Sanctions clauses in contracts – 3 lessons from recent cases you can apply

International contracts can no longer ignore sanctions risk. Provisions that were once included only in selected high-risk transactions have become a standard risk-management tool in many cross-border agreements. Sanctions can affect payments, counterparties, beneficial owners, supply chains, financial institutions, and the legality of performance itself. Recent case law shows that even a formally valid agreement can become difficult or impossible to perform if the contract does not clearly allocate sanctions-related risks. In this article, we explain what a sanctions clause in contracts should cover, which drafting mistakes weaken protection, and what three recent cases can teach businesses about suspension, termination, and sanctions compliance.

What is a sanctions clause?

A sanctions clause is a contractual provision that regulates the parties’ rights and obligations if applicable sanctions affect the transaction, a counterparty, its beneficial owners, payment flows, or the legality of performance. It helps businesses manage the risk of suspended payments, blocked performance, termination, and potential regulatory exposure.

Unlike a general obligation to “comply with the law”, a sanctions clause should identify the relevant sanctions regimes and explain what happens if restrictions apply.

It may allow the parties to:

1. Define which sanctions regimes trigger the clause, such as UN, EU, OFAC, OFSI, or applicable local measures;
2. Suspend or terminate performance where continuing the contract would be prohibited or expose a party to sanctions risk;
3. Allocate costs and losses arising from blocked or delayed performance;
4. Require prompt notification of changes in sanctions status;
5. Include representations and warranties concerning sanctions status, ownership, control, and ongoing compliance.

OFAC has specifically recommended that contracts in sanctions-exposed sectors contain sanctions-specific clauses allowing parties to exit or terminate arrangements that would otherwise violate U.S. sanctions rules.

A well-drafted sanctions clause therefore serves both a compliance and a risk-allocation function. It does not guarantee that performance will remain possible, but it gives the parties a clear contractual mechanism for responding to restrictions and reduces uncertainty if payments, services, or deliveries become affected.

Key elements of an effective sanctions clause

A well-drafted sanctions clause should clearly define the events that trigger contractual rights and the consequences for both parties. The wording should also be consistent with other essential clauses governing termination, liability, force majeure, and dispute resolution.

Scope of applicable sanctions

The clause should identify which sanctions regimes apply to the agreement. Depending on the parties, transaction, payment routes, and jurisdictions involved, this may include measures administered by the UN, EU, OFAC, OFSI, and relevant national authorities.

The clause should also clarify whether it covers sanctions imposed on the parties themselves, their beneficial owners, controlling persons, banks, intermediaries, or other participants in the transaction.

Suspension of performance

It is useful to include a mechanism for temporarily suspending obligations if sanctions make performance unlawful or create a material sanctions risk but the situation may still be resolved. This avoids immediate termination and gives the parties time to assess licences, payment routes, or alternative performance.

The suspension mechanism should also be coordinated with the contract’s force majeure clauses, because the two provisions may apply to the same disruption but produce different consequences.

Termination rights

The clause should specify when a party may terminate the agreement because sanctions make performance prohibited or no longer legally possible. It should also define whether termination is immediate or follows a period of suspension, and what happens to obligations already accrued.

Clear termination wording reduces uncertainty and should be aligned with the broader contract termination provisions of the agreement.

Allocation of losses

One of the most sensitive issues is who bears the costs if performance is suspended or the contract is terminated. The clause should address advance payments, unavoidable expenses, third-party liabilities, and other sanctions-related losses.

These provisions should be reviewed together with limitation of liability and indemnity clauses to avoid conflicting risk-allocation mechanisms.

Notification obligations

The parties should be required to notify each other promptly of sanctions-related developments that may affect performance. Instead of relying on a universal deadline, the contract should set a clear notice period appropriate to the transaction and specify the required form of notice and supporting information.

Compliance warranties

The agreement may include representations and warranties confirming that, at the time of signing, the parties, their relevant beneficial owners, and controlling persons are not subject to applicable sanctions.

The clause may also require ongoing notification if that status changes and cooperation with reasonable compliance checks during the life of the contract. These warranties do not replace sanctions screening or due diligence, but they provide an additional contractual remedy if the information supplied by a counterparty proves inaccurate.

Sanctions clause example

A basic definition may be drafted as follows:

“Applicable Sanctions” means any sanctions, restrictive measures, embargoes, or trade restrictions administered or enforced by the United Nations, European Union, the U.S. Office of Foreign Assets Control (OFAC), the UK Office of Financial Sanctions Implementation (OFSI), or any other competent authority having jurisdiction over a Party or the transaction.

The operative provisions should then specify what happens if Applicable Sanctions affect performance: whether obligations may be suspended, whether alternative performance can be considered, when termination becomes available, and how losses are allocated.

A sanctions clause example should always be adapted to the parties, jurisdictions, transaction structure, and payment flows rather than copied into a contract without review.

Current sanctions regimes to consider in 2026

A sanctions clause should not refer to one regulator only. In cross-border contracts, the relevant regimes may include the UN, EU, U.S. OFAC, UK OFSI, and national authorities connected to the parties, payment banks, or transaction structure.

European Union

EU restrictive measures may include asset freezes, travel restrictions, sectoral measures, trade restrictions, and prohibitions on making funds or economic resources available to designated persons or entities. Because sanctions measures and listings change regularly, businesses should avoid hard-coding outdated lists into contracts and instead refer to the applicable sanctions laws and regulations in force from time to time.

For broader risk assessment, sanctions screening should also be integrated into transaction monitoring and counterparty due diligence procedures.

United States – OFAC

The U.S. Office of Foreign Assets Control (OFAC) administers multiple sanctions programmes covering countries, entities, individuals, industries, and specific activities. OFAC programmes are updated frequently, which makes ongoing screening important throughout the contract lifecycle, not only at onboarding.

Companies exposed to U.S. jurisdiction should ensure that their compliance procedures cover counterparties, beneficial owners, payment routes, banks, and relevant transaction participants.

United Kingdom – OFSI

UK financial sanctions are implemented by the Office of Financial Sanctions Implementation (OFSI). The official Financial Sanctions General Guidance was updated in May 2026 and covers licensing, reporting, ownership and control, enforcement, and other compliance issues.

Since 28 January 2026, the UK Sanctions List has been the sole source for UK sanctions designations. Businesses should therefore ensure that screening systems and contractual references use the current official list rather than obsolete databases.

United Nations

The UN Security Council currently maintains 15 sanctions regimes, which may include asset freezes, arms embargoes, travel bans, and other targeted measures. The UN Security Council Consolidated List contains individuals and entities subject to sanctions measures and was most recently updated in October 2026.

For businesses dealing with higher-risk counterparties or markets, sanctions checks should form part of broader Enhanced Due Diligence and onboarding controls rather than being treated as a standalone contractual exercise.

The practical rule is simple: a sanctions clause should identify the regimes relevant to the transaction, but the company must also maintain current screening and escalation procedures throughout the business relationship.

Three lessons from recent case studies

Sanctions clauses are increasingly tested in commercial disputes. Recent cases show that courts focus not only on whether such a clause exists, but also on its wording, the evidence supporting its use, and whether the party invoking it acted within the contractual standard.

Case 1. A sanctions clause does not eliminate the need for evidence

In Kuvera Resources Pte Ltd v JPMorgan Chase Bank NA [2023] SGCA 28, the bank refused payment under confirmed letters of credit after identifying potential sanctions concerns connected with the transaction. The Singapore Court of Appeal accepted that the sanctions clause formed part of the contractual arrangement but held that the bank had not established sufficient evidence to rely on it and refuse payment.

The court stressed that whether the transaction fell within the relevant restriction had to be assessed objectively. An internal risk assessment or concern about possible sanctions exposure was not, by itself, enough.

Lesson: the clause should define clear triggers, but the party invoking it must also be able to substantiate that those triggers have actually occurred. Where a dispute reaches Commercial Litigation, contemporaneous sanctions screening and due diligence records may become critical evidence.

Case 2. The right to suspend performance must be exercised reasonably

In Tonzip Maritime Ltd v 2Rivers Pte Ltd [2025] EWHC 2036 (Comm), the English High Court considered an EPS sanctions clause that allowed contractual performance to be withheld where the shipowner reasonably judged that performance could expose it or related parties to sanctions.

The court confirmed that contractual terms allowing a party to withhold performance are construed narrowly. Because the clause used a “reasonable judgment” standard, the party relying on it had to show that its decision was objectively reasonable. On the facts, that threshold was not satisfied.

Lesson: when drafting sanctions clauses, businesses should specify not only the triggering event but also the decision-making standard. Terms such as “reasonable belief”, “reasonable judgment”, or “reasonable sanctions risk” can create an objective standard that may later be tested by a court.

Case 3. A sanctions clause must fit the legal function of the document

In The “Tina I” [2024] SGHCR 12, the Singapore court considered whether a sanctions clause should be included in security provided by payment into court following a maritime dispute. The court declined to impose the proposed clause, finding that it was not supported by the evidence and was inconsistent with the legal nature of payment into court.

The decision shows that sanctions wording cannot simply be copied from one type of agreement into another. A clause that works in a contractual guarantee, financing document, or letter of undertaking may not be appropriate where the legal mechanism and purpose are different.

Lesson: sanctions provisions must be tailored to the transaction and coordinated with other contractual clauses. Standard wording should not be inserted without checking how suspension, payment, termination, and enforcement actually operate under the relevant agreement.

Practical recommendations for businesses

Sanctions clauses work only when they are supported by practical compliance procedures. Businesses should review both the contract wording and the actual controls used before and during the relationship.

Key steps include:

• Identify the sanctions regimes relevant to the transaction;
• Screen counterparties, beneficial owners, banks, and intermediaries before signing;
• Repeat screening during the contract term where risk levels justify it;
• Define clear suspension, notification, and termination procedures;
• Document the reasons for invoking a sanctions clause;
• Coordinate sanctions provisions with force majeure, termination, and liability clauses;
• Ensure staff understand when sanctions concerns must be escalated to compliance teams.

For higher-risk relationships, sanctions checks should also form part of broader Enhanced Due Diligence, transaction monitoring, and AML controls.

Where suspicious activity is identified, businesses should also understand the interaction between sanctions screening and SAR, STR, and CTR reporting.

How can Key2Law help businesses manage sanctions risks?

Sanctions clauses require both precise drafting and a clear compliance process. Key2Law helps international businesses review contractual exposure, structure sanctions provisions, and respond when restrictions affect payments, counterparties, or performance.

Key2Law team can help you:

• Draft and review sanctions provisions through our contract drafting support;
• Assess counterparties, beneficial owners, payment routes, and sanctions exposure;
• Coordinate sanctions clauses with termination, liability, force majeure, and dispute provisions;
• Develop internal screening and escalation procedures;
• Advise on suspension, termination, or alternative performance where sanctions affect an existing agreement;
• Support businesses in commercial litigation arising from sanctions-related contractual disputes;
• Provide ongoing business support for cross-border operations and compliance matters.

If sanctions may affect your contracts or counterparties, contact Key2Law. Our team can review the agreement, identify the relevant risks, and help build a practical contractual and compliance strategy.

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This article is provided for general informational purposes only and does not constitute legal or regulatory advice. Sanctions regimes, designated persons, licensing rules, and enforcement practices change frequently and may differ depending on the jurisdictions, parties, and transaction involved. Businesses should obtain professional advice before relying on a sanctions clause or taking action in response to sanctions-related restrictions.