"No re-export to Russia": Legally Compliant Export Contracts

Introduction

On 18 December 2023, the European Council decided on the 12th sanctions package against Russia. The goal is to combat the circumvention of EU export bans, specifically situations where goods exported to third countries are re-exported to Russia. One of the focal points includes a so-called "no re-export to Russia" clause (abbreviated as "No-Russia" clause). According to Article 12g(1) of the Regulation (EU) No 833/2014 (in the consolidated version of 23 February 2024), companies are required from 20 March 2024 to include a clause in their contracts for the sale, supply, trasport, or export of goods and technologies to third countries that contractually prohibits the re-export to Russia and the re-export for use in Russia.

Scope of Application

The "no re-export to Russia" clause must, however, only be included in the sale of the following goods and technologies:

• Annex XI (especially goods for use in the aerospace industry)

• Annex XX (particularly jet fuels and fuel additives)

• Annex XXXV (firearms and other weapons)

• Annex XL (including circuits, semiconductor devices, certain electrical equipment)

• Annex I of Regulation (EU) No 258/2012 (firearms and ammunition)

The obligation applies to contracts with companies not based in the EU. Exceptions currently exist for the following partner countries: USA, Japan, the United Kingdom, South Korea, Australia, Canada, New Zealand, Norway, and Switzerland (see Annex VIII of EU Regulation 833/2014).

Existing Contracts

Contracts concluded before 19 December 2023 do not need to contain a "no re-export to Russia" clause if they are fulfilled by 19 December 2024, according to Article 12g(2) of Regulation (EU) 833/2014. However, if fulfilled only after 20 December 2024, such a clause must be included.

Contracts concluded after 19 December 2023 must include the "no re-export to Russia" clause from 20 March 2024 onward.

EU Commission FAQ

The EU Commission published FAQs on 22 February 2024 (available in English only) about Article 12g of Regulation (EU) 833/2014. These are not only very informative but also include a sample "no re-export to Russia" clause that complies with the requirements of Article 12g (see below). Divergent formulations are possible and also necessary under German law (see remarks below). According to the EU Commission, the clause must be a material component of the respective contract and contain appropriate remedies, but these are not further specified. Furthermore, violations of the re-export to Russia must be reported to the competent authorities (in Germany to the Federal Office for Economic Affairs and Export Control – BAFA).

EU Commission Template Clause

(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, including, but not limited to:
(i) termination of this Agreement; and
(ii) a penalty of [XX]% of the total value of this Agreement or price of the goods exported, whichever is higher.

(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.

Remarks on the Template Clause

Paragraph 1 contains the obligation of the contract partner to refrain from selling, exporting, or re-exporting to Russia. An expansion or adaptation does not seem necessary at this point.

Paragraph 2 only includes a best efforts obligation. It seems more sensible to require the contract partner to pass on the obligations in the supply chain.

Paragraph 4 regulates which rights the exporter has in the event of a breach of duty by the contract partner.

Linguistically, some adjustments need to be made:

• Initially, a serial comma must be added at crucial points throughout the entire clause (see highlights below), which can have both linguistic and legal implications in case of a dispute (as in this case).

  • in paragraph 1 it must read "shall not sell, export, or re-export"

  • in paragraph 4 "Any violation of paragraphs (1), (2), or (3)"

  • in paragraph 5 "problems in applying paragraphs (1), (2), or (3)"

  • and further in paragraph 5 "obligations under paragraph (1), (2), and (3)"

• Additionally, the formulation in paragraph 4 could be revised, especially the part "of an essential element" seems superfluous.

• Lastly, in modern contract language, "may" is used instead of "shall be entitled".

Content-wise, the exporter's right to withdraw from the contract in paragraph 4(i) is essential. No adjustment is necessary here.

The contractual penalty contained in paragraph 4(ii) is, however – under German law – legally ineffective due to general business terms law.

• The penalty clause is designed to be independent of culpability and is therefore legally ineffective according to § 307(2) No. 1 BGB – even in B2B (see BGH ruling of 21 March 2013 - VII ZR 224/12).

• Furthermore, the penalty clause does not differentiate between whether a breach of the obligation under paragraph 1 (abstention from sale, export, or re-export to Russia), paragraph 2 (best efforts obligation), or paragraph 3 (monitoring) occurs. According to BGH, the inappropriateness of a penalty clause can already result from a flat-rate sanction being imposed without differentiating according to the type, weight, and duration of the contractual breaches. Such a sanction would only be permissible if the stated amount is also appropriate in light of the typically smallest contractual breach (see BGH ruling of 31 August 2017 - VII ZR 308/16; BGH ruling of 20 January 2016 – VIII ZR 26/15).

• Independently of this, the exporter must carefully consider how high the penalty should be. The amount of the penalty could also result in an unacceptable disadvantage for the contract partner. This is particularly the case when the sanction is out of proportion to the gravity of the breach and its consequences for the contract partner (see BGH ruling of 20 January 2016 – VIII ZR 26/15).

• The legal ineffectiveness of the penalty could even encompass the entirety of paragraph 4. However, the exporter could argue in case of a dispute that the remaining paragraph 4 stands logically and linguistically on its own ("blue-pencil-test").

• The legal consequences of the ineffectiveness of the penalty would not appear dramatic at first glance. Although the exporter could not claim the penalty in a dispute, they could still assert a claim for damages under § 280(1) BGB. However, the exporter would then need to precisely demonstrate and prove the extent of the damage incurred, which is often difficult to impossible in practice.

• How could the penalty be structured to be legally secure?

  • A plausible option would be to make the penalty dependent on culpability. This would mean, however, that the contract partner could exculpate themselves in the event of a breach, and the penalty would not apply. Independent of this, the penalty amount would still need to differentiate according to the type of breach.

  • It is also conceivable to use a penalty clause according to the so-called "Hamburg Custom", whereby the exporter can determine the penalty amount at their reasonable discretion, with the appropriateness being reviewed by the competent court in the event of a dispute (§ 315 BGB). It would also be possible to specify an amount in the contract that is intended to correspond to fairness. However, such a regulation would ultimately lead to a legal dispute (this already results from the wording).

  • Another alternative would be a liquidated damages, but its amount must be proportional to the potential damage to the exporter. This can hardly be predicted at the time of contract design.

  • An individual agreement (with the consequence that general business terms law does not apply) is ruled out because the exporter (legally the user of general terms and conditions) cannot seriously make the "no re-export to Russia" clause available for negotiation. However, the highest court jurisprudence in Germany requires this, which many companies are unaware of (see BGH ruling of 19 March 2019 – XI ZR 9/18).

  • A completely different approach would be to resolve the general business terms law issue of the penalty clause and other provisions in the contract (especially the exporter's liability limitation) by choosing an appropriate legal jurisdiction. Before considering Swiss law or other legal systems, it may be worth looking at the UN Sales Law (CISG) as part of German law. If the UN Sales Law is not excluded – as is often reflexively done out of ignorance – two aspects would be interesting: First, an independent penalty would be possible because the UN Sales Law does not require culpability. Second, the "material breach" mentioned in paragraph 4 of the "no re-export to Russia" clause could be seen as a "fundamental breach" in the sense of Article 25 CISG. This would allow the exporter to demand a legally effective penalty and withdraw from the contract according to paragraph 4 of the clause or Article 64 CISG. A arbitration clause should be included instead of a jurisdiction clause.

• The term "appropriate remedies" used in paragraph 4 could – under German law – be viewed as not clear and understandable (opaque) in the sense of § 307(1) sentence 2 BGB, which could render the clause ineffective. For this reason, it seems advisable to revise the regulation linguistically and substantively, for example, by listing the remedies concretely and exhaustively. Another option would be to implement a dedicated fallback provision in a separate paragraph ("blue-pencil-test").

Paragraph 5 should be linked to an audit right of the exporter.

It seems advisable to include in a new paragraph 6 an indemnity obligation of the buyer towards the exporter ("Indemnity") in case the buyer violates its obligations under the "no re-export to Russia" clause. The issue of legality under general business terms law should also be considered in this context.

Regardless of the legality under general business terms law, the exporter should not only implement the "no re-export to Russia" clause in its General Terms and Conditions of Sale, but also in other contract documents (contract, offer, etc.). This is because general terms and conditions frequently do not become part of the contract internationally due to lack of (effective) inclusion or due to conflicting general terms and conditions ("battle of the forms"), which would lead to the "no re-export to Russia" clause not being applicable.

Practical Recommendations

Companies should first check whether the scope of application is opened at all. Specifically, whether in individual cases it concerns goods listed in the mentioned lists of goods and sold to contract partners whose seat is not in the EU or a partner country.

If the scope of application is opened, companies must include a "no re-export to Russia" clause in their contracts. The EU Commission's template clause can be adopted but should be revised linguistically and substantively and supplemented with additional regulations (audit, indemnity, etc.). Additionally, when German law applies, the requirements under general business terms law must be considered.

Further Information

Article 12g of Regulation (EU) No 833/2014 (in the consolidated version of 23 February 2024) states:

(1) In the sale, supply, transport, or export of goods or technologies listed in Annexes XI, XX, and XXXV of this Regulation, of common goods with high priority according to the list in Annex XL of this Regulation, or of firearms and ammunition according to the list in Annex I of Regulation (EU) No 258/2012 to a third country — with the exception of partner countries listed in Annex VIII of this Regulation — exporters must contractually prohibit re-export to Russia and re-export for use in Russia from 20 March 2024 onward.

(2) Paragraph 1 does not apply to the fulfillment of contracts concluded before 19 December 2023 until 20 December 2024 or their expiration date, whichever is earlier.

(3) When implementing paragraph 1, exporters ensure that the agreement with the third-country partner contains appropriate remedies in the event of a breach of a contractual obligation entered into under paragraph 1.

(4) If the third-country partner breaches one of the contractual obligations entered into under paragraph 1, the exporters shall inform the competent authority of the Member State in which they are resident or established as soon as they become aware of the breach.

(5) Member States shall notify each other and the Commission of any established breach of a contractual obligation entered into under paragraph 1 or of any circumvention of such an obligation.

Adjusted Template Clause

The adjustment of the template clause depends on many factors in individual cases, such as the chosen legal system, negotiation position, etc. The following wording does not replace advice from specialized lawyers.

No re-export to Russia

(1) The [Importer/Buyer] shall not sell, export, or re-export, directly or indirectly, any goods supplied under or in connection with this Agreement to the Russian Federation or for use in the Russian Federation, as covered under Article 12g of Council Regulation (EU) No 833/2014.

(2) The [Importer/Buyer] shall ensure that the prohibitions in paragraph (1) are not circumvented by any third parties in the commercial chain, including by possible resellers.

(3) The [Importer/Buyer] shall establish and maintain effective monitoring mechanisms to detect and prevent any actions by third parties that would contravene paragraphs (1) or (2). This includes keeping detailed records and documentation of compliance efforts, which must be retained for at least [X] years after this Agreement's termination.

(4) The [Importer/Buyer] shall promptly inform the [Exporter/Seller] of any difficulties in applying paragraphs (1), (2), or (3), including any relevant third-party activities that could undermine the objectives of paragraphs (1) or (2).

(5) The [Importer/Buyer] shall provide the [Exporter/Seller] with the necessary information and documentation to prove its compliance with its obligations stated in this clause within two weeks upon request.

(6) The [Exporter/Seller] may audit the [Importer/Buyer]'s business and production premises at any time to verify the [Importer/Buyer]'s compliance with its obligations stated in this clause. Audits shall be conducted with reasonable notice and within the [Importer/Buyer]'s usual business hours. The [Exporter/Seller] shall protect any confidential information or business secrets encountered during such audits.

(7) Any violation of paragraphs (1) to (5) constitutes a material breach of this Agreement, and the [Exporter/Seller] may seek appropriate remedies, including, but not limited to:
(i) termination of this Agreement without notice; and
(ii) liquidated damages of [XX]% of the total value of this Agreement or the price of the goods exported, whichever is higher, unless the [Importer/Buyer] is not responsible for the breach.