Originally published in WorldECR, issue 152, September 2026, pp. 24–25. WorldECR: www.worldecr.com.
A distinguishing feature of US sanctions is their extraterritorial application: they are often intended to influence the conduct of foreign nationals and non-US entities through their broader extraterritorial reach. That this has a significant bearing on commercial transactions even between non-US parties is reflected in the number of disputes that have arisen as a result before the English courts and courts in other jurisdictions – and highlights the importance of sanctions clauses in contracts, write Leigh Crestohl, Kartik Mittal and Stephanie Limaco.
How US sanctions affect non-US parties
One distinguishing feature of United States sanctions, compared with those imposed by the United Kingdom, is their extraterritorial application. While UK sanctions primarily regulate the conduct of UK nationals, entities incorporated or constituted within the UK jurisdiction, and activities within the UK territory (including its territorial sea), US sanctions are often designed to influence the conduct of foreign nationals and non-US entities through their broader extraterritorial reach.
US sanctions achieve this by providing that foreign individuals or entities that facilitate transactions for, provide material support to, or otherwise engage in certain activities with a US-designated individual or entity may themselves become subject to US sanctions. Such restrictions are usually referred to as US ‘secondary sanctions.’
Inclusion on the US sanctions list can have significant consequences for an individual or entity, particularly in relation to access to the US financial system and the freezing of assets within US jurisdiction. Consequently, the risk of designation by the US government acts as a powerful deterrent, discouraging foreign individuals and entities from engaging with US-sanctioned parties, even where US laws may not directly apply due to the absence of a US nexus.
Impact of foreign sanctions on English law contracts
The impact of US sanctions on commercial transactions is reflected in the number of disputes that have arisen as a result before the English courts and courts in other jurisdictions. For example, two non-US parties may enter into a contract governed by English law, following which one party becomes subject to US sanctions. In such circumstances, the non-sanctioned party may face a significant dilemma: while it may be legally obliged to make payment under the contract, doing so could expose it to the risk of US sanctions.
Under English law, the general position is that illegality under foreign law does not frustrate or otherwise relieve a party from contractual performance. The doctrine of foreign illegality operates as a defence only in limited circumstances, such as where:
- the object or purpose of the contract involves doing an act in a foreign and friendly state that would violate the law of that state (Foster v Driscoll [1929] 1 KB 470);
- performance of the contract is unlawful by the law of the country where the contract is to be performed, i.e., the lex loci solutionis (Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287); or
- there is a contractual provision that modifies the general position that illegality under foreign law does not frustrate or otherwise relieve a party from contractual performance.
With respect to the Ralli Brothers defence (i.e. where performance of a contract is unlawful under the law of the country in which it is to be performed), the English Commercial Court has recently provided some useful guidance in Beneathco DMCC v RJ O’Brien Limited [2025] EWHC 3079 (Comm), a case in which our firm acted for one of the parties. In that decision, the Court indicated (at paragraph 96) that the English courts may enforce a payment obligation under an English law contract (requiring a non-sanctioned company to discharge a debt owed to a US-sanctioned entity), even where compliance would expose that company to the risk of US sanctions. The takeaway is clear: sanctions risk alone may not defeat an English law payment claim. Such an outcome could place the non-sanctioned party in a difficult position.
Managing sanctions risk contractually: sanctions clauses in practice
A practical means by which parties can mitigate the risk of finding themselves in the position described above is to incorporate an express contractual provision addressing the risks associated with non-compliance with sanctions, including those imposed by the US. Such provisions, commonly referred to as ‘sanctions clauses’, vary in form and scope. The courts have, depending on the precise language employed, interpreted these clauses and provided useful guidance as to their effect.
In Mamancochet Mining Ltd v Aegis Managing Agency Ltd [2018] EWHC 2643 (Comm), the English High Court considered the interpretation of a sanctions clause in a marine insurance contract. The clause provided that ‘No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America.’
The insurers contended that, on a proper construction of the clause, they were not liable to pay a claim if doing so would expose them to the risk of sanctions, irrespective of whether in law that conduct was prohibited or not. By contrast, the insured argued that the clause required the insurer to demonstrate, on the balance of probabilities, that payment would in fact breach applicable sanctions and thereby expose the insurer to sanctions. The Court accepted the insured’s interpretation and held that the insurer would only be relieved of liability where payment would be prohibited under one of the specified legal regimes and would thereby expose the insurer to sanctions. It was not enough to show that there was a risk that OFAC might conclude that the conduct was prohibited and so impose a sanction, because if that had been the intention of the parties, they would have used the wording ‘exposure to the risk of being sanctioned’ or ‘conduct which the relevant authority might consider to be prohibited’.
In Lamesa Investments Ltd v Cynergy Bank Ltd [2020] EWCA Civ 821, the English Court of Appeal considered the interpretation of a clause in a facility agreement which permitted non-payment ‘in order to comply with any mandatory provision of law, regulation or order of any court of competent jurisdiction’. The Court adopted a broad interpretation of this clause, holding that it encompassed US secondary sanctions. This was notwithstanding the fact that such sanctions do not expressly prohibit conduct but instead give rise to a risk of adverse consequences where certain actions are undertaken.
In Tonzip Maritime LTD v 2Rivers PTE Ltd [2025] EWHC 2036 (Comm) and [2026] EWCA Civ 641, the English courts have considered the interpretation of a sanctions clause in a charterparty. The clause allowed vessel owners to refuse to comply with charterers’ orders ‘which in the reasonable judgment of the owners is prohibited by sanctions or will expose the owners, the vessel or its managers, crew, the vessel’s insurers or reinsurers to sanctions’. The Court held that the owner’s obligation to comply with the charterers’ orders does not apply where the owners make either of two reasonable judgements. First, where the owners reasonably conclude that compliance is prohibited by sanctions, meaning it is more likely than not that compliance with the order would trigger the application of sanctions. Second, where the owners reasonably conclude that compliance would expose them to sanctions, that is, where there is a risk or real danger of becoming subject to sanctions.
In conclusion, carefully drafted sanctions clauses remain an effective tool to manage the impact sanctions can have on commercial transactions. Parties should not only consider including a sanctions clause in their agreements but should also give close attention to the precise wording of such provisions, informed by the approach taken by the courts in interpreting comparable clauses. These clauses should be tailored to the transaction, counterparties and deal structure. As an example, parties should define the applicable regimes (typically including the UN, UK, EU and US), address secondary sanctions exposure, include an ongoing compliance covenant with information and cooperation undertakings, provide for termination if a counterparty, or any entity in its ownership or control chain (including shareholders, subsidiaries and affiliates) becomes designated, and preserve rights to suspend, withhold or refuse performance and payment where prohibited, or where performance would expose a party or other relevant parties to sanctions risk. Clauses should also anticipate and allocate how to manage conflicts with EU, UK or other blocking measures.
Seeking timely legal advice at the contracting stage – so that any sanctions clause is properly tailored and clearly expressed – can materially reduce uncertainty, disruption and potential exposure where a counterparty subsequently becomes subject to sanctions. It can also help ensure that, if an English law dispute does arise following a sanctions event, the contract contains clear protection, rather than leaving the parties with limited (or no) contractual protection.
Leigh Crestohl is the Managing Partner, Kartik Mittal a Partner and Stephanie Limaco a Senior Associate at Zaiwalla & Co in London.
