As of 20 March 2024: obligation to include ‘no re-export to Russia’ clause in contracts

Part of the EU's 12th sanctions package against Russia[1] is the obligation for exporters of certain sensitive goods and technology to third countries to contractually ban re-exports to Russia or for use in Russia. This obligation to contractually prohibit re-exports to Russia or for use in Russia applies to contracts concluded from 19 December 2023 with effect from 20 March 2024 and thus takes effect this Wednesday.

All the more reason, then, for yet another warning: failure to include the contractual prohibition on re-exports to Russia, including appropriate corrective measures in case of breach by the contracting party, does indeed constitute a violation of sanctions regulations.

"No re-export to Russia" clause 

The EU's 12th sanctions package against Russia includes an obligation for exporters to contractually prohibit re-export to Russia or for use in Russia when selling, supplying, transferring or exporting certain goods or technology to a third country from 20 March 2024. The obligation is contained in Article 12g of Regulation (EU) No 833/2014. Many European exporters, especially those of more sensitive goods, will have already voluntarily included such clauses in their contracts. However, if they have not yet done so, they should still proceed to do so by the middle of this week.

Article 12g aims to combat the circumvention of EU export bans even more effectively and in particular in the situation where goods are exported to third countries and then re-exported from there to Russia. Meanwhile, it has become clear that EU export bans are being circumvented via third countries, undermining these sanctions measures. This is obviously a thorn in the EU's side, which is why this requirement is now being introduced. Buyers in third countries are not bound by EU sanctions measures by default.[2]  Through this measure, however, they will contractually be made so.

Practical implications

It is a new step in combating circumvention of EU export bans via (buyers in) third countries. The provision is reasonably clear and leaves little room for doubt as to when a contractual prohibition on re-export to or for use in Russia should be included in a contract.

All sorts of interesting legal questions can be raised about the provision, though. The practical aspects of the measure are also interesting. For instance, is it necessary that the buyer explicitly and/or in writing agrees to a new clause, or can the clause be imposed unilaterally? How should companies that do not use (comprehensive) (framework) agreements, but supply products based on 'orders' and 'order confirmations', proceed? Can the clause be put in general terms and conditions? And how should companies that do use long-term framework agreements that did not already contain such a clause proceed? What if the contract provides that changes to the contract require express, written consent of both parties and the other party refuses to agree to a proposed change to the contract? Suppose the existing pre-19 December 2023 contract continues beyond the end of the transition period until 20 December 2024 and the other party refuses to agree. The exporter will then have to terminate the contract, but does this not potentially constitute a breach of contract? What role does the law applicable to the contract have in this context, in particular if it is not the law of an EU Member State but of a third country? All sorts of interesting case positions are conceivable that render the measure less straightforward to implement in practice than it seems at first sight.

Goods and technology covered by the scope of the provision

The contractual ban on re-export to or for use in Russia does not apply to all goods and technology subject to export bans. Here, of course, the exporter's general obligation to make careful enquiries to ensure that a buyer in a third country will not divert the goods to Russia does apply. After all, export bans prohibit not only direct sale, delivery, transfer or export to Russia or for use in Russia, but also 'indirect' ones.[3] In addition, sanctions law of course has the basic rule that, in any case, it is prohibited to: " participate, knowingly and intentionally, in activities the object or effect of which is to circumvent prohibitions in this Regulation”. [4]  

In short, Article 12g is thus not directed against all goods and technology subject to export bans. It concerns more sensitive goods, namely goods and technology as listed in:

• Annex XI (goods and technology suitable for use in the aerospace sector)
• Annex XX (jet fuels and fuel additives)
• Annex XXXV (firearms and other arms of heading 9303 and ex 9304)
• Annex XL with so-called "common high priority products" 
• Firearms and ammunition as listed in Annex I to Regulation (EU) No 258/2012

In particular, the list in Annex XL of common high priority products includes goods whose sensitivity may not be immediately obvious, such as - for example – other television cameras, digital cameras and video cameras (8525.89), plugs and sockets for a voltage not exceeding 1000 V. These are products classified under various tariff (sub)headings of Chapters 84, 85, 88 and 90 of the Combined Nomenclature.  

Partner countries are excluded 

The requirement to contractually enforce a prohibition on re-export to or for use in Russia when selling, supplying, transferring or exporting the aforementioned goods and technology does not apply to all third countries. EU partner countries, as listed in Annex VIII to Regulation (EU) No 833/2014, are exempted. After all, these partner countries have similar measures in place to combat circumvention of sanctions measures. The partner countries are (currently) the United States, Japan, the United Kingdom, Australia, Canada, New Zealand, Norway and Switzerland. 

Existing contracts concluded before 19 December 2023

As indicated, the obligation applies as of 20 March 2024. For contracts that had already been concluded before 19 December 2023, the obligation does not yet apply until 20 December 2024, or until the expiry date of the contract, if the contract has an expiry date prior to that date. Therefore, a few months remain in this regard to arrange a contract amendment, if necessary.

The European Commission applies a broad interpretation of what constitutes a "new" contract, i.e. a contract "concluded" after 18 December 2023. For instance, amendments and tacit or explicit renewals of contracts concluded before 19 December 2023 are considered to be separate contracts concluded after 18 December 2023 which must therefore contain the clause.

It is also important to note that the obligation does not only apply to purchase/sale contracts, but to all contracts resulting in the sale, supply, transfer or export from the EU to third countries of the said goods and technology. For example, this could include rental, lease or distribution agreements. 

Contractual ban on re-exports and appropriate remedies

The measure includes not only the obligation to prohibit the re-export to or for use in Russia of the aforementioned goods and technology, but also the requirement to include in the contract with the counterparty appropriate corrective measures applicable in case of violation of the contractual prohibition on re-export to Russia. It is not exactly specified what appropriate corrective measures should entail. In the answer to question 5 of the now-published Frequently Asked Questionnaire update, the European Commission makes the following suggestions: termination of the contract and payment of a contractual penalty. In practice, whether corrective measures are appropriate will depend on the type of contract, the goods, the third country in question, the customer et cetera.  

Reporting obligation

However, it does not stop at the obligation to include a prohibition on re-export and appropriate remedies in case of violation. Article 12g additionally provides for an obligation for exporters to inform the competent authorities of the Member State where they are established as soon as they become aware of a breach by their counterpart (paragraph 4). Also in light of effectively combating circumvention of export bans of the aforementioned goods and technology, Member States must subsequently inform each other and the Commission of detected instances of a breach or circumvention (paragraph 5).

Explanatory remarks European Commission by update frequently asked questionnaire

Questions were raised in response to the measure. The European Commission provided further clarification by answering some frequently asked questions on 22 February 2024.[5] In its answer to FAQ number 6, the Commission also included a template clause that meets the obligation. It is not obligatory to use exactly the wording of the clause proposed by the Commission. While other wording is also allowed, the Commission recommends that the clause is identified as an essential element of the contract.  Of course, the aspects mentioned in Article 12g should recur, including once again the prohibition on re-export to Russia or for use in Russia and appropriate remedies in case the contractual counterpart of the exporter would nevertheless re-export the goods or technology to Russia in violation of the prohibition.  

Recommendations

Given the approaching expiry of the first settlement period on 20 March 2024 for contracts entered into after 18 December 2023, exporters involved in the sale, supply, transfer or export of restricted goods and technology to third countries should ensure that their (standard) contracts have been amended in time with a "no re-export to Russia" clause. For existing contracts dated before 19 December 2023, there is a somewhat longer period to arrange a contract amendment.

In practice, there is likely to be much reliance on a separate "no re-export to Russia" declaration that third-country buyers must sign before they can still be supplied with said goods and technology, which statements, once signed, will become part of the agreement between the exporter and buyer. Such separate declarations offer a pragmatic solution to either enforce the ban contractually and adjust existing contracts, especially for companies that need to do this on a large scale. As far as we are concerned, separate “no re-export to Russia” statements are also appropriate in this sense because they explicitly draw attention to the ban on re-exports to Russia.  

Questions?

If you have any questions about this article or any other queries about or in response to the sanctions against Russia, please contact Ploum's Customs, Trade & Logistics team, Jikke Biermasz (j.biermasz@ploum.nl) and/or Marijn van Tuijl (m.vantuijl@ploum.nl).