Casually, the words ‘embargo’ and ‘sanction’ are often used interchangeably. But when it comes to drafting a contract or assessing the viability of an export opportunity, failing to use the correct word can have serious consequences. Generally, both terms describe government measures that prohibit individuals and entities under the jurisdiction of one country (not necessarily just its citizens and companies) from engaging in trade or transacting with those of another. Historically, an embargo connotes a complete ban on all commercial activity between two nations, while sanctions are more limited in scope and prohibit trade in certain types of goods or transactions with particular individuals and entities. In fact, sanctions are described by some as a ‘partial embargo.’ The current measures governing commercial relations between the United States and Cuba are a classic example of what is considered an embargo. But even this characterization can be misleading. Strictly speaking, the measures imposed against Cuba are not a total embargo as certain transactions involving journalistic pursuits, certain foodstuffs, humanitarian assistance, and religious travel are allowed despite the ‘embargo.’ Thus an embargo to one person may not be an embargo to all. Another example is Iran. There is an embargo on US goods going to Iran unless you export medical and dental “devices” or foodstuff. However, consider N. Korea where most people would say we also have an embargo. US entities are permitted to make financial investments in North Korea. Who knew that? Of course it isn’t true for Iran or Cuba. Each country has its own specific unique set of sanctions.
When drafting sanction and embargo clauses in contracts or considering where to do business, keep these points in mind:
If you (or your company) are a U.S. person, the U.S. sanction or embargo restrictions apply everywhere in the world: whether you are in the United States, in the country being sanctioned, or anywhere else. So avoid language that ties a party’s sanctions obligations to a physical location.
Just because a country is sanctioned (or even embargoed) it does not mean that all commercial opportunities in that country or with that country’s nationals are off limits. Each sanctions regime is different (compare the fairly limited sanctions currently imposed on certain Russian and Ukrainian individuals and entities with the broader sanctions that are imposed on most transactions with the Iranian government, Iranians, and Iranian entities), so in certain cases a particular deal can go forward because it falls outside the scope of applicable restrictions. Of course, a detailed review of current regulations is necessary to determine whether this is true in a particular case, but make sure to leave room for lawful activity in sanctioned countries by avoiding blanket statements that prohibit parties from involving themselves in any transaction that involves a sanctioned country. (I have seen really high priced lawyer make this mistake.
Due to the political nature of sanctions and the fact that they are used by the US government as diplomatic tools to influence the behaviors of other nations they are constantly changing in response to the ever-evolving geopolitical landscape. So avoid including lists of specifics countries in your contracts because if sanctions against a particular country are lifted while the contract is still in force such outdated language could potentially complicate a party’s plans to enter an attractive new market.
In most cases, due to the all-encompassing nature of the concept of an embargo discussed above, it is preferable to describe measures as sanctions in a contract in order to allow for the intricacies of each individual sanctions regime and avoid a reading that would prohibit all (including legal) activity in or with a sanctioned country.
An appreciation for the business activities that remain permissible in or with sanctioned countries along with sufficiently permissive contract language and a comprehensive export compliance program that requires your employees to perform the necessary due diligence on each individual transaction will ensure your company remains compliant but doesn’t miss out on perfectly legal and potentially lucrative opportunities in the process! [I know the sentence is really long. You may need to read it twice. Sorry.]
Have a great day,