Clifford Chance

On 22 February 2024, the European Commission published guidance on the requirement for European exporters to impose "No Re-Export to Russia" clauses in contracts for the export of certain goods from the EU to third countries, that was adopted as part of the 12th package of EU sanctions against Russia in December 2023.

Article 12g – The Law

As part of the EU Commission's ongoing efforts to tackle circumvention of existing sanctions on Russia, Article 12g of Council Regulation (EU) No 833/2014 obliges European exporters to ensure that, when exporting certain items from the EU to most destinations worldwide, the relevant contract includes express provisions prohibiting the counterparty from re-exporting those goods to Russia.

Failure to comply with this requirement is a breach of the EU sanctions regulation, which is a criminal offence in most EU Member States.

The requirement applies in relation to any sale, supply, export or transfer of aircraft and other aviation-related items, jet fuel, firearms, common high priority items and other specified sensitive goods. Supply would include a lease or other agreement for use and possession of the goods.

Specifically:

"When selling, supplying, transferring or exporting to a third country […] goods or technology […], common high priority items [...], or firearms and ammunition […], exporters shall […] contractually prohibit re-exportation to Russia and re-exportation for use in Russia."

"[..] exporters shall ensure that the agreement with the third-country counterpart contains adequate remedies in the event of a breach of a contractual obligation [..]."

"If the third-country counterpart breaches any of the contractual obligations […], exporters shall inform the competent authority of the Member State where they are resident or established as soon as they become aware of the breach." (emphasis added)

Exports to the USA, Japan, UK, South Korea, Australia, Canada, New Zealand, Norway and Switzerland ("Partner Countries") are exempted.

European exporters are also subject to an obligation to notify the relevant competent authorities if they become aware of a breach by their counterparty of the contractual prohibition (the "Reporting Obligation").

When to comply?

Contracts concluded before 19 December 2023 must include a "No Re-Export to Russia" clause by 20 December 2024 for any performance that will take place thereafter.

Contracts concluded from 19 December 2023 onwards must include a "No Re-Export to Russia" clause by 20 March 2024 for any performance after that date.

"Concluded" means entered into or otherwise taking effect.

Article 12g – The Guidance

Key takeaways from the European Commission's guidance include:

• Verification and Enforcement: European exporters must comply with the obligation at the time of export/sale/supply/transfer, and must be able to prove to the relevant competent authorities upon request that the requisite arrangements are in place.
• Jurisdiction and Scope: the obligation applies to EU incorporated companies and non-EU companies when concluding contracts which involve exports by them from the EU. EU citizens and residents are also subject to the regulation.
• Adequate Remedies: Adequate remedies for breach of the "No Re-Export to Russia" clause must be envisaged by the contract. The European Commission guidance includes, as examples, termination of the contract or payment of a penalty.
• Reporting: the EU whistle-blower tool is another avenue for reporting breaches.
• Template Clause: while the guidance makes clear that European operators are free to draft their own wording so long as it meets the requirements of Article 12g, the European Commission has published a template clause. This is discussed in more detail below.
• General: European exporters should remain mindful of the general circumvention prohibitions in Article 12 and ensure robust due diligence measures are in place. They should not deal with non-EU operators which refuse to incorporate a “No Re-Export to Russia” clause.

How to comply?

While it is expressly not mandatory to include the form of contract clause proposed by the European Commission in the guidance, it is clear that it may present several commercial challenges:

• The template clause not only requires that the importer/buyer shall not re-export the goods to Russia, but also that it shall use its best efforts to ensure that third parties further down the commercial chain, including possible resellers, do not frustrate the purpose of the prohibition. This may be difficult for some buyers to accept, where using their best efforts in the circumstances is unclear.
• The template clause also includes an obligation on the importer/buyer to establish and maintain "an adequate monitoring mechanism" to "detect conduct by any third parties further down the commercial chain, including by possible resellers". Not only is this stricter than the wording of Article 12g (which instils an obligation on the EU exporter to report suspected breaches only by the direct contractual counterparty without making explicit reference to any third parties down the commercial chain), the specific requirement is unclear in terms of what it entails. It may also make the contract commercially unviable in practice in some cases.
• The "adequate remedies" for breach expressly include termination of the contract, or a penalty expressed as a percentage of the total value of the contract, or price of the goods, whichever is higher. This is likely to be problematic for parties to agree to, and there may be a question as to whether it is an enforceable term (to the extent it involves imposition of a penalty which is not reflective of loss suffered).

Enforcement Risk

The investigation and enforcement of sanctions in the EU (and therefore failure to include such clauses) is currently decentralised. It is up to the national competent authorities to take action against sanctions breaches (including circumvention), and penalties range between administrative, civil and criminal. The risk of enforcement will vary across Member States, some being more proactive than others. In theory, competent authorities may decide to take action against EU exporters for any of the following:

• Failure to insert a "No Re-Export to Russia" clause in commercial agreements;
• Failure to ensure the clause envisages adequate remedies in the event of a breach of the contractual prohibition by a counterparty;
• Failure to report suspected breaches of the clause by counterparties to the national competent authority or through the EU whistle-blower tool.

Conclusion

While many European exporters may have already updated their standard contractual frameworks as part of their due diligence enhancements, Article 12g elevates the practice onto a legislative footing and makes re-export requirements more stringent.

European exporters involved in the export of the items within scope, to non-Partner Countries, need to carefully consider their contractual arrangements to ensure compliance with the new rules. Failure to do so could expose the company to criminal law risk, even in circumstances where they may not have anticipated any Russian connection to their contract.

Steps that European exporters can take now include:

1. Considering whether existing contractual arrangements with non-EU or non-Partner Country counterparts go far enough to cover the requirements of Article 12g, in particular whether "adequate remedies" in the spirit of the guidance are envisaged by the current drafting;
2. assessing their ability to monitor the flow of a product down the commercial chain, for example by including information sharing clauses which create regular reporting obligations on the direct counterparty throughout the duration of the contract and after its expiry;
3. updating standard precedents to include a "No Re-Export to Russia" clause for any in-scope contracts by 20 March 2024.