Legal Alerts

Russia Sanctions Create Heightened Need for Sophisticated Due Diligence in Sales Contracts

Washington, D.C. (April 18, 2022) - The increasing number and intensity of U.S. sanctions against Russia (see Lewis Brisbois’ alert of April 13, 2022) have brought the need to conduct adequate due diligence prior to the execution of an agreement for the sale of goods and services into sharp focus. In the current fraught environment, businesses need to exercise an elevated degree of care to avoid the risks of both potential sanctions violations and the limited recourse available in the event of a contract default caused by the imposition of sanctions. Courts in the District of Columbia and in other jurisdictions give significant deference to U.S. government foreign policy measures like sanctions, and enforcement of a judgment may in any event be problematic.

Given the complexity of these issues and the quickly-evolving nature of the situation, parties to a contract that contains provisions potentially implicated by U.S. sanctions should consider seeking sophisticated legal expertise and guidance. The key areas for concern include:

1. Parties

U.S. persons contemplating a purchase or sale of goods that could be implicated by sanctions should be mindful of the parties with whom they intend to transact business, regardless of a party’s nationality, jurisdiction of organization, or the site of performance. U.S. persons are generally prohibited from dealing with individuals and entities owned or controlled by, for, or on behalf of, targeted entities, which are identified in the Office of Foreign Asset Control’s (OFAC) list of Special Designated Nationals (SDN); the list is updated as new sanctions are imposed. Legal entities that are owned 50% or more by one or more sanctioned parties are subject to the same sanctions, even if they are not listed in the SDN or other sanctions list. Further, OFAC may also sanction legal entities with ownership percentages less than 50% when dealing with certain entities, goods, or commodities. The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) imposes additional restrictions on transactions with certain persons. For these reasons, a U.S. person entering into a potentially sanctionable contract should obtain and evaluate sufficient information about the counterparty, its share ownership structure, and the relative rights of its equity holders, to ensure against a sanctions violation.

2. Goods and Services

As the prohibited products, reduction in trade measures, and the resulting increase in the intensity of the Russian sanctions expand, U.S. persons should carefully monitor the types of goods, services, and investments that are covered. Current Russian sanctions restrict a U.S. person’s ability to (i) import into the U.S. specific goods of Russian origin, and (ii) export, re-export, sell, or supply goods or such other Russian or U.S. goods determined by the appropriate government agencies, without a license or other exception. For example, recent Executive Orders prohibit the importation of Russian Federation petroleum products, seafood, non-industrial diamonds, and alcohol, among other items. Similarly, the BIS maintains a list of prohibited exports and relevant licensing requirements. Further, the sanctions limit “new investments” in the Russian Federation and “any approval, financing, facilitation or guarantee” by any U.S. person, wherever located, of a transaction by a foreign person, if that transaction would be prohibited if performed by a U.S. person. Adding further complexity, businesses also need to be aware of sanctions imposed by other countries.

3. Price, Payment, and Currency

Executive Order 14068 prohibits the exportation or supply, directly or indirectly, of U.S. dollar-denominated banknotes to the Russian Federation, with some exceptions for explicitly licensed conduct or preexisting contracts. In addition to the prohibitions established by this and other Executive Orders, OFAC has broadly banned transactions by U.S. persons or in the United States if they involve transferring, paying, exporting, withdrawing, or otherwise dealing in the property interests of an entity or individual listed on OFAC’s SDN List. If a party to a potentially sanctionable transaction cannot obtain a specific license from OFAC exempting the transaction or payment from these or similar sanctions, the parties may be unable to enforce price, payment, or currency provisions in a sales agreement, with little recourse available in U.S. courts, as noted above. Moreover, to the extent enforcement of a judgment or breach of contract litigation would need to take place in a jurisdiction hostile to the U.S. or one with no ability to seize assets, the prospects of success are dim.

Conclusion

The accumulating volume and complexity of U.S. sanctions create serious risks for U.S. businesses with respect to both their own vulnerability to sanctions violations and concerns related to potential unenforceability of breaches of contract for the sale of goods and services. Sanctions-related restrictions on international transfers of funds and measures put in place by other countries further complicate the picture and reinforce the need for sophisticated expertise as businesses seek to identify and manage risk in this new commercial paradigm.

Lewis Brisbois’ attorneys are advising clients on the many dimensions of this issue and are available to assist businesses in navigating these exceptional challenges. Please contact the authors of this alert or other members of the firm’s Ukraine Conflict Response team for assistance.

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