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Understanding the Impact Sanctions May Have on Your Business

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Trade Sanctions / Embargos

In light of the Russian / Ukraine conflict, its timely to review and understand the potential impact Sanctions may have on your business.

Most of us will have a basic awareness of what sanctions are, and that they can be applied from Australia mirroring UN Security Council Resolutions as well Australia applying its own autonomous sanctions.

Who must comply with sanctions?

Although each specific Australian sanction regime varies in scope, all are applicable within Australia.

Australian sanction laws are enforceable against Australian nationals, whether they are in Australia or overseas.

What are the potential penalties and risks for a business in breach of sanctions?

The consequences of failure to comply with the Australian Sanctions Regime are serious.

  • For individuals, each breach is punishable by imprisonment for up to 10 years and a fine of up to three times the value of the transaction or $555,000 (whichever is greater).
  • For bodies corporate, each breach is punishable by a fine of up to three times the value of the transaction or $2.22 million (whichever is greater).

For bodies corporate, these are strict liability offences, which means engaging in conduct that contravenes a sanction will be a breach even if there is no intention to contravene the sanction.

When might a business breach sanctions indirectly liable and/or be at risk of circumventing sanctions?

Businesses need to be alert to the different ways in which sanctions can affect their operations, even if they are not directly dealing with a sanctioned party or a sanctioned country. For example, depending on the relevant sanctions, there could be risk where a business exports an item to a non-sanctioned country with knowledge that it will be re-exported (whether by itself or integrated into something else) to a sanctioned country or end-user; or where the immediate counterparty to a transaction is owned or controlled by a sanctioned party.

Businesses must be careful not to take actions that have the purpose or effect of circumventing sanctions.

The persons and entities on which targeted financial sanctions have been imposed are identified on the Consolidated List.

Australian Sanctions (since start of Russian invasion of Ukraine)

Potential Trade Remedies – What to consider when negotiating contractual protections

In industries that are significantly exposed to natural disasters – for example, resources and transport– the use of force majeure and contractual protections is an important risk mitigation measure. The current trade restrictions introduced by Australia on Russian shipments (inbound/outbound) provide an opportunity for parties to consider what they will, and will not include, in provisions they are currently negotiating, such as:

  • Force majeure: Parties should consider whether the list of force majeure events should be inclusive or exhaustive and – just as importantly – they should consider whether they will make clear when a force majeure event will not apply.
  • Notices: Given it may not always be practical to specify the length of delay caused by a force majeure event at the time the notice is delivered, parties should consider an obligation on the affected party to provide periodic supplemental notices for the duration of the force majeure.
  • Mitigation: If express mitigation obligations are included, parties should consider the extent of these. Another matter to consider is whether an obligation on the parties to meet and endeavour to reach agreement as to how to best minimise the impact of a force majeure event is appropriate.
  • Supply interruptions: If the contract involves an obligation for supply of a critical product, consider including mechanisms that require the supplier to treat the customer equitably with other customers if supply of the relevant commodity will be curtailed in a force majeure scenario (eg. a requirement that the supplier supply the commodity that is available pro rata amongst customers with firm supply rights).
  • Terms of trade: Specific terms addressing title to goods, import clearances and transport costs are an important mechanism to deal with external events occurring during shipment. These will vary depending on the contractual relationship between the parties and the estimated risks and costs associated with delivery.
  • Change in law: Parties should carefully consider whether to provide relief for changes in law and, if so, the scope of the relief and definition of a “change in law”, and whether it appropriately addresses all circumstances that parties may wish for the contract to be flexibly adapted to.
  • Termination: In the event of a prolonged force majeure event, in addition to termination rights, parties should consider if express re-negotiation rights should be triggered and whether the supplier should have an obligation to assist a customer with obtaining alternative supply.

Trade Sanctions Sample Clause

Trade Sanctions. Each Party acknowledges that the ability of the other Party to perform under this Agreement is subject to compliance by such other Party and its Affiliates with applicable laws, rules and regulations, including but not limited to applicable trade sanctions implemented at the local, regional, and international level (collectively, “Trade Sanctions”). Each Party agrees that any refusal or failure by the other Party to perform hereunder on account of compliance with Trade Sanctions or other legal requirements shall not constitute a breach of any obligation under this Agreement.

Prepared by Darryl Daisley – Director Customs & International Trade Pitcher Partners WA (23 March 2022)

Further references:

Please note the information provided here is general in nature and does not constitute financial, tax or other professional advice. You should consider whether the information is appropriate for your needs and seek professional advice prior to making any decisions.