"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, particularly the situation where goods exported to third countries are re-exported to Russia. One of the key features is a so-called "no re-export to Russia" clause (abbreviated "No-Russia" clause). According to Article 12g paragraph 1 of 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 concerning the sale, delivery, transfer, or export of goods and technologies to third countries, which contractually prohibits re-export to Russia and re-export for use in Russia.

Scope of Application

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

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

• Annex XX (especially jet turbine 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 that are not established 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).

Legacy Contracts

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

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

FAQ of the EU Commission

On 22 February 2024, the EU Commission published FAQs (exclusively in English) regarding Article 12g of Regulation (EU) 833/2014. These are not only very worth reading but also include a model "no re-export to Russia" clause that complies with the requirements of Article 12g (see below). Deviating formulations should be possible and are also necessary under German law (see notes below). According to the EU Commission, the clause must be an essential part of the respective contract and include appropriate remedies, which are not specified in detail. Additionally, violations of the re-export to Russia must be reported to the competent authorities (in Germany, the Federal Office for Economic Affairs and Export Control – BAFA).

Model Clause of the EU Commission

(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.

Notes on the Model Clause

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

Paragraph 2 contains only a best-efforts duty ("best efforts"). It seems more sensible to oblige the contract partner to pass on the obligations in the supply chain.

Paragraph 4 regulates which rights ("remedies") the exporter is entitled to in the event of the contract partner's breach of duty.

Linguistically, some adjustments need to be made:

• First, a serial comma should be added throughout the entire clause at crucial points (see highlights below), which can have not only linguistic but also legal and economic implications in the event of a dispute (as in this case).

  • in paragraph 1 it should 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 wording in paragraph 4 could be revised, especially the part "of an essential element" seems superfluous.

• Finally, it is customary in modern contract language to use "may" instead of "shall be entitled".

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

The penalty clause contained in paragraph 4 (ii) is, however—with the application of German law—invalid under general terms and conditions law.

• The penalty clause is independent of fault and therefore legally invalid under § 307 para. 2 no. 1 BGB—even in B2B (cf. BGH, decision of 21 March 2013 - VII ZR 224/12).

• Moreover, the penalty clause does not differentiate whether there is a breach of duty under paragraph 1 (refraining from selling, exporting, or re-exporting to Russia), paragraph 2 (best efforts), or paragraph 3 (monitoring). According to the BGH, the unreasonableness of a penalty clause may already result from the fact that a specific amount is provided as a flat sanction without differentiating according to the nature, weight, and duration of the violations. Such a sanction would only be permissible if the specified amount was still reasonable even in light of the typical least contractual breach (cf. BGH, decision of 31 August 2017 - VII ZR 308/16; BGH, decision of 20 January 2016 – VIII ZR 26/15).

• Regardless, the exporter must carefully consider how high the penalty should be. Because the amount of a penalty could also result in disadvantage to the contract partner. This is especially the case if the sanction is disproportionate to the weight of the violation and its consequences for the contract partner (cf. BGH, decision of 20 January 2016 – VIII ZR 26/15).

• The invalidity of the penalty clause under general terms and conditions law could even affect the entire paragraph 4. However, the exporter can argue in case of dispute that the rest of paragraph 4 stands alone linguistically and content-wise ("blue-pencil-test").

• The legal consequences of the invalidity of the penalty would not be dramatic at first glance. Although the exporter could not claim the penalty in case of dispute, he could still assert a claim for damages under § 280 para. 1 BGB. However, the exporter would then have to precisely demonstrate and prove the amount of the damage incurred, which is often difficult if not impossible in practice.

• How could the penalty be legally secure?

  • Clearly, it would be to structure the penalty dependent on fault. However, this would mean that the contract partner could excuse themselves in case of breach and the penalty would not apply. Regardless, the penalty amount would still have to differentiate according to the type of breach.

  • It is also conceivable to use a penalty clause according to the so-called "Hamburger Brauch", where the exporter can determine the penalty amount at its reasonable discretion, with reasonableness reviewed by the competent court (§ 315 BGB). It would also be possible to name an amount in the contract that is deemed reasonable. However, such a regulation inevitably leads to a legal dispute (this already results from the wording).

  • Another alternative would be a lumpsum damage compensation ("liquidated damages"), although its amount must be proportionate to the possible damage to the exporter. This can hardly be predicted at the time of contract formation.

  • An individual agreement (with the result that general terms and conditions law do not apply) is already ruled out because the exporter (using general terms and conditions law) cannot seriously put the "no re-export to Russia" clause up for negotiation. However, this is precisely demanded by the highest courts in Germany (cf. BGH, order of 19 March 2019 – XI ZR 9/18).

  • A completely different approach would be to solve the general terms and conditions law problem of the penalty clause and other regulations in the contract (especially the exporter's limitation of liability) through an appropriate choice of law. Before considering Swiss law or other jurisdictions, it is worth looking at the UN Sales Law (CISG) as part of German law. If the UN Sales Law is not—often reflexively and rather out of ignorance—excluded in practice, two aspects would be interesting: Firstly, an independent penalty would be possible because the UN Sales Law does not require fault. Secondly, the "material breach" mentioned in paragraph 4 of the "no re-export to Russia" clause could quite possibly be seen as a "fundamental breach" in the sense of Article 25 CISG. This would allow the exporter both to demand an enforceable penalty and to withdraw from the contract under paragraph 4 of the clause or Article 64 CISG. Additionally, a arbitration clause should be added instead of a court jurisdiction clause.

• The term "appropriate remedies" (appropriate remedies) used in paragraph 4 could—when applying German law—be seen as not clear and understandable (intransparent) in terms of § 307 para. 1 sentence 2 BGB, which could lead to the clause's invalidity. For this reason, it seems reasonable to revise the regulation linguistically and content-wise, for example, by listing the remedies specifically and conclusively. Another possibility would be to include a dedicated fallback regulation in its own paragraph ("blue-pencil-test").

Paragraph 5 should be associated with an audit right of the exporter.

It seems reasonable to include an indemnification obligation of the buyer to the exporter ("Indemnity") for a breach of the "no re-export to Russia" clause in a new paragraph 6. Again, the issue of general terms and conditions law should be considered.

Regardless of the legal effectiveness, the exporter should implement the "no re-export to Russia" clause not only in its general sales conditions but also in other contractual documents (contract, offer, etc.). Because internationally, general terms and conditions are often not part of the contract due to lack of incorporation or due to conflicting general terms and conditions ("battle of forms"), which would result in the "no re-export to Russia" clause not being applied.

Practical Recommendations

Initially, companies should check whether the application scope is opened at all. Specifically: whether it concerns goods mentioned in the goods lists and sold to contract partners not established in the EU or a partner country.

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

Further Information

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

(1) In the sale, delivery, transfer, or export of goods or technologies listed in Annexes XI, XX, and XXXV of this regulation, common goods of high priority according to the list in Annex XL of this regulation, or firearms and ammunition according to the list in Annex I of Regulation (EU) No 258/2012 to a third country—with the exception of the 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.

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

(3) In application of paragraph 1, exporters ensure that the agreement with the partner from the third country contains appropriate remedies for the event of a breach of a contractual obligation entered into according to paragraph 1.

(4) If the partner from the third country breaches any contractual obligation entered into according to paragraph 1, exporters inform the competent authority of the member state where they reside or are established as soon as they become aware of the breach.

(5) Member states inform each other and the Commission about a discovered breach of a contractual obligation entered into according to paragraph 1 or about a discovered circumvention of such an obligation.

Adjusted Model Clause

The adjustment of the model clause depends on many factors in each case, such as the chosen legal system, negotiation position, etc. The following wording therefore does not replace consultation with 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.