Frozen in Place: Making the Contract Work on the Morning of a Designation

The Thursday afternoon problem

A designation under the Sanctions and Anti-Money Laundering Act 2018 can be published on a Thursday afternoon. By Friday morning the counterparty is a designated person, its funds are frozen, and any person who makes funds or economic resources available to it—directly or indirectly—commits an offence. The contract has not changed. The legal character of every obligation under it has.

Most commercial agreements address this with a short sanctions representation and a right to terminate. That is not a plan. It tells the compliant party almost nothing about what to do in the hours after the freeze: whether to keep performing, where to send the invoice, whether notice has been validly given, and whether the accrued debt can be paid at all.

How a designation actually bites

UK financial sanctions are strict liability. The Office of Financial Sanctions Implementation does not need to prove knowledge or intention. Two consequences follow. First, continuing to perform a contract may itself be an offence, even where the performance is routine. Second, the contract's ordinary mechanics—invoicing, payment, delivery, notice—may become unlawful without a licence.

The asset freeze also catches more than the named entity. It applies to entities owned or controlled by a designated person, including through the fifty per cent rule. A contract that refers only to 'the Counterparty' will miss the group companies, the beneficial owner and the nominee shareholder. Drafting should define the sanctioned perimeter, not just the signatory.

Termination: automatic is not always better

An automatic termination clause sounds decisive, but it creates its own problems. If termination is automatic, the parties may not know the precise moment it occurred; performance may cease mid-delivery; and post-termination obligations—accrued debts, refunds, transition services—still require a licence. A right to terminate, by contrast, gives the compliant party a choice, a record and a route to a licence where continued performance is permitted.

Either way, the clause should be exercisable immediately, without a notice period, and should not depend on the designated party receiving notice. It may be unable to. Include a deemed notice mechanism: publication by OFSI or the Foreign, Commonwealth and Development Office is sufficient notice to both parties. That single provision can resolve weeks of uncertainty.

Termination is not always the desired outcome. In some supply chains the compliant party may wish to continue under a general licence—to wind down safely, to supply humanitarian goods, or to maintain critical infrastructure. The clause should therefore permit suspension as an alternative to termination, and should not force termination where a licence is available.

Payment and the frozen ledger

Payment clauses assume money can move. After designation, it cannot—at least not to the designated party. The contract should state what happens to payments that fall due: whether they are suspended, paid into a blocked account, or paid to a licensed recipient. It should disapply set-off and netting rights that would otherwise require the compliant party to calculate a net balance with a frozen entity. It should address interest: a clause that continues to accrue interest on a frozen debt may look like an attempt to make funds available. And it should require cooperation in seeking an OFSI licence where performance is prohibited but desirable.

Warranties, undertakings and the group

A sanctions warranty is only useful if it is repeated, broad enough to capture affiliates and beneficial owners, and backed by a notification duty. The warranty should cover not only designation but also ownership and control by a designated person, and should be repeated on each payment date. The notification duty should require the affected party to notify immediately and to provide the information needed for a licence application.

Do not rely on the counterparty to tell you. Build in a right to suspend on reasonable suspicion, not only on confirmed designation. A right that arises only after the freeze is a right that arrives too late.

Notice and the practicalities

Designated parties often cannot give notice. Notices clauses should therefore provide alternative routes: to a nominated alternative contact, to the counterparty's UK legal adviser, or by publication. Consider whether notices should be deemed given on OFSI's publication rather than on receipt. Address the position of an appointed administrator or interim manager, and provide for information sharing with the authorities where required.

A drafting checklist

• Define 'Sanctions Event' by reference to the UK regime and the UN regime at a minimum. Avoid over-broad definitions that catch harmless listings.
• Define 'Affected Party' and 'Sanctions Authority' precisely.
• Include a suspension right, not only a termination right.
• Make termination immediate and notice-free, with a deemed notice mechanism.
• Address payment mechanics: blocked accounts, no set-off, no continuing interest.
• Repeat sanctions warranties on each payment date.
• Include notification and cooperation duties, with information rights.
• Carve out performance required by law or permitted by licence.
• Address group companies and the fifty per cent ownership and control rule.
• Provide for audit and information rights to verify compliance.

Conclusion

No clause can prevent a designation. But a contract that says what happens on the morning of one—who may suspend, where money goes, when notice is deemed given—will keep the compliant party on the right side of strict liability and out of the enforcement headlines. The drafting work is done before the freeze, not after it.