Following the European Union’s 12th package of sanctions, among the measures adopted by the European Council was the introduction of a new requirement under Article 12g of EU Regulation 833/2014. It means that EU exporters and suppliers are obliged to include relevant wording in certain sales contracts prohibiting the re-export of restricted goods to Russia, and providing for ‘adequate remedies’ in the event of a breach. The intention is to combat the circumvention of EU export bans, and, more specifically, the situation where goods exported to third countries are re-exported to Russia.
Although the re-exportation of restricted goods is prohibited, there are certain exceptions applicable to ‘partner countries’, namely the US, Japan, the UK, South Korea, Australia, Canada, New Zealand, Norway and Switzerland.
The prohibition applies to the following restricted goods:
- dual-use goods;
- advanced technology items used in Russian military systems found on the battlefield in Ukraine, or critical to their development;
- production or use of those Russian military systems; and
- aviation goods and weapons.
The first clause of Article 12g(1) states:
‘When selling, supplying, transferring or exporting to a third country, with the exception of partner countries listed in Annex VIII to this Regulation, goods or technology as listed in Annexes XI, XX and XXXV to this Regulation, common high priority items as listed in Annex XL to this Regulation, or firearms and ammunition as listed in Annex I to Regulation (EU) No 258/2012, exporters shall, as of 20 March 2024, contractually prohibit re-exportation to Russia and re-exportation for use in Russia.’
EU guidance
The EU Commission has sought to add clarity through the Commission Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014. This guidance provides that Article 12g aims to combat the circumvention of EU export bans and goods originally exported to third countries being re-exported to Russia.
Many EU operators already insert ‘no re-export’ clauses in their contracts, as a matter of good practice within their basic due diligence. Article 12g turns this practice into a legal requirement for certain sensitive goods, improving legal certainty in the context of business negotiations and relations. It moreover creates a deterrent effect on those non-EU operators that redirect sanctioned EU goods to Russia, as it exposes them to contractual penalties.
Article 12g obliges EU exporters to insert a ‘no export to Russia’ clause in their export/sale/supply/transfer or similar contracts. This applies only to specific types of sensitive goods, including goods related to aviation, jet fuel (annexes XI, XX to the regulation), firearms (annex XXXV, as well as annex I to Regulation (EU) No 258/2012) and common high priority items (annex XL). The EU guidance addresses the geographical scope of the obligation and the requirement that the ‘no re-export to Russia’ clause must contain adequate remedies to ensure its effectiveness.
Exporters should not sell their products to any non-EU operator that is not ready to incorporate a ‘no re-export to Russia’ clause in contracts falling within the scope of Article 12g.
Independent of the obligation established by Article 12g, operators should have in place strong due diligence frameworks to ensure sanctions compliance.
In its notice of 1 April 2022, the EU Commission indicated that ‘in view of the risk of circumvention, economic operators in the EU are advised to take adequate due diligence measures available in order to prevent circumvention of the [sanctions on Russia]’.
It also stated that ‘due diligence measures that exporters and importers are advised to take are, for instance, the introduction in import and export contracts of provisions destined to ensure that any imported or exported goods are not covered by the restrictions. These may take the form of e.g. a statement that the respect of such provision is an essential element of the contract, or of contractual clauses committing the importer in third countries not to export the concerned goods to Russia or Belarus, and not to resell the concerned goods to any third party business partner that does not take a commitment not to export the concerned goods to Russia or Belarus giving rise to liability in case the latter re-exports the items to those countries.’
Suggested wording
The EU guidance suggests the following clause meets the requirements of Article 12g. Nonetheless, this is guidance only, and parties are free to choose any wording they wish, provided such wording complies with the requirements of Article 12g.
‘(1) The [Importer/Buyer] shall not sell, export or re-export, directly or indirectly, to the Russian Federation or for use in the Russian Federation any goods supplied under or in connection with this Agreement that fall under the scope of Article 12g of Council Regulation (EU) No 833/2014.
(2) The [Importer/Buyer] shall undertake its best efforts to ensure that the purpose of paragraph (1) is not frustrated by any third parties further down the commercial chain, including by possible resellers.
(3) The [Importer/Buyer] shall set up and maintain an adequate monitoring mechanism to detect conduct by any third parties further down the commercial chain, including by possible resellers, that would frustrate the purpose of paragraph (1).
(4) Any violation of paragraphs (1), (2) or (3) shall constitute a material breach of an essential element of this Agreement, and the [Exporter/Seller] shall be entitled to seek appropriate remedies …
(5) The [Importer/Buyer] shall immediately inform the [Exporter/Seller] about any problems in applying paragraphs (1), (2) or (3), including any relevant activities by third parties that could frustrate the purpose of paragraph (1). The [Importer/Buyer] shall make available to the [Exporter/Seller] information concerning compliance with the obligations under paragraph (1), (2) and (3) within two weeks of the simple request of such information.’
Applicable contracts
Going forwards, companies should consider whether the products under their sales contracts fall within the restricted goods listed in Article 12g.
General sanctions compliance clauses may not be adequate to satisfy the requirements of Article 12g. EU operators should check whether their existing contracts are affected by the new requirements and whether it is necessary to make any amendments. It should also be kept in mind that the obligation to include the ‘no re-export to Russia’ clause depends on the contract’s date of conclusion:
- Contracts concluded before 19 December 2023 – contracts that were already concluded when Council Regulation (EU) 2023/2878 came into force benefit from a one-year transition period until 19 December 2024, or until the contracts’ expiry, whichever is earliest. For any re-execution of such contracts as of 20 December 2024, they need to be amended to include the ‘no re-export to Russia’ clause.
- Contracts concluded as of 19 December 2023 – these contracts must contain the ‘no re-export to Russia’ clause as of 20 March 2024.
Companies must review their internal compliance programmes to implement the new restrictions and requirements of Article 12g. This may involve strengthening due diligence and compliance processes, implementing efficient monitoring controls, and enhancing reporting mechanisms.
Source – https://www.penningtonslaw.com/news-publications/latest-news/2024/no-russia-clause-what-is-it-and-when-is-it-needed