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, in particular the situation in which goods exported to third countries are re-exported to Russia. One of the focal points is a so-called "no re-export to Russia " clause (abbreviated to "no-Russia" clause). According to Article 12g (1) of Regulation (EU) No. 833/2014 (in the consolidated version of February 23, 2024), from March 20, 2024, companies are obliged to include a clause in their contracts for the sale, supply, transfer or export of goods and technology to third countries that contractually prohibits re-export to Russia and re-export for use in Russia.

Area of application

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

The obligation applies to contracts with companies that are 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).

Old contracts

According to Article 12g (2) of Regulation (EU) 833/2014, contracts concluded before December 19, 2023 do not have to contain a "no re-export to Russia" clause if they are fulfilled by December 19, 2024. However, if they are not fulfilled until after December 20, 2024, they must contain this clause.

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

FAQ of the EU Commission

On February 22, 2024, the EU Commission published FAQs (in English only) on Article 12g of Regulation (EU) 833/2014. These are not only well worth reading, but also include a sample "no re-export to Russia" clause that complies with the requirements of Article 12g (see below). Deviating formulations should be possible and are also required under German law (see comments below). According to the EU Commission, the clause must be an integral part of the respective contract and contain appropriate remedies, although these are not specified in more detail. In addition, violations of the re-export to Russia must be reported to the competent authorities (in Germany, the Federal Office of Economics 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 contracting party to refrain from selling, exporting or re-exporting to Russia. An extension or adjustment does not appear necessary at this point.

Paragraph 2 only contains a "best efforts" obligation . It seems more sensible to oblige the contractual partner to pass on the obligations in the supply chain.

Paragraph 4 regulates the rights ("remedies") to which the exporter is entitled in the event of breaches of duty by the contracting party.

Some linguistic adjustments need to be made:

  • First of all, the clause as a whole must contain a serial comma (see emphasis below), which can have not only linguistic but also legal and economic implications in the event of a dispute (as in this Case).
    • paragraph 1 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)"
  • In addition, the wording in paragraph 4 could be revised, in particular the part"of an essential element" seems superfluous.
  • Finally, in modern contract language"may" is used instead of "shall be entitled".

In terms of content , the exporter's right to withdraw from the contract in paragraph 4 (i) is essential. There is no need for adjustment at this point.

However, the contractual penalty contained in paragraph 4 (ii) is - if German law is applied - invalid under general terms and conditions law.

  • The contractual penalty clause is designed to be independent of fault and is therefore legally ineffective in accordance with Section 307 (2) No. 1 BGB - also in B2B (see BGH, judgment of 21.03.2013 - VII ZR 224/12).
  • In addition, the contractual penalty clause does not differentiate between a breach of the obligation under paragraph 1 (refraining from selling, exporting or re-exporting to Russia), paragraph 2 (obligation to make efforts) or paragraph 3 (monitoring). According to the BGH, however, the inappropriateness of a contractual penalty clause can already result from the fact that a certain amount is provided for as a lump sum sanction without differentiating according to the type, weight and duration of the contractual violations. Such a sanction would only be permissible if the amount stated was still reasonable even in view of the typically smallest breach of contract (see BGH, Urt. v. 31.08.2017 - VII ZR 308/16; BGH, Urt. v. 20.01.2016 - VIII ZR 26/15).
  • Irrespective of this, the exporter must carefully consider how high the contractual penalty should be. This is because the amount of a contractual penalty can also result in an unreasonable disadvantage for the contractual partner. This is particularly the case if the penalty is disproportionate to the weight of the breach of contract and its consequences for the contractual partner (see BGH, judgment of 20.01.2016 - VIII ZR 26/15).
  • The invalidity of the contractual penalty under GTC law could even cover the entire paragraph 4. However, in the event of a dispute, the exporter will be able to argue that the remaining paragraph 4 can stand on its own in terms of language and content ("blue-pencil test").
  • At first glance, the legal consequences of the invalidity of the contractual penalty would not be dramatic. Although the exporter could not assert the contractual penalty in the event of a dispute, he could nevertheless assert a claim for damages in accordance with Section 280 (1) BGB. However, the exporter would then have to precisely state and prove the amount of the damage incurred, which is often difficult or even impossible in practice.
  • How could the contractual penalty legally compliant be designed?
    • The obvious solution would be to make the contractual penalty dependent on fault. However, this would mean that the contractual partner could exculpate itself in the event of a breach of duty and the contractual penalty would not apply. Irrespective of this, the amount of the contractual penalty would still have to be differentiated according to the type of breach of duty.
    • However, it is also possible to use a contractual penalty clause in accordance with the so-called"Hamburg custom", according to which the exporter can determine the amount of the contractual penalty at its reasonable discretion, whereby the fairness is reviewed by the competent court in the event of a dispute (Section 315 BGB). It would also be possible to specify an amount in the contract that would be equitable. However, such a provision would result in a legal dispute (this is already clear from the wording).
    • Another alternative would be liquidated damages, although their amount must be in proportion to the potential loss suffered by the exporter. However, this can hardly be predicted at the time the contract is drawn up.
    • An individual agreement (with the consequence that GTC law does not apply) is already ruled out because the exporter (the user under GTC law) cannot seriously challenge the "no re-export to Russia" clause. However - and many companies are not aware of this - this is required by supreme court case law in Germany (see BGH, decision of 19.03.2019 - XI ZR 9/18).
    • A completely different approach would be to solve the legal problems of the contractual penalty clause and other provisions in the contract (in particular the exporter's limitation of liability) by making a suitable choice of law. Before considering Swiss law or other legal systems, it is worth taking a look at the UN Convention on Contracts for the International Sale of Goods (CISG) as part of German law. If the UN Convention on Contracts for the International Sale of Goods is not excluded - as is so often the case in practice, reflexively and rather out of ignorance - two aspects would be interesting: Firstly, a no-fault contractual penalty would be possible, as the UN Convention on Contracts for the International Sale of Goods does not require fault. Secondly, the "material breach" mentioned in paragraph 4 of the "no re-export to Russia" clause could also be seen as a "fundamental breach" within the meaning of Article 25 CISG. This would mean that the exporter could both demand a legally effective contractual penalty and withdraw from the contract in accordance with paragraph 4 of the clause or Article 64 CISG. In addition, an arbitration clause would have to be included instead of a jurisdiction clause.
  • The term"appropriate remedies" used in paragraph 4 could - when applying German law - be seen as not clear and comprehensible(intransparent) within the meaning of Section 307 (1) sentence 2 BGB, which could lead to the clause being invalid. For this reason, it seems sensible to revise the language and content of the provision, e.g. to list the remedial measures specifically and conclusively. Another option would be to include a dedicated fallback provision that is implemented in a separate paragraph ("blue-pencil test").

Paragraph 5 should be linked to the exporter's right to audit.

It would seem sensible to include a new paragraph 6 with anindemnity obligation of the buyer towards the exporter in the event that the buyer breaches its obligations under the "no re-export to Russia" clause. In this context, too - as with the contractual penalty - the issue of general terms and conditions would have to be considered.

Irrespective of the legal effectiveness of the GTC, the exporter should implement the "no re-export to Russia" clause not only in its general terms and conditions of sale, but also in the other contractual documents(contract, offer, etc.). This is because GTC often do not become part of the contract internationally due to a lack of (effective) inclusion or due to conflicting GTC ("battle of forms"), which would mean that the "no re-export to Russia" clause would not apply.

Practical recommendations

Companies should first check whether the scope of application is open at all. Specifically, whether the individual case involves goods that are named in the aforementioned lists of goods and are sold to contractual partners who are not based in the EU or in a partner country.

If the scope of application is opened up, 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 revised in terms of language and content and supplemented with additional provisions (audit, exemption, etc.). In addition, if German law applies, the requirements under general terms and conditions law must be observed.

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Further information

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

(1. When selling, supplying, transferring or exporting goods or technology 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 to a third country, with the exception of partner countries listed in Annex VIII to this Regulation, exporters shall contractually prohibit re-export to Russia and re-export for use in Russia from March 20, 2024.

2. Paragraph 1 shall not apply to the performance of contracts before December 19, 2023, until December 20, 2024, or until their expiration date, whichever is earlier.

(3. In applying paragraph 1, exporters shall ensure that the agreement with the third-country partner contains appropriate remedies in the event of a breach of a contractual obligation concluded in accordance with paragraph 1.

(4. Where the third-country partner is in breach of a contractual obligation entered into pursuant to paragraph 1, 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 inform each other and the Commission of any breach or circumvention of a contractual obligation entered into pursuant to paragraph 1 that has been detected.

Adapted model clause

The adaptation of the model clause in individual cases depends on many factors, e.g. the chosen legal system, negotiating position, etc. The following wording is therefore no substitute for 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.