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

Introduction

On December 18, 2023, the European Council adopted the 12th sanctions package against Russia. The aim is to combat the circumvention of EU export bans, particularly the situation where goods exported to third countries are re-exported to Russia. Key focuses include 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 February 23, 2024), companies are required, starting March 20, 2024, to include a clause in their contracts for the sale, supply, transportation, 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

The "no re-export to Russia" clause, however, 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 aircraft 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)

This obligation applies to contracts with companies not based in the EU. Exceptions currently exist for the following partner countries: the 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 December 19, 2023, are not required to include a "no re-export to Russia" clause under Article 12g Paragraph 2 of Regulation (EU) 833/2014 if they are fulfilled by December 19, 2024. However, if fulfilled after December 20, 2024, they must include this clause.

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

FAQ of the European Commission

On February 22, 2024, the European Commission published FAQs (available only in English) on Article 12g of Regulation (EU) 833/2014. These are not only highly worthwhile to read but also include a sample "no re-export to Russia" clause that complies with the provisions of Article 12g (see below). Deviating formulations are permissible and are also required under German law (see notes below). According to the European Commission, the clause must be an essential component of the respective contract and include appropriate remedies, which are not further specified. Furthermore, breaches of the re-export ban to Russia must be reported to the competent authorities (in Germany, the Federal Office for Economic Affairs and Export Control – BAFA).

Sample Clause of the European 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 Sample Clause

Paragraph 1 contains the obligation of the contract partner to refrain from selling, exporting, or re-exporting to Russia. No expansion or adaptation appears necessary at this point.

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

Paragraph 4 stipulates the rights ("remedies") afforded to the exporter in case of the contract partner's breach of duty.

Linguistically, some adaptations need to be made:

• Initially, a serial comma must be added at decisive points throughout the clause, which could have not only linguistic but also legal and economic effects in case of a dispute (as in this case).

  • In paragraph 1, it should say "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)"

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

• Furthermore, the formulation in paragraph 4 could be revised, particularly the phrase "of an essential element" seems superfluous.

• Finally, the modern contract language uses "may" instead of "shall be entitled".

In terms of content, the right of the exporter to withdraw from the contract in paragraph 4(i) is essential. There is no need for adaptation here.

However, the penalty contained in paragraph 4(ii) is legally invalid under AGB law under German law.

• The penalty clause is independent of fault and thus legally invalid under § 307 Para. 2 No. 1 BGB, even in B2B settings (cf. BGH, judgment of 21.03.2013 - VII ZR 224/12).

• Moreover, the penalty clause does not differentiate according to whether there is a breach of duty from paragraph 1 (abstaining from sale, export, or re-export to Russia), paragraph 2 (best efforts obligation), or paragraph 3 (monitoring). According to the BGH, the unreasonableness of a penalty clause can already result from a specified amount as a flat-rate sanction, without differentiating according to the nature, severity, and duration of the breaches. Such a sanction would only be permissible if the specified amount were still reasonable given the typically minor breach (cf. BGH, judgment of 31.08.2017 - VII ZR 308/16; BGH, judgment of 20.01.2016 – VIII ZR 26/15).

• Regardless, the exporter must carefully consider how high the penalty should be. The height of a penalty can also result in an unreasonable disadvantage of the contract partner. This is particularly the case if the sanction is out of proportion to the severity of the breach and its consequences for the contract partner (cf. BGH, judgment of 20.01.2016 – VIII ZR 26/15).

• The AGB legal invalidity of the penalty could even affect the entire paragraph 4. However, in a dispute, the exporter could argue that the rest of paragraph 4 can stand alone both linguistically and content-wise ("blue-pencil test").

• The legal consequences of the invalidity of the penalty would not initially be dramatic. Although the exporter could not enforce the penalty in a dispute, they could still claim damages under § 280 Para. 1 BGB. However, the exporter would then have to accurately demonstrate and prove the amount of the damages, which is often difficult to impossible in practice.

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

  • It would be obvious to design the penalty fault-based. However, this would mean that the contract partner can exculpate themselves in case of a breach of duty, and the penalty would not apply. Regardless, the amount of the penalty would still have to differentiate according to the nature of the breach.

  • Another possibility is to utilize a penalty clause according to the so-called "Hamburg method" where the exporter determines the penalty amount at their reasonable discretion, with fairness being reviewed by the competent court in case of a dispute (§ 315 BGB). It would also be possible to specify an amount in the contract deemed equitable, although such a regulation would lead to legal proceedings (as indicated by the wording).

  • Another alternative would be a liquidated damages clause, but the amount must be proportional to the potential damages of the exporter, which is difficult to predict at the time of contract drafting.

  • An individual agreement (meaning AGB law does not apply) is not an option as the exporter (AGB legally the user) cannot seriously put the "no re-export to Russia" clause at the user's discretion. This is required by the highest court jurisprudence in Germany, which many companies are not aware of (cf. BGH, decision of 19.03.2019 – XI ZR 9/18).

  • An entirely different approach would be to address the AGB legal issue of the penalty clause and other contract regulations (particularly the limitation of liability of the exporter) by choosing an appropriate governing law. Before considering Swiss law or other legal systems, it's worth considering the UN Sales Law (CISG) as part of German law. If the UN Sales Law is not excluded, as often done reflexively and out of ignorance in practice, two aspects would be interesting: First, an independent-from-fault penalty would be possible since the UN Sales Law does not require fault. Second, the "material breach" stated in paragraph 4 of the "no re-export to Russia" clause could also be regarded as a "fundamental breach" in terms of Article 25 CISG. This would mean the exporter could both demand a legally valid penalty and withdraw from the contract per paragraph 4 of the clause or Article 64 CISG. Additionally, an arbitration clause instead of a jurisdiction clause should be included.

• The term "appropriate remedies" used in paragraph 4 could, under German law, be seen as lacking clarity and transparency under § 307 Para. 1 S. 2 BGB, leading to the invalidity of the clause. For this reason, it seems sensible to revise the regulation linguistically and substantively, e.g., by listing the remedies specifically and conclusively. Another possibility would be to include a dedicated fallback regulation, implemented in a separate paragraph ("blue-pencil test").

Paragraph 5 should be linked with an audit right for the exporter.

In a new paragraph 6, an indemnity obligation of the buyer to the exporter ("Indemnity") should be included for the case that the buyer violates their duties from the "no re-export to Russia" clause. As with the penalty, the AGB legal issues need to be considered in this context.

Regardless of the AGB legal validity, the exporter should implement the "no re-export to Russia" clause not only in their general terms of sale but also in other contractual documents (contract, offer, etc.). In international dealings, AGB often do not become part of the contract due to lack of (valid) inclusion or conflicting AGB ("battle of forms"), resulting in the "no re-export to Russia" clause not applying.

Practical Recommendations

Companies should first verify whether the scope is applicable at all. Specifically, whether they are dealing with goods listed in the specified lists and being sold to contract partners based outside the EU or a partner country.

If the scope is applicable, companies must incorporate a "no re-export to Russia" clause into their contracts. The sample clause from the European Commission can be adopted but should be revised linguistically and substantively and complemented by additional regulations (audit, indemnity, etc.). Additionally, when German law applies, the AGB legal requirements must be observed.

Further Information

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

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

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

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

(4) If the partner from the third country breaches any contractual obligations entered into under paragraph 1, the exporters shall 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 shall inform each other and the Commission of any detected breach of a contractual obligation entered into under paragraph 1 or any detected circumvention of such an obligation.

Adapted Sample Clause

The adaptation of the sample clause depends on many factors in the specific case, such as the chosen legal system, negotiating position, etc. The following formulation does not replace consultation by 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.