CM December 2021

OPINION
AUTHOR – Adam Bernstein
would also consider regular testing of screening
rules, screening all parties to a transaction, and
thinking about who is in the payment chain.
Other steps that McQueen recommends
include ongoing monitoring for changes to
sanctions lists against business and risk profile;
dealing with red flags with a mechanism in
place to analyse and deal with identified preand
post-contractual red flags. This he says
involves understanding the law, having clear
reporting lines, and considering whether a
transaction should be terminated; conducting
supply chain audits to confirm country of origin
and to mitigate against the risk that goods or
services are sourced from a sanctioned entity or
location; and having appropriate record-keeping
procedures that document decision-making, due
diligence, and mitigation measures.
CONTRACTUAL PROTECTIONS
Contracts can offer safe harbour and both
Northage and Crayton would look to them for
protection. Northage would seek to: “insert
express sanctions and trade controls compliance
clauses when contracting with counterparties,
tailored to the circumstances – such as
jurisdiction, product, corporate structure
involved – and level of risk.” These he says could
include representations and warranties that the
counterparty has not breached sanctions, is not
a sanctioned party and will not distribute to or
source products from prohibited parties, sectors,
or countries; obligations not to deal with such
parties and to ensure that sanctions compliance
obligations flow through the contractual supply
chain; and sanctions reporting requirements
and audit rights.
But even with clauses inserted, Northage
advises addressing what would happen when
a sanctions event impacts on contractual
performance. Other scenarios he says to look
out for include: “the imposition of sanctions
that affect the supply of certain products or
disrupt the movement of goods via established
trading routes…or even rendering performance
impossible.”
Crayton takes a moment to detail that
contractual protections can include suspension
and termination rights, obligations, and
provisions that release a party from performing
the contract or which allow for some form of
commercial flexibility or assistance. “Notably,” he
says, “the English courts do not look favourably
on reliance on force majeure clauses to escape
contractual obligations that have simply become
more expensive or difficult to perform.”
He also says to take particular care when
drafting termination provisions. He asks, for
example, does the contract cater for termination
arising out of the imposition of new sanctions?
He adds a note of caution when documenting
the reasons for termination, especially where
there is the potential for challenge: “without
a valid contractual ground for termination, a
mere risk of exposure to US secondary sanctions
may not be sufficient. Further, depending on
the sanction in question, it may be difficult to
terminate a contract with a sanctioned party.”
Crayton’s recommendation is clear – “tailor
drafting rather than rely purely on boilerplate
provisions.”
EXISTING CONTRACTS
But what of the contract already in existence?
Here Crayton suggests checking contracts for
specific sanctions clauses and related suspension
and termination provisions. As he points out:
“Even if there is no express sanctions clause,
the event may be covered by a force majeure
clause.” Northage expands on this: “Sanctions
events will not automatically be covered. Under
English law, force majeure provisions must
be express – they cannot be implied into the
contract – and the event in
question must fall within
the definition.” Despite
this, he says that if the
contract is governed by a
law which implies such a
provision into a contract,
“a party may still be able
to rely on force majeure,
although it will usually be
necessary to show that all
possible steps were taken
to prevent or mitigate the
effects of the event.”
Crayton agrees. He says
that if reliance on force
majeure is not an option, it may be possible to
argue that the contract is frustrated or should be
terminated due to supervening illegality: “In the
scenario where a counterparty has been made
the subject of sanctions after the contract was
entered into, the contract will only potentially
be frustrated if the contract is impossible to
perform, not just because it would be impossible
to perform without breaking the sanctions.”
Fundamentally, he says that the bar for
a successful frustration claim is high – the
doctrine operates within very narrow confines
and the courts will not lightly relieve parties of
their contractual obligations.
IN SUMMARY
There are enough threats to perpetually keep
boards on their toes. While some are a fact of
life, those relating to Government sanctions are
essential to consider. Reviewing contractual
arrangements and inserting specific sanctions
clauses and other protections as appropriate into
agreements should be high up on the corporate
agenda.
Adam Bernstein is a freelance
business writer.
The sanctions
landscape is constantly
changing as evidenced
by new trade, financial
and aviation sanctions
that the UK imposed on
Belarus in August.
Brave | Curious | Resilient / www.cicm.com / December 2021 / PAGE 18