A US-domiciled trading group signs a long-term commodity supply agreement with a European counterparty. The contract runs to several hundred pages. Buried in the boilerplate is a single sanctions clause – five lines, standard form, drafted for a prior deal in a different market. Two years later, OFAC designates one of the group's intermediate suppliers. The European buyer invokes the clause and suspends performance. The trading group has no clean termination right and no obligation on the buyer to seek a licence. The deal unravels. The question nobody asked at signing was: does our sanctions clause actually work under OFAC?
Sanctions clauses in contracts under OFAC rules are contractual provisions that suspend, terminate, or modify a party's obligations when a transaction would violate – or risk violating – US sanctions administered by the Office of Foreign Assets Control. OFAC itself does not mandate a prescribed clause form. The legal obligation runs directly from the underlying sanctions programmes, not from a drafting standard. But a poorly drafted clause can leave a party exposed to liability, trapped in a prohibited contract, or unable to recover commercially from a sanctions event.
This briefing addresses the governing authority, what an effective clause must cover, how the analysis differs across the major comparable regimes, and the risk flags that most frequently produce enforcement exposure. As of August 2026, the points set out below reflect the obligations as currently in force; verify the current position before relying on anything stated here.
Who governs sanctions clauses in contracts under OFAC – and why that matters?
OFAC, operating within the US Treasury, administers the principal US economic-sanctions programmes under IEEPA and related statutory authority. OFAC does not publish a model sanctions clause or require contracting parties to use particular language. What it does do is impose strict-liability prohibitions on US persons and, through secondary-sanctions risk, on non-US persons transacting in goods, services, or technology of US origin or with US-nexus transactions. A contract that does not address those prohibitions adequately leaves parties to absorb the legal consequences themselves.
The governing law of the contract does not determine OFAC applicability. A contract governed by English or German law, between two non-US entities, may still trigger OFAC's jurisdiction if the transaction involves US-origin goods, US financial institutions clearing US dollar payments, or US persons in the supply chain. In our experience, this is the point most frequently missed when deal teams classify a transaction as "not OFAC-relevant". The jurisdictional hook is broader than the parties' domiciles or the governing-law clause.
What does that mean practically? It means a sanctions clause drafted only for the party's home-country obligations – say, a clause referencing only EU-listed persons – will not protect a US-nexus transaction. The clause must address the correct regime, the correct list, and the correct test for what counts as a prohibited counterparty.
What OFAC prohibits: the obligations a clause must reflect
OFAC's prohibitions, at their core, forbid US persons from engaging in transactions with sanctioned persons, sanctioned countries, and entities owned by sanctioned persons, and from facilitating foreign persons in doing the same. Three obligations in particular drive the content of an effective sanctions clause.
First, the prohibition applies to the counterparty but also to any intermediate party that is an SDN (Specially Designated National and Blocked Person – a person listed on OFAC's SDN List) or that is owned 50 percent or more by one or more SDNs, whether that ownership is direct or layered. This is the 50 percent rule (OFAC's rule treating entities owned 50 percent or more in aggregate by blocked persons as themselves blocked, whether or not they are individually listed). A clause that triggers only on direct listing misses the aggregated-ownership scenario entirely. We regularly advise clients who discover mid-contract that a sub-contractor or funder falls within the 50 percent rule, and whose contractual exit right depends on how that scenario was drafted at signing.
Second, OFAC's prohibitions are strict liability. Good faith and commercial reliance are mitigating factors in a civil-penalty calculation, but they are not a defence to the underlying violation. A party that continues performance once it has reason to know a counterparty is blocked has not protected itself by relying on the other side's representations. The clause must therefore address what happens at the point of knowledge or reasonable suspicion, not only at confirmed listing.
Third, certain OFAC programmes restrict dealing in the property rights of listed persons even where a transaction is not directly with them. A bond issued by a listed entity, a receivable owed by a designated company, an interest in real property belonging to a blocked person – all of these may be subject to blocking requirements. A narrowly drafted clause that applies only to "payments to listed persons" will not address this range of prohibited property dealings.
How should an effective OFAC sanctions clause be structured?
An effective OFAC sanctions clause is not a single sentence. It is a cluster of related provisions, each addressing a distinct legal function. Consider the following elements.
Representation and warranty. Each party represents that it is not an SDN, is not owned or controlled by an SDN, and is not itself subject to a blocking order or a programme-specific prohibition applicable to the transaction. This representation should be given as at the date of signing and, in longer-term contracts, on a continuing basis or renewed at each renewal date. A static representation given only at signing provides no protection for the life of the contract.
Covenant to notify. Each party covenants to notify the other promptly if it becomes aware that any representation ceases to be true. The notification obligation must be paired with a clear definition of what triggers it: listing of the party itself, listing of a material owner, or listing of a key sub-contractor that the other party cannot replace. Without a notification covenant, a party may learn of a sanctions event only when the affected counterparty is already in breach.
Suspension right. Where a party has reasonable grounds to suspect (but not yet confirmed) that continued performance would violate OFAC rules, it must be able to pause performance without itself being in breach of contract. This suspension right is operationally critical. In our experience, parties that lack a clearly drafted suspension right face a commercial bind: they cannot perform (because of OFAC risk) and cannot stop performing (because of breach risk) while they wait for a screening result or a legal opinion.
Termination right and consequences. The clause should specify the conditions under which suspension ripens into termination, who has the right to terminate, and what happens to accrued payment obligations. A party should not be obligated to make payments that would themselves be prohibited – the clause should address whether accrued but unpaid amounts are blocked, deferred, or treated as a force-majeure event.
Licence and co-operation obligation. Some OFAC-prohibited transactions can be licensed. The clause should address whether a party is obligated to seek a licence, and within what time frame, before exercising a termination right. A clause that permits immediate termination without any licence-seeking step may be commercially reasonable in some markets but counterproductive in others – particularly where OFAC's specific-licence process for the relevant programme has a meaningful approval rate.
How does OFAC's approach compare with OFSI and the EU?
The cross-regime comparison is essential for any contract with a cross-border dimension – and for practitioners advising on sanctions clauses in contracts under OFSI rules, the differences are operationally significant. Under OFSI (the UK's Office of Financial Sanctions Implementation), the ownership and control test diverges from OFAC's mechanical 50 percent rule. OFSI applies an ownership threshold but also a control test: a listed person who does not own 50 percent of an entity but who controls it through voting rights, board composition, or contractual arrangements may still bring that entity within the UK prohibition. A contract clause that tracks only ownership – as many US-style boilerplate clauses do – will therefore be under-inclusive in a UK context.
EU sanctions regulations adopt a broadly similar ownership and control test to the UK, with the Council regulations specifying that both direct and indirect control are relevant. The EU regime also operates with a blocking regulation that, in certain circumstances, prohibits EU persons from complying with a third-country sanctions measure. A multi-regime contract clause must be designed to work with these tensions, not just to ignore them.
For businesses operating across the Swiss market, sanctions clauses in contracts under SECO's regime present a further set of drafting considerations, as Switzerland maintains autonomous sanctions that largely align with but are not identical to EU measures. Alignment is not identity, and drafting that assumes equivalence can create gaps.
One practical consequence of the divergence: a clause drafted to satisfy OFAC may not satisfy OFSI, EU rules, or SECO simultaneously. Where a contract has connections to more than one jurisdiction, the clause needs to address each applicable regime by name – or use a definition of "applicable sanctions" broad enough to capture all of them – rather than assuming that a US-law reference covers all obligations.
What are the principal risk flags in sanctions-clause drafting?
Several drafting and operational patterns consistently produce enforcement or commercial exposure. We have acted for clients whose contracts contained all of the following, and who found themselves without adequate protection when a sanctions event occurred.
Programme-specific blind spots. Some clauses are written around one OFAC programme and do not address others. A clause drafted for one set of country designations will not, on its face, address sectoral or thematic restrictions that may apply under a separate programme to the same counterparty. As OFAC's programme range has expanded, single-programme clauses have become structurally insufficient for contracts with any significant cross-border dimension.
Static list references. A clause that refers to a fixed, named list version is outdated by definition. OFAC updates its SDN List regularly, sometimes multiple times in a week. A clause must refer to the SDN List as updated from time to time, not as of a particular date.
Failure to address property blocking. A clause limited to payment prohibitions does not address the obligation to block property. Under OFAC rules, when a US person holds property in which a blocked person has an interest, that property must be blocked and reported. A clause that permits a party to retain, transfer, or deal with such property without restriction, because the clause does not speak to it, creates OFAC exposure that the contract itself is not managing.
No expedited-review mechanism. Where a party suspects a sanctions hit, time matters. A clause without an agreed mechanism for expedited legal review – who does it, within what window, at whose cost – can delay a response and allow a violation to continue. OFAC's enforcement guidelines treat the duration of an apparent violation as a relevant factor. A clause that gives parties ten or twenty business days to respond to a screening alert may, in fact, be extending the window of exposure.
Governing-law mismatch. A contract governed by the law of a jurisdiction outside the United States does not thereby exclude OFAC's application. But it may affect how a US-origin sanctions clause is interpreted or enforced in a local court. If the primary governing law is not US law, the clause should address whether OFAC's definitions govern its construction, or whether a local-law interpretation applies. The two may not align.
Reporting, record-keeping, and the compliance infrastructure around the clause
A sanctions clause is not a self-contained compliance measure. It sits within a broader set of obligations that OFAC imposes on US persons and, in certain circumstances, on non-US persons with US-nexus exposure. Two obligations are particularly relevant to contract-level compliance.
Where a US person holds or receives property in which a blocked person has an interest, OFAC requires that the property be blocked and that a report be filed. The reporting obligation is not optional and is not displaced by a contractual provision to the contrary. A sanctions clause that purports to give a party discretion to deal with potentially blocked property, rather than blocking and reporting it, does not protect that party from OFAC liability. The clause must point toward the correct legal action, not around it.
Record-keeping obligations run parallel to the substantive prohibitions. Businesses subject to OFAC's rules must maintain records of transactions, screening results, and any licences obtained. Five years is the standard record-keeping period under OFAC's rules, as currently in force; verify the current position before relying on this. A contract-management function that does not retain the screening records generated at the time of signing, and at each subsequent renewal or assignment, will be unable to demonstrate due diligence if a matter is later reviewed. The sanctions clause is only as good as the documentation infrastructure behind it.
The position above covers the standard obligations in a commercial-contract context. Your facts – the programme in play, the counterparty's ownership structure, the goods or services involved, and the presence or absence of a US nexus – will change the analysis materially. If you are reviewing contract terms ahead of a new transaction or following a sanctions alert, an early assessment can confirm whether your current clause is adequate.
For a review of your contract terms and compliance programme, contact Calder & Vance at info@caldervance.com.
What a common myth about sanctions clauses gets wrong
A widely held assumption among deal teams is that a standard force-majeure clause provides adequate cover for a sanctions event. It does not. Force majeure provisions address circumstances beyond a party's control that prevent contractual performance. Sanctions prohibitions are legal requirements – they do not prevent performance in a physical sense; they make it unlawful. Courts in multiple common-law jurisdictions have consistently treated the two as distinct. A party that relies on force majeure to excuse continued non-performance after a sanctions listing may find that the clause does not apply, that the limitation-of-liability carve-out does not extend to regulatory prohibitions, and that it is simultaneously in breach of contract and in breach of OFAC's rules.
The correct solution is a dedicated sanctions clause that addresses OFAC's specific tests, procedures, and obligations – not a force-majeure clause repurposed for a different risk category. We regularly advise clients who discover, following a sanctions event, that their existing contract terms do not support the legal position they assumed. The cost of correcting the clause before signing is a fraction of the cost of managing the dispute after the event.
For an assessment of your existing contract clauses and OFAC exposure, or to discuss a current sanctions alert, contact Calder & Vance at info@caldervance.com.
When should you involve counsel on sanctions-clause drafting?
Counsel should be involved at three distinct points: at initial drafting, at assignment or novation of the contract, and at the point of a sanctions alert. Each presents distinct risks that a generic in-house review is unlikely to catch.
At drafting, the issues are definitional precision (does "applicable sanctions" cover every relevant programme?), the correct trigger standard (confirmed listing vs. reasonable grounds to suspect), and the alignment of termination mechanics with the relevant OFAC licensing pathway. In a recent matter, a financial services business engaged us to review a suite of standard-form agreements ahead of a significant counterparty expansion. The existing clauses referenced only one OFAC programme, contained no aggregated-ownership language, and imposed a thirty-day response window before suspension was available. We revised the definitions, introduced the 50 percent rule as a defined trigger, and aligned the suspension mechanics with OFAC's expected review timeline. The counterparty expansion proceeded on terms that reflected the actual regulatory position.
At assignment or novation, the risk is that the incoming party is assessed only for direct listing, not for ownership by blocked persons or for programme-specific restrictions that apply to its sector. An assignment clause that permits assignment on standard fit-and-proper criteria without a sanctions screen creates an obvious gap.
At the point of a sanctions alert, the critical questions are: does the alert relate to a party whose status is determinative of a prohibition, or only a potential match? Does the contract permit suspension while the alert is investigated? Who within the organisation has authority to trigger the suspension, and who must report to OFAC if the alert is confirmed? Counsel's role at this stage is to scope the apparent violation, advise on the voluntary-disclosure question, and stabilise the contractual position before it deteriorates further.
If a transaction has already been flagged, or a contract is under review following a screening alert, an early review can preserve options that narrow considerably with time. Contact Calder & Vance at info@caldervance.com to discuss your position.
Related practices
- Sanctions compliance audit and testing – programme stress-testing, screening-logic review, and gap identification across OFAC, OFSI, and comparable regimes.
- Sanctions clauses in contracts under OFSI – how the UK regime's ownership and control test changes the drafting analysis.
- Sanctions clauses in contracts under SECO – Swiss autonomous-sanctions obligations and their effect on multi-regime clause design.
Frequently asked questions: sanctions clauses in contracts and OFAC rules
Who administers sanctions clauses in contracts under OFAC?
OFAC, a bureau of the US Treasury, administers and enforces the US economic-sanctions programmes that underpin the obligations reflected in contractual sanctions clauses. OFAC does not prescribe a standard clause form. Its authority derives principally from IEEPA and programme-specific executive orders. It is the agency to which blocking reports must be submitted, from which specific licences are obtained, and which initiates civil-penalty proceedings for violations. Compliance with OFAC's rules is the substance of what a well-drafted sanctions clause is designed to maintain.
What does OFAC prohibit in relation to sanctions clauses in contracts?
OFAC prohibits US persons from engaging in transactions with SDNs, with entities owned 50 percent or more by blocked persons under the 50 percent rule, and with persons subject to programme-specific restrictions. These prohibitions are strict liability. A sanctions clause in a contract does not displace those prohibitions; it allocates the commercial risk and procedural obligations that arise from them. A clause that permits continued performance without addressing the underlying prohibition does not protect either party from OFAC liability.
How is sanctions clauses in contracts enforced under OFAC?
OFAC enforces violations of its programmes through civil-penalty proceedings, which may result in a significant monetary penalty, and by referral to the Department of Justice for criminal prosecution in the most serious cases. Enforcement is not contingent on a party's failure to have a sanctions clause. It follows from the underlying transaction. A VSD (voluntary self-disclosure – a self-initiated report to OFAC of an apparent violation before OFAC opens an investigation) is a significant mitigating factor in penalty proceedings. Contractual provisions that facilitate prompt identification and reporting of a potential violation accordingly serve a dual function: commercial risk management and regulatory mitigation.
About the author
J. M. Aldridge advises multinationals and financial institutions on US sanctions and export controls, with a focus on OFAC licensing, secondary-sanctions risk, and BIS classification. 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.