At the time of the designation, the distributor's parent was listed under EU sanctions but not on the SDN List. That divergence is not unusual. The EU and OFAC regularly maintain different lists, sometimes designating the same entity at different times, sometimes not designating the same entity at all. A sanctions clause drafted only to one regime will fail to capture this possibility.
For the US affiliate, the analysis under IEEPA and the relevant OFAC programme required a separate ownership assessment. Because the parent company was not on the SDN List, the 50 percent rule did not apply. The US affiliate's obligations under the contract were therefore not prohibited under US sanctions at the time of the designation event. But the EU-based trading group entity remained prohibited from performance. This divergence created a structural problem: the US affiliate could legally continue to perform, but doing so in a way that benefited the EU entity's counterparty risked secondary-sanctions exposure if the parent company were subsequently added to the SDN List.
Secondary-sanctions risk – the risk that a non-US person's conduct involving certain designated persons or programmes exposes it to US jurisdiction under OFAC's extraterritorial reach – is a distinct and additional layer of analysis that many sanctions clauses simply ignore. We regularly advise on exactly this interaction, and it is consistently underweighted in standard commercial drafting.
The clause in this contract made no reference to secondary-sanctions risk, no reference to the interaction between EU and US obligations, and no allocation of responsibility as between the two group entities.
What were the options at the point of designation?
Once the designation event occurred, the trading group faced a narrow set of options. Understanding the decision sequence matters for any business in a similar position.
The first option was immediate suspension of all performance and a rapid internal legal review. This was the most conservative path and carried the lowest regulatory risk. Its cost was the commercial disruption: three in-transit consignments, an unfulfilled quarterly order, and the prospect of a breach-of-contract claim from the distributor.
The second option was to seek a specific licence from the competent EU authority in the relevant member state. A specific licence (a case-by-case authorisation to conduct an otherwise-prohibited transaction) can in principle be granted for certain categories of transaction, including the wind-down of pre-existing contractual obligations. Licensing timelines vary and are not guaranteed. The applicable EU regime provides licensing routes, but the outcome of any application depends on the facts presented and the policy position of the relevant authority at the time of the application.
The third option was to seek legal advice on whether the distributor entity itself was, on proper analysis, within the prohibition. If control could not be established under the relevant EU test, performance might be permissible without a licence. This route required an expedited ownership-and-control analysis, which is precisely the kind of assessment our practice conducts at short notice.
The trading group pursued the first and third options in parallel. The expedited control analysis concluded that there was material risk but not certainty that the prohibition applied to the distributor entity. On that basis, a decision was made to suspend performance pending a licensing enquiry, to notify the relevant authority in line with the reporting obligations applicable under the EU regime, and to instruct local counsel in the relevant member state to assess whether a wind-down licence was appropriate to apply for.
What does this mean for sanctions clauses in commercial contracts?
The lessons from this matter are specific and operational. Sanctions clauses in contracts involving EU counterparties must address a defined set of questions to be effective.
Regime scope. The clause must identify which regimes it covers: EU Council regulations, OFAC programmes, OFSI financial sanctions, UN Security Council designations, or a defined combination. A clause that says "applicable sanctions laws" without definition will be disputed. The question of which law governs is not merely academic – it determines whether the trigger has been pulled.
Trigger event. Define what constitutes a sanctions event precisely. Does it cover designations of the counterparty? Of its direct parent? Of any entity in the ownership and control chain? Does it apply to a new designation or only to a designation in force at signing? In our experience, the narrower the trigger definition, the greater the risk of a gap. The broader the definition, the greater the risk of an over-triggered termination right that the counterparty disputes.
Ownership and control review. Include a periodic representation and warranty from the counterparty covering its beneficial ownership structure and any designated persons within its ownership chain. Tie a breach of that representation to the trigger event. This shifts the information burden to the counterparty and creates a contractual remedy independent of the regulatory prohibition.
Partial performance and wind-down. Provide explicitly for what happens to in-transit goods, prepaid amounts, and outstanding obligations. A clause that terminates all obligations immediately on a designation event may cause more compliance exposure – not less – by creating uncertainty about the handling of assets already in the supply chain.
Licensing pathway. Build in a period – agreed between the parties – during which either party may seek a specific licence or authorisation before a termination right is exercised. This is not a mechanism for delay: it is a mechanism for lawful compliance. EU licensing routes exist precisely for this purpose, and a clause that bypasses them creates unnecessary urgency.
Cost allocation. Agree in advance who bears the commercial cost of a suspension or termination event. This is a commercial negotiation, not a legal one, but it must happen at the drafting stage. Leaving it to resolution at the point of crisis guarantees a dispute.
A common misunderstanding about sanctions clauses and contractual protection
A persistent myth in commercial practice is that a sanctions clause reliably protects a business from liability on both sides – that is, from regulatory liability for continuing performance and from contractual liability for non-performance. This is incorrect on both counts.
A sanctions clause does not create a regulatory safe harbour. If a business continues to perform an obligation that benefits a designated person – even relying in good faith on a contractual termination mechanism it has not yet exercised – the regulatory prohibition applies. The contract does not override the law.
Equally, a sanctions clause does not automatically excuse non-performance under the governing law of the contract. Whether a sanctions clause operates as a force majeure event, a condition, a warranty, or a simple termination trigger depends on its drafting and on the governing law of the agreement. English law, French law, and German law treat these mechanisms differently. For contracts governed by EU member state laws, the interaction between the sanctions clause and the applicable national contract-law rules requires specific advice.
In this matter, the distributor initially took the position that the trading group's suspension of performance was a repudiatory breach of contract because the sanctions clause had not been properly triggered under its terms. That dispute required separate analysis of both the regulatory position and the contractual position. The two are not automatically aligned.
Do your sanctions clauses actually protect you – or do they create a false sense of security while leaving the operational and contractual gaps open?
Related practices
- Sanctions compliance audit and testing – identifying gaps in screening, documentation, and clause design before a designation event occurs.
- OFAC sanctions risk assessment: a worked matter – how OFAC ownership analysis intersects with EU and UK positions in a cross-border review.
- Sanctions risk assessment: a Singapore matter – multi-regime exposure for businesses operating across Asian and European jurisdictions.
Frequently asked questions: sanctions clauses in contracts
What went wrong in this sanctions clauses in contracts matter?
The core failure was a clause that identified no governing regime, no control-test scope, and no procedure for partial performance or wind-down. When the designation event occurred, the trading group faced simultaneous regulatory uncertainty and contractual ambiguity. The EU ownership-and-control analysis had not been built into the clause, so the designated parent company's influence over the distributor had not been assessed as a trigger risk. The clause provided no protection because it had not been designed for the facts it encountered.
How was the EU issue resolved?
Performance was suspended pending an expedited ownership-and-control analysis and a licensing enquiry with the competent EU member-state authority. Local counsel in the relevant member state was engaged to assess the wind-down licensing route. In parallel, the contractual dispute with the distributor was managed through a standstill arrangement while the regulatory position was clarified. The licensing enquiry and the regulatory notification together provided the principal mechanism for bringing the matter toward an orderly resolution without an enforcement referral.
What is the lesson for similar businesses?
Sanctions clauses in contracts must be designed as operational tools, not boilerplate. They should identify the regimes in scope, define the trigger event with reference to the ownership-and-control test applicable under each regime, create space for a licensing enquiry before termination, allocate costs, and address partial performance. Businesses operating across EU and US jurisdictions should also address secondary-sanctions risk and the divergence between OFAC and EU designation lists. A standard force-majeure or compliance-with-laws clause will not reliably serve these purposes.
If your contracts include sanctions clauses that have not been reviewed against the current EU, OFAC, and OFSI positions, contact Calder & Vance at info@caldervance.com for a confidential assessment.
About the author
Claire Dubois advises on EU sanctions, including Council-regulation analysis, ownership-and-control questions, and annulment actions before the EU General Court. She regularly advises on the drafting and review of sanctions clauses in commercial and financial agreements, and on the interaction between EU and US sanctions positions in cross-border transactions. Calder & Vance – International Sanctions & Export Control Counsel.
About Calder & Vance
Calder & Vance is an independent international sanctions and export-control boutique. We advise multinationals, financial institutions, exporters, and individuals on the major regimes – OFAC and BIS in the United States, OFSI and ECJU in the United Kingdom, the EU Council regulations and the EU General Court, the United Nations Consolidated List, and the regimes of Switzerland, Canada, Australia, the UAE, Singapore, and Japan. Our work is limited to lawful compliance, licensing, delisting, enforcement defence, and due diligence. To discuss a matter, contact info@caldervance.com.
Disclaimer: This material is general information, not legal advice, and is not a substitute for advice on your specific facts. Sanctions and export-control rules change frequently and differ by regime; verify the current position before relying on anything stated here. Calder & Vance does not advise on circumventing or evading sanctions. For advice on your situation, contact info@caldervance.com.