A cross-border supply agreement is weeks from signing. The counterparty is headquartered in a jurisdiction where OFAC maintains active designations. Your legal team flags the exposure. Does the contract contain the right sanctions clause? And if OFAC designates the counterparty tomorrow, does the clause give you an exit – or does it expose you to a breach claim?
Sanctions clauses in contracts under OFAC are the contractual mechanism by which parties allocate the risk that a transaction becomes illegal, or a counterparty becomes blocked, under US sanctions law administered by the Office of Foreign Assets Control (OFAC, the US Treasury agency responsible for administering and enforcing economic sanctions). A well-drafted clause defines the trigger, the permitted response, and the consequences for non-performance – turning a potential criminal exposure into a managed contractual exit. As of mid-2026, OFAC's enforcement posture remains active across multiple programme areas, and poorly drafted clauses are among the most common compliance gaps we identify.
This page explains what OFAC-governed sanctions clauses must do, how they differ from their UK and EU counterparts, the risk flags that counsel look for, and how Calder & Vance supports businesses at every stage of the drafting and review process.
What do sanctions clauses in contracts under OFAC actually cover?
An OFAC-compliant sanctions clause does at least three things: it defines the prohibited conduct by reference to the applicable US sanctions regime, it triggers a right to suspend or terminate performance where continued performance would violate that regime, and it allocates liability for the resulting loss. Each element requires precision.
The definition of "prohibited" conduct is the foundation. US sanctions administered under IEEPA, TWEA, and the relevant programme-specific regulations prohibit US persons – and in some cases, non-US persons – from engaging in transactions with Specially Designated Nationals (SDNs, persons on OFAC's list of Specially Designated Nationals and blocked persons, for whom all property and property interests are blocked). The clause must track OFAC's actual prohibition, not a vague paraphrase. Generic "applicable laws" language rarely captures the full scope of the prohibition, and in our experience it is the first point a counterparty's counsel will attack when a designation occurs and performance becomes impossible.
The suspension or termination right is the operational core. It must specify the trigger event: a designation of the counterparty, a material change in its ownership structure that engages the 50 percent rule (OFAC's rule that an entity owned 50 percent or more in the aggregate by one or more blocked persons is itself treated as blocked), or the application of a sectoral or secondary-sanctions measure. It must also specify the procedure: notice, a cure window where lawful, and the consequences of non-cure.
Liability allocation is where parties most often disagree. Neither party wants to bear the full cost of a forced exit triggered by an OFAC designation. Balanced drafting distributes termination fees, return of prepayments, and indemnities in a way that reflects the actual risk each party assumed at signing.
How does the OFAC clause differ from its OFSI and EU equivalents?
The OFAC clause is distinct in scope and in the secondary-sanctions risk it carries, and any business operating across US, UK, and EU jurisdictions must understand those differences before it commits to a single clause form.
Under the UK regime, OFSI (the Office of Financial Sanctions Implementation, the UK Treasury body responsible for financial-sanctions enforcement) applies an ownership and control test that extends the prohibition to entities owned or controlled by designated persons. "Control" has independent meaning beyond the arithmetic ownership threshold. A UK sanctions clause drafted on the OFSI standard will capture entities that the OFAC 50 percent rule might miss – and vice versa. A business that contracts on OFAC standard terms and performs the contract lawfully under OFAC may nonetheless face exposure under OFSI if the counterparty is controlled, but not majority-owned, by a UK-designated person.
Under EU Council regulations, the control test is similarly broad. The EU additionally applies de-listing and asset-freeze provisions across all member states simultaneously, so a counterparty that falls outside the OFAC SDN framework may nonetheless be frozen under an EU regulation. For parties in multi-jurisdiction transactions, a clause that addresses only OFAC creates a false sense of security.
Secondary-sanctions risk adds a further layer. OFAC administers programmes under which non-US persons who engage in significant transactions with certain designated parties may themselves face designation. A sanctions clause must acknowledge this exposure – and a well-advised counterparty will insist that it does. We regularly advise clients whose commercial counterparts have asked for reciprocal secondary-sanctions representations precisely because their US transaction banking sits within the reach of OFAC's secondary-sanctions authority.
The position above covers the standard case. Your facts – the counterparty's jurisdiction, its ownership chain, the goods or services in question, and the regimes engaged – change the analysis materially.
For an assessment of your exposure under OFAC or across multiple regimes, contact Calder & Vance at info@caldervance.com.
What is the legal basis and governing authority for OFAC sanctions clauses?
OFAC derives its authority primarily from IEEPA and TWEA, supplemented by specific emergency declarations and the programme-specific implementing regulations. No single OFAC rule prescribes the form of a commercial sanctions clause; the obligation arises from the underlying prohibition. If performance of a contract would violate OFAC's rules, a US person – or any person dealing in US-dollar clearing or otherwise caught by the jurisdictional reach of the programme – must cease performance.
That architecture matters for drafting. The clause cannot be drafted once and left static. OFAC designations occur on any business day. A counterparty that was clean at signing may appear on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons) six months into the contract's life. The clause must therefore contain a continuing representation and warranty that the counterparty is not, and will not become, a blocked person – coupled with an obligation to notify and a termination right that activates without delay.
OFAC guidance makes clear that "facilitation" of a prohibited transaction – which can include continuing to perform a contract after a counterparty's designation without taking steps to exit – may itself constitute a violation. The clause is, in part, the mechanism by which the performing party demonstrates that it took reasonable steps to exit the transaction promptly. It is not merely protective; it is evidence of a sound compliance programme.
BIS and the Export Administration Regulations (the EAR) add a parallel layer for contracts involving goods, software, or technology subject to export controls. An export-controlled item delivered under a contract that lacks adequate end-use and re-transfer controls creates exposure even where no OFAC programme is triggered. In our practice we frequently review commercial agreements where the OFAC clause is adequate but the EAR end-use representation is absent entirely.
What does a compliant OFAC sanctions clause contain – and what is the drafting sequence?
A compliant OFAC sanctions clause contains six operative elements, and the order of drafting matters because each element builds on the last.
- Scope definition. Define the regulated parties – US persons, entities owned 50 percent or more by a blocked person, and non-US persons within the jurisdictional reach of the programme in question. A narrow definition that covers only US-citizen signatories will fail the moment the counterparty routes payment through a US correspondent bank.
- Representations and warranties. Each party warrants that it is not a blocked person, that it is not owned or controlled by a blocked person, that no governmental authorisation is required to proceed, and that it will maintain each representation on a continuing basis throughout the contract term. The continuing-basis obligation is essential; a one-time representation at signing offers minimal protection.
- Undertakings. The counterparty undertakes to notify immediately upon becoming aware of any fact that would render a representation false, and to take all steps within its control to remedy the position. This includes notifying of any investigation by OFAC or any related US government body.
- Trigger events. Define precisely the events that permit or require suspension or termination: SDN designation, engagement of the 50 percent rule, imposition of a sectoral restriction, or an OFAC licence being required but not obtained. Where a general licence may authorise continued performance, the clause should accommodate that route rather than mandating immediate termination.
- Consequences and liability. Specify that termination by the complying party due to a sanctions trigger does not constitute a breach, that prepayments are returned within a defined period, that termination fees are waived or capped, and that each party bears its own losses from a regulatory trigger it caused. Where indemnity language is used, it should be bounded – an open-ended indemnity from a counterparty that has just been designated is commercially worthless.
- Governing law and interaction with other sanctions clauses. Where the contract also contains OFSI or EU sanctions clauses, the OFAC clause must be read alongside them. Conflicts – for example, where OFAC requires exit but an EU blocking regulation prohibits compliance with OFAC – must be addressed, typically through a hierarchy-of-laws provision and a legal-opinion mechanism.
The drafting sequence in our practice runs: scope definition → representations → undertakings → trigger map → consequence and liability → interaction review. It is iterative; the trigger map frequently sends us back to the scope definition to correct misalignments.
What are the cross-border and extraterritorial risks in OFAC-governed contracts?
OFAC's jurisdictional reach extends beyond US persons. US-dollar clearing conducted through a US correspondent bank can bring a non-US transaction within the prohibitions. Goods that incorporate a de minimis threshold of US-origin content or technology may carry export-control obligations under the EAR that run in parallel to OFAC. Secondary-sanctions authorities mean that a non-US party can face designation risk for engaging in significant transactions with certain designated parties, even without any direct US nexus beyond the programme's statutory reach.
For a business contracting from the UK or EU with a counterparty that also has US connections, this creates a layered problem. The contract may need to satisfy OFAC, OFSI, and the relevant EU Council regulation simultaneously. Each regime has its own ownership and control test, its own licensing route, and its own record-keeping requirement. A clause drafted to satisfy only one regime leaves the other two as unmanaged gaps.
What happens when a licence exists under one regime but not another? Where OFAC issues a specific licence authorising a transaction that would otherwise be prohibited, the contract clause must make space for that licence: suspending the termination trigger during the licensing window, conditioning performance on licence validity, and specifying what happens if the licence lapses or is revoked. A clause that mandates immediate termination on any regulatory trigger will inadvertently prohibit OFAC-licensed performance – a result no commercial party intends.
We regularly advise on contracts where the payment route creates OFAC exposure that the underlying goods sale does not. A manufacturing agreement between two non-US parties, denominated in euros, may nonetheless flow through a US correspondent for settlement. The OFAC clause in that agreement needs to address both the goods and the payment leg.
If a transaction has already been flagged by a correspondent bank, or a filing has been refused, an early review preserves options that narrow quickly with time. Contact Calder & Vance at info@caldervance.com.
What are the common drafting failures and risk flags?
The most common failure is scope underreach. A clause that applies only to "US persons" as defined by the drafter – rather than OFAC's regulatory definition – will miss non-US entities caught by secondary-sanctions measures or by the 50 percent rule applied to a US-headquartered parent's subsidiary. Have you verified that your clause's definition of "US person" tracks OFAC's own regulatory definition exactly?
The second failure is static representation design. A warranty given only at signing does not protect against a designation that occurs on day 180 of a two-year supply agreement. The continuing representation obligation, combined with a real-time monitoring protocol and a triggered notice obligation, is the minimum structure that functions in practice.
Third: the absence of a licensing carve-out. Contracts drafted before a licensing issue arises frequently contain termination triggers that are absolute. When OFAC subsequently issues a general licence or a specific licence authorising the very transaction the clause would terminate, the parties face the paradox of a commercially authorised deal that their own contract prohibits. Drafting a licensing carve-out at the outset is materially cheaper than seeking to amend under pressure.
Fourth: conflicts with blocking statutes. The EU Blocking Regulation, and equivalent statutes in other jurisdictions, prohibit compliance with certain US secondary-sanctions measures. A contract that is also subject to EU law may contain an OFAC clause whose operation is itself unlawful under EU law in specified circumstances. This conflict is not hypothetical; it arises regularly in contracts involving EU-headquartered parties and US-designated counterparties. Managing it requires a hierarchy-of-laws analysis and, in some cases, a legal opinion mechanism in the contract.
Fifth: inadequate records. OFAC's compliance guidance identifies record-keeping as a component of an effective compliance programme. Contracts, screening records, and licence copies should be retained for a period consistent with applicable requirements. Where those records do not exist, the ability to demonstrate a good-faith compliance effort in an enforcement context is significantly diminished.
How does this service address the common myth about standard-form clauses?
A persistent assumption in commercial contracting is that a standard-form sanctions clause – whether drawn from a trade association template, a master agreement boilerplate, or a previous contract – will be adequate for the next deal. In our experience, that assumption is wrong far more often than clients expect when they first seek a review.
Standard-form clauses are drafted for the common case. They do not account for the specific ownership structure of the counterparty, the payment route of the transaction, the jurisdictions whose regimes are engaged simultaneously, or the licensing environment at the time of signing. A clause that was adequate for a straightforward supply contract in 2022 may not address the additional secondary-sanctions risk that has arisen since. OFAC's programme environment changes: new designations, new general licences, new guidance on the 50 percent rule, and new enforcement priorities all affect the adequacy of existing contract language.
The business case for bespoke review is straightforward. The cost of reviewing and updating a sanctions clause before a problem arises is a fraction of the cost of managing an enforcement enquiry, a blocked payment, or a counterparty dispute after one does. OFAC civil penalties can be substantial – and the absence of an adequate compliance programme, including adequate contractual protections, is a factor that OFAC considers in its penalty determinations. We have acted for businesses in post-designation contract disputes where the outcome turned entirely on whether the terminated party had a clause that clearly permitted exit without breach.
Related practices
- OFSI sanctions clauses in contracts – UK financial-sanctions clause drafting and review for OFSI-governed agreements
- UN sanctions clauses in contracts – UN Consolidated List clause drafting and multi-regime alignment
- Sanctions compliance audit and testing – Australia – DFAT-regime compliance programme audit and gap analysis
How Calder & Vance supports sanctions clause drafting and review under OFAC
Our work on OFAC sanctions clauses in contracts covers the full cycle from initial assessment to final execution. We assess eligibility, prepare and review clause language calibrated to the specific transaction and the specific regimes engaged, and manage regulatory queries that arise during or after execution.
For a new contract, our process begins with a counterparty and transaction assessment: who are the parties, what are the goods or services, what is the payment route, and which OFAC programmes and other regimes are potentially engaged? That assessment drives the clause design. We then prepare a draft clause set – OFAC primary, with OFSI and EU-compatible language where required – and work through the negotiation with the client's commercial team.
For an existing contract, we test the screening logic, map ownership and control against the current OFAC SDN and other applicable lists, and redesign any inadequate clause to the standard described above. We identify conflicts with blocking statutes and advise on the hierarchy-of-laws mechanism. Where a licensing carve-out is absent, we draft one.
In a recent matter, a technology business with a US parent and a European subsidiary was entering a long-term distribution agreement with a counterparty in a market where several related entities had been designated under a US sanctions programme. We classified the transaction, confirmed the OFAC programme requirements and the available licence routes, designed the clause set to accommodate both OFAC and the applicable EU Council regulation, and structured a licensing carve-out that permitted continued performance under any future OFAC general licence. The matter reached execution without requiring a separate OFAC submission at that stage.
Our practice covers contracts governed by New York law, English law, and mixed-jurisdiction governing law clauses. For contracts where local-law advice is required, we work alongside local counsel in the relevant jurisdiction.