Russian sanctions create increased need for sophisticated due diligence in sales contracts – International Law
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Washington, DC (April 18, 2022) – The increasing number and intensity of U.S. sanctions against Russia (see Lewis Brisbois alert of April 13, 2022) has highlighted the need to conduct adequate due diligence before executing an asset sale agreement and services. In the current difficult environment, companies must exercise great caution to avoid both the risks of potential sanctions violations and the limited remedies available in the event of a contract default caused by the imposition of sanctions. Courts in the District of Columbia and other jurisdictions give great deference to US government foreign policy measures such as sanctions, and enforcement of a judgment may in any event be problematic.
Given the complexity of these issues and the rapidly changing nature of the situation, parties to a contract that contains provisions potentially implicated by US sanctions should consider seeking sophisticated legal advice and expertise. Key areas of concern include:
U.S. persons considering the purchase or sale of property that may be subject to sanctions should be aware of the parties with whom they intend to do business, regardless of a party’s nationality. , the jurisdiction of the 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, who are identified in the Office of Foreign Asset Control’s Special Designated Nationals (SDN) list. (OFAC); the list is updated as new sanctions are imposed. Corporations that are 50% or more owned by one or more sanctioned parties are subject to the same sanctions, even if they are not on the SDN or other sanctions list. In addition, OFAC may also sanction corporations with less than 50% ownership percentage 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 dealings with certain individuals. For these reasons, a US person entering into a potentially sanctionable contract must obtain and evaluate sufficient information about the counterparty, its ownership structure, and the relative rights of its shareholders, to guard against a sanctions violation.
2. Goods and services
As banned products, the reduction in trade measures and the resulting increase in the intensity of Russian sanctions increase, US citizens 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 United States specific goods of Russian origin, and (ii) export, re-export, sell, or supply goods or any other specified Russian or U.S. property by the relevant government agencies, without license or other exceptions. For example, recent presidential decrees prohibit the import of petroleum products, seafood, non-industrial diamonds and alcohol from the Russian Federation, among others. Similarly, the BIS maintains a list of prohibited exports and relevant licensing requirements. In addition, the sanctions limit “new investment” in the Russian Federation and “any endorsement, financing, facilitation, or guarantee” by any U.S. person, wherever located, of a transaction by a foreign person, if such transaction would be prohibited if made by a US Person. To add to the complexity, companies should also be aware of sanctions imposed by other countries.
3. Price, payment and currency
Executive Order 14068 prohibits the export or supply, directly or indirectly, of US dollar-denominated banknotes to the Russian Federation, with some exceptions for conduct under explicit license or pre-existing contracts. In addition to the prohibitions established by this and other executive orders, OFAC has broadly prohibited transactions by U.S. persons or persons in the United States if they involve the transfer, payment, export, withdrawal, or other transaction in the ownership 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 such or similar sanctions, the parties may be unable to enforce price, payment or currency in a sales agreement, with little recourse available in US courts, as noted above. In addition, to the extent that the enforcement of a judgment or a breach of contract litigation would have to take place in a hostile jurisdiction in the United States or in a jurisdiction unable to seize assets, the prospects for success are low.
The growing volume and complexity of U.S. sanctions creates serious risks for U.S. businesses with respect to both their own vulnerability to sanctions violations and concerns about the potential unenforceability of breaches of contract for the sale of goods and services. Sanctions-related restrictions on international funds transfers and measures put in place by other countries further complicate the situation and reinforce the need for sophisticated expertise as companies seek to identify and manage risks in this new business paradigm.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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