Sanctions Clause in a Contract with a Counterparty: What to Include
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Before entering into a contract, companies usually check the price, deadlines, payment terms, and the parties’ liability. But another risk may arise during the relationship: sanctions may be imposed on the counterparty, its owner, or another person involved by it.
You have paid the supplier an advance for equipment. The contract has been signed, everything seems fine, and then the bank suddenly stops the next payment. It turns out that the owner of the supplier company has become subject to an asset-blocking sanction.
What happens now? Can you continue working together? Must the supplier return the advance payment? Do you have the right to terminate the contract, or would that be considered a breach on your part? The contract itself provides no answers—it covers the price, delivery deadlines, and liability for delay. It says nothing about sanctions.
This is not an unusual situation. As the number of sanctions decisions in Ukraine grows, any long-term business relationship may face this risk, even if the counterparty was completely clear of sanctions when the contract was signed.
The problem is not that sanctions were imposed. The problem is that the parties did not agree in advance on what to do if that happened, so they now have to resolve the issue under the pressure of a blocked payment rather than calmly at the negotiating table.
To avoid disputes like this, it is worth including a sanctions clause in the contract. It sets out what the parties must do if sanctions affect or may affect performance of the contract. In this article, you will learn what such a provision can look like in your contract.
Worth reading: Checking the Beneficial Owners of a Ukrainian Company: Sanctions and Reputational Risks
What Is a Sanctions Clause and Why Is It Needed?
The Law of Ukraine “On Sanctions” provides for various types of restrictions. These include blocking of assets, restrictions on trade operations, suspension of economic and financial obligations, and a ban on participation in public procurement.
Therefore, a person’s inclusion on a sanctions list does not always mean that every contract with that person is automatically terminated. First, it is necessary to determine which sanction was imposed, for how long, and whether it prohibits the specific payment, delivery, or transfer of property.
A sanctions clause is a provision in a contract in which the parties agree in advance on how to act if a sanctions risk arises. In particular, it may allow a party to:
- request additional information and documents from the counterparty;
- temporarily suspend a payment or delivery;
- replace a bank, carrier, or subcontractor;
- terminate the contract if lawful performance becomes impossible;
- require the return of an advance payment or compensation for losses in the circumstances specified in the contract.
For example, if sanctions are imposed not on the supplier itself but on the carrier, the contract does not necessarily have to be terminated. The supplier may engage another carrier and complete the delivery without violating the applicable restrictions.
At the same time, a sanctions clause does not permit the parties to circumvent the law. If a particular payment or transfer of property is prohibited, the parties cannot agree in the contract to carry out that transaction anyway.
What Should a Sanctions Clause Cover?
The content of the clause depends on the subject matter of the contract, the payment structure, and the persons involved in its performance. However, it is advisable to include several core provisions.
Which Sanctions Lists the Parties Will Consider
The contract should specify which sanctions lists will be checked. For a contract between Ukrainian companies, the primary focus should be sanctions imposed under Ukrainian law.
A person can be checked in the State Register of Sanctions. It identifies the persons subject to sanctions, the types of restrictions imposed, their duration, and the relevant decisions.
If the contract involves foreign currency, imports, exports, or a foreign bank, EU, U.S., UK, or other foreign sanctions may also need to be considered. In that case, it is better to name the relevant lists expressly rather than use the vague phrase “any international sanctions.”
The review should cover not only the company itself but also its ultimate beneficial owners and the persons who actually control it. Where appropriate, the bank, carrier, manufacturer, or subcontractor involved in the specific transaction should also be checked.
Representations by the Parties
Each party may confirm that, as of the date the contract is entered into:
- neither it nor its owners are subject to sanctions that prohibit performance of the contract;
- performance of the contract does not involve transferring funds or property for the benefit of a person to whom such a transfer is prohibited;
- the information provided about its owners and other involved persons is accurate.
In long-term contracts, these representations should remain in effect throughout the entire business relationship, not only on the date of signing.
Notice of Changes
The parties should notify each other about the imposition or modification of sanctions, a change in ownership or actual control, a bank blocking a payment, and other circumstances that may prevent performance of the contract.
The contract should set a specific deadline for such notice, for example three business days, and specify the email or postal address to which notices must be sent.
Together with the notice, the party may be required to provide the sanctions decision, the bank’s explanation, an up-to-date ownership structure, or other documents needed for verification.
Suspension and Termination of the Contract
If there is a reasonable sanctions risk, a party should have the right to temporarily suspend a specific obligation, such as payment or shipment of goods. The contract should define the period for the review and provide that no penalties accrue during that period for performance that has been lawfully suspended.
The parties may first try to eliminate the risk by replacing the bank, carrier, or another involved person. If lawful performance is impossible, the contract may provide for the right to terminate the relationship early by written notice.
The contract should separately state what happens to goods already delivered, services already provided, and advance payments already made. In particular, it should address whether performance completed before the sanctions were imposed must be paid for and within what period the unused portion of an advance payment must be returned, provided that such payment is not prohibited.
A party may also be required to compensate documented losses if they arose because of false representations or concealment of sanctions-related information known to that party.
What Can a Sanctions Clause Look Like?
Below is a shortened sample sanctions clause that must be adapted to the specific contract:
Sanctions Clause
Each party represents that, as of the date this contract is entered into, neither it, its ultimate beneficial owners, nor any persons exercising actual control over it are subject to sanctions that prohibit or restrict performance of this contract.
A party must notify the other party in writing within three business days of the imposition or modification of sanctions, a change in its ownership or control structure, the blocking of a payment related to the contract, or any other circumstance that may make performance prohibited.
If there are reasonable grounds to believe that performance of a particular obligation may violate sanctions restrictions, the other party may suspend that obligation for the duration of the review without incurring penalties.
The parties will agree on a lawful method of further performance, including replacement of the bank, carrier, or subcontractor. If the risk cannot be eliminated, a party may terminate the contract in full or with respect to the part affected by the restrictions.
Termination of the contract does not release the parties from settlements permitted by law for obligations already properly performed or from returning the unused portion of an advance payment, provided that such a transaction is not prohibited.
This example is not universal. For a specific contract, the applicable sanctions, the persons to be checked, the review period, and the settlement procedure after termination of the relationship must be defined.
Worth reading: Counterparty Monitoring: How Not to Miss a Lawsuit, Debt, or Asset Seizure
What Should You Do if Sanctions Are Imposed During Contract Performance?
First, verify whether the sanctions actually apply to your counterparty or to a related person. Check the company name, legal entity identification code, owner information, and other details. The same surname or a similar company name does not establish that it is the same person or entity.
Next, determine the type and duration of the sanction and identify which obligations it affects. A restriction may apply to a specific payment or transfer of property rather than to the entire contract.
You should also check other prohibitions imposed by the state. For example, Resolution No. 187 of the Cabinet of Ministers of Ukraine establishes a moratorium on certain obligations and transactions involving the Russian Federation and specified persons associated with the aggressor state.
After the review, it is advisable to:
- save an extract from the register, the relevant decision, and the bank’s notice;
- notify the counterparty in writing of the identified risk;
- request documents and explanations;
- if necessary, suspend the specific payment, delivery, or other obligation;
- check whether performance can lawfully continue through another bank, carrier, or subcontractor;
- if the risk cannot be eliminated, terminate the contract in the manner provided by it and settle what happens to the funds and property.
You should not transfer payment to an unknown third party’s account merely because the bank blocked the previous payment. A change of account or intermediary must not be used to circumvent sanctions.
Important! The imposition of sanctions does not automatically constitute force majeure. Under Article 617 of the Civil Code of Ukraine, a party must prove that the specific breach resulted from force majeure. In addition, release from liability does not always terminate the obligation itself.
Why Should You Check the Counterparty Before Entering Into the Contract?
A sanctions clause sets out what to do after a problem arises, but it does not replace pre-contract due diligence. If the sanctions information was already publicly available, contractual wording does not guarantee the return of an advance payment or that a bank will process the payment.
Before signing the contract, it is advisable to check:
- the company, its owners, its director, and the person signing the contract;
- the ownership structure and the persons who actually control the company;
- Ukraine’s State Register of Sanctions;
- foreign sanctions lists if they may affect the transaction;
- connections with the Russian Federation and the Republic of Belarus;
- the bank, carrier, manufacturer, or subcontractor if performance of the contract depends on them.
For a one-off supply transaction, the check should be performed before the contract is signed and before payment. In a long-term relationship, it is advisable to repeat it before significant payments, when extending the contract, and after changes in owners, the director, or bank details.
For example, a company enters into a one-year contract with a supplier. Several months later, the supplier’s ultimate beneficial owner changes. If the contract requires notice of such changes, the buyer can conduct a new check before paying the next advance.
Worth reading: A Counterparty’s Court Cases: When They Are a Risk and When They Are Routine
How We Help Minimize Sanctions Risks
We analyze not only the wording of the sanctions clause but also how the contract will actually be performed. To do this, we:
- identify which sanctions restrictions may affect the transaction;
- analyze the subject matter of the contract, the payment arrangements, and the movement of goods;
- draft a sanctions clause tailored to the specific risks;
- establish the notice, review, and suspension procedure;
- define the conditions for terminating the contract, returning the advance payment, and paying for performance already completed;
- prepare notices and an action plan if sanctions are imposed while the contract is in force.
As a result, the client receives a clear action plan: whom to check and when, which documents to request, when performance may be suspended, and how to terminate the contract without unnecessary disputes.
If you are entering into a contract with a Ukrainian counterparty or have already identified a sanctions risk, contact us. We will review the transaction, prepare a sanctions clause, and help establish a safe procedure for the next steps.
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