When Sanctions Disrupt an International Deal: Who Bears the Risk?

International business transactions rarely fail because the parties simply change their minds. Increasingly, contracts are disrupted by something neither party fully controls: sanctions, export restrictions, banking restrictions, asset freezes, or sudden changes in trade regulations.

A company may sign a perfectly valid international contract today and discover weeks or months later that performing it has become legally difficult—or even impossible.

Who bears the loss in that situation?

The answer is not always obvious. It depends heavily on the contract, the applicable law, the relevant sanctions regime, and the way the parties allocated regulatory risk before signing the deal.

Sanctions Can Turn a Commercial Problem into a Legal Problem

Consider a simple transaction.

A European company agrees to sell industrial equipment to a foreign buyer. The contract provides for delivery within six months and payment in US dollars.

After the contract is signed, a new sanctions measure is introduced. The buyer's bank refuses to process the payment. The shipping company will no longer carry the goods. Alternatively, the final destination of the goods becomes subject to an export restriction.

The commercial question is straightforward:

Can the parties still perform the contract?

The legal questions are much more complicated:

• Is performance now prohibited?

• Can either party suspend its obligations?

• Does a sanctions event qualify as force majeure?

• Can the contract be terminated?

• Who bears additional costs?

• Can the seller refuse an alternative payment method?

• Can the buyer claim damages for non-delivery?

• What happens if the transaction itself is lawful but a bank, insurer or carrier refuses to participate?

These questions cannot be answered simply by saying that "sanctions prevented the transaction."

A Sanctions Clause Is Not the Same as a Force Majeure Clause

One of the most important distinctions in international contracting is between a sanctions clause and a force majeure clause.

A force majeure clause generally addresses events outside a party's reasonable control that prevent or impede contractual performance. Whether sanctions qualify will depend on the wording of the clause and the applicable law.

A sanctions clause, by contrast, is specifically designed to allocate sanctions-related risks between the parties.

For example, a well-drafted sanctions provision may require a party to:

• comply with applicable sanctions and export-control laws;

• confirm that it and certain relevant owners or controlled entities are not sanctioned;

• provide information concerning the end user or destination of goods;

• avoid prohibited re-export or diversion;

• conduct appropriate due diligence on relevant counterparties;

• notify the other party when a sanctions-related risk arises;

• suspend or terminate performance in specified circumstances.

The European Union and the UK have both emphasized contractual controls and due diligence as important tools for preventing sanctions circumvention. In certain transactions involving sensitive goods, EU law may also require contractual restrictions on re-export to Russia.

But there is an important limitation:

A contractual clause cannot make an otherwise prohibited transaction lawful.

EU sanctions, for example, are mandatory for persons and entities within the scope of EU sanctions law. A private contract cannot override those legal obligations. Even an Incoterm such as EXW does not transfer away sanctions liability where EU sanctions law applies.

What If the Contract Does Not Contain a Sanctions Clause?

This is where disputes become particularly difficult.

A party may argue that sanctions make performance impossible and therefore constitute force majeure. The other party may respond that alternative methods of performance were available.

For example:

"The bank refused the payment, but another lawful payment route was available."

Or:

"The original shipping route was unavailable, but another route could have been used."

Whether such arguments succeed depends on the contract and the governing law.

A particularly important example comes from the English-law case of RTI Ltd v MUR Shipping BV, where the dispute concerned payment in US dollars after sanctions affected the contractual payment arrangements. The UK Supreme Court ultimately held that the contractual requirement to pay in US dollars did not require the affected party to accept payment in euros as an alternative form of performance.

The broader lesson for businesses is significant:

Do not assume that a court or arbitral tribunal will rewrite your contract after sanctions disrupt the transaction.

The precise wording agreed before the problem arose can become decisive.

Who Should Bear the Risk?

There is no universal answer.

The parties should decide this when negotiating the contract.

For example, a contract may specify that a party can suspend performance where:

1. performance would violate applicable sanctions;

2. a required licence or authorization cannot be obtained;

3. a bank, carrier or insurer refuses the transaction because of sanctions-related restrictions;

4. the counterparty, its beneficial owner, end user or relevant third party becomes sanctioned;

5. the goods become subject to an export or import prohibition.

The contract should also address what happens next.

Is there a temporary suspension?

Must the parties attempt an alternative method of performance?

Can the contract be terminated after a specified period?

Are advance payments refundable?

Who pays storage, demurrage, insurance or additional transportation costs?

These details can determine whether a sanctions event becomes a manageable commercial disruption or a multimillion-dollar dispute.

Due Diligence Should Come Before the Contract

Contractual protection is only one part of the solution.

A company should conduct appropriate due diligence before signing an international transaction.

Depending on the nature of the deal, this may include reviewing:

• the identity and ownership of the counterparty;

• beneficial owners and controlling persons;

• relevant sanctions lists;

• the end user of the goods or services;

• the ultimate destination;

• intermediaries and distributors;

• banks and payment channels;

• shipping and insurance arrangements;

• applicable export-control restrictions;

• potential red flags suggesting diversion or sanctions circumvention.

The European Commission's sanctions due-diligence guidance specifically highlights risk assessment of business partners, transactions and goods, together with indicators of potential circumvention.

This is particularly important in transactions involving jurisdictions or sectors exposed to rapidly changing sanctions regimes.

A company should not treat sanctions screening as a one-time check performed on the day a contract is signed. A long-term transaction may require repeated monitoring because the legal and commercial risk can change during the life of the contract.

Existing Contracts Are Not Necessarily Safe

Another common misconception is:

"The contract was signed before the sanctions changed, so we are protected."

Not necessarily.

Sanctions regimes can introduce transitional or "grandfathering" arrangements for certain existing contracts, but these protections are highly specific and may depend on the goods, parties, dates and nature of the contractual commitment.

For example, recent EU sanctions measures have included transitional arrangements for certain pre-existing contracts, while also imposing strict conditions concerning the timing and substance of those contracts.

Companies therefore need to examine the actual legal basis for any transitional protection rather than assuming that an old contract is automatically exempt.

The Better Approach: Allocate the Risk Before It Happens

The best time to negotiate sanctions risk is before the transaction is signed.

An international contract should ideally answer several practical questions:

What happens if the law changes?

What happens if one party becomes sanctioned?

What happens if the goods can no longer be exported?

What happens if payment through the agreed banking channel becomes impossible?

What happens if a carrier or insurer refuses the transaction?

Can the parties use an alternative route, currency, bank or delivery method?

When does suspension become termination?

Who bears the resulting costs?

These are not merely compliance questions. They are questions of contractual risk allocation.

Final Takeaway

Sanctions are no longer an issue relevant only to banks, governments and compliance departments.

For companies engaged in international trade and investment, sanctions can directly affect whether a contract can be performed, whether payment can be made, whether goods can be delivered, and whether a commercial relationship can continue.

A strong international contract therefore needs to do more than define the price, quantity and delivery date.

It should also anticipate what happens when the legal environment changes.

At B&P Legal Group, we approach cross-border transactions from both the commercial and legal perspectives, helping businesses identify regulatory risks, structure contractual protections and manage legal issues that may arise across jurisdictions.

Before signing an international contract, the better question is not only "What happens if everything goes according to plan?"

It is also: "Who bears the risk if the law suddenly changes?"