Sanctions are fast moving and frequently evolving, as they are influenced by the changing geopolitical situation. They are increasingly favoured as a foreign policy tool by western governments and can have a significant impact on some transactions.

Due diligence

It is important to conduct thorough due diligence before contracting in order to identify sanctions risk as early as possible (amongst other risks). This enables the necessary risk mitigation measures to be implemented. It is also important to remain alert to sanctions risks throughout negotiations (e.g if the proposed structure changes and a new party becomes involved).

Which sanctions?

When considering sanctions risk, it is important to identify which sanctions regimes are applicable to the transaction. Sanctions are imposed by multiple state actors as well as international or regional organisations such as the UN and EU. US sanctions are particularly broad in scope and US sanctions against Iran can have extraterritorial effect even where there is no link with the US.

Difficulty can arise in transactions which involve multiple jurisdictions because a transaction can be subject to multiple sanctions regimes which vary from jurisdiction to jurisdiction and sometimes conflict.

Cautious approach

Sanctions are often drafted in wide and sometimes imprecise terms with little associated guidance (particularly US sanctions). Enforcement priorities are also often based on a multitude of factors, including but not limited to foreign policy and the prevailing geopolitical situation. This means that implementing authorities can have a wide degree of discretion when considering whether a particular trade or activity is lawful or not.

Added to this there is potential for significant fines and even imprisonment for breach of sanctions. This means that a cautious approach should always be taken when assessing sanctions risks.

Sanctions clause

Consider inserting a sanctions clause in all leases and relevant transactional documents in order to mitigate against sanctions risks.

Lessors could rely on other clauses in a lease (such as illegality clauses) to terminate the lease in the event of sanctions making continuance of the lease illegal.

However, sanctions clauses have added benefits such as (inter alia) prohibiting the aircraft visiting certain sanctioned jurisdictions which are not strictly illegal for an aircraft to visit, but which are subject to broad sanctions regimes which could present some in-jurisdiction sanctions risks. For example, a lessor could have difficulties stepping in to pay or provide security for the release of an arrested aircraft, engines and records in a jurisdiction subjected to asset freeze restrictions or other payment restrictions.

If the lessee were to breach sanctions during the course of operating the aircraft, sanctions wording restricting the operation of the aircraft into jurisdictions which pose a sanctions risk can also serve as evidence that the lessor was an innocent party who entered into the lease in good faith with no knowledge that the lessee would operate the aircraft in such a way to breach sanctions. However, note that the mere presence of sanctions wording in a contract is not an absolute defence.

On-going monitoring

Sanctions are a fast moving area of the law which frequently evolves according to the geopolitical situation and are increasingly favoured as a foreign policy tool by western governments. All participants in a transaction should therefore monitor sanctions developments and be alert to changes in the law which could create a sanctions risk for the continued operation of the transaction.