The Grand Chamber of the Court of Justice of the European Union (“CJEU”) has opined for the first time on the controversial 1996 EU Blocking Regulation,1 which prohibits EU companies from complying with certain US sanctions related to Iran and Cuba. In its 21 December 2021 judgment in the Bank Melli case,2 the CJEU answered four questions referred by a German higher regional court (Hanseatisches Oberlandesgericht) about how the EU Blocking Regulation should apply. While the judgment provides some clarifications, it leaves national courts to grapple with the difficult question of whether EU parties may in specific cases be prevented from terminating a contract with a US sanctioned person in order to comply with US sanctions.
The EU Blocking Regulation was adopted in 1996 to counteract the extra-territorial effects of certain US sanctions against Cuba, Libya and Iran. It was updated in August 2018, in response to the decision of the US to re-impose on Iran the sanctions it had lifted under the Joint Comprehensive Plan of Action.3
Article 5 prohibits EU-related individuals and companies from “comply[ing], directly or through a subsidiary or another intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from” the specified US Sanctions. Such compliance may only be allowed if an authorisation has been granted by the European Commission, on the basis that non-compliance would seriously harm the interests of the persons covered by that regulation or those of the European Union (Article 5, second paragraph). To date, enforcement by the competent national authorities of this prohibition has not become public so far. Rather, it is in the context of business relations with private parties that the implications of the EU Blocking Regulation have been felt.
The Bank Melli case arose from a dispute between the German branch of the Bank Melli Iran (“Bank Melli“) and Telekom Deutschland GmbH (“Telekom“), a subsidiary of Deutsche Telekom AG, which generates about half of its turnover in the US. Telekom had terminated all contracts with Bank Melli, without express reasons and without authorisation from the European Commission. Relying on Section 134 of the German civil code, which provides that ‘any legal act contrary to a statutory prohibition shall be void except as otherwise provided by law’, Bank Melli had brought proceedings, claiming that the termination was in fact an act of compliance with the relevant US sanctions concerning Iran, violating the EU Blocking Regulation.
The Hanseatisches Oberlandesgericht stayed proceedings and referred four questions to the CJEU aimed at clarifying how the EU Blocking Regulation should apply to the case at hand.4
Below, we have briefly summarized the questions and responses as provided by the Grand Chamber of the CJEU. Notably, the CJEU deviated from the Advocate General’s (“AG”) Opinion in certain imported points.5
First Question – Does the Article 5 prohibition apply even when there is no order directing compliance issued by US administrative or judicial authorities?
Unsurprisingly, the CJEU confirmed that indeed there does not have to be a specific indirect or direct official or court order on the part of the US in order to trigger the EU Blocking Regulation. Pursuant to the wording of the Regulation, compliance with any requirement in the listed US sanctions is forbidden, regardless of whether the compliance was specifically ordered or requested by an administrative body in the US It therefore suffices if the action of the EU operator is predicated on compliance with the relevant US sanctions.
Second Question – Can an EU person terminate a contract with a person who is designated under the relevant US sanctions, without providing reasons for that termination?
After recalling that the EU Blocking Regulation had direct effect and that national courts must ensure its full effectiveness in proceedings before them, the CJEU held that the EU Blocking Regulation did not require EU persons to give reasons for terminating a contract with a US sanctioned person. However, its actions can be reviewed in civil proceedings, and in that case, the burden of proof to show that the action in question was not taken to comply with US sanctions lies with the EU operator.
Third and Fourth Question – Having regard to the freedom to conduct a business enshrined in Article 16 of the Charter of Fundamental Rights (“Charter”), must the termination of a contract by an EU person in compliance with the relevant US sanctions be allowed, in the situation where that person risks suffering substantial economic loss if the termination is annulled?
On this point, the AG had taken a far-reaching position. He drew a clear distinction between, on the one hand, the penalties that might be imposed for a violation of the EU Blocking Regulation, which had to be “effective, proportionate and dissuasive” and, on the other hand, measures taken to redress the situation resulting from the unlawfulness committed, the adoption of which is necessary in order to ensure the full effect of EU law.6 As regards the latter, he took the view that the any decision by an EU person to terminate a contractual relationship with a person subject to the relevant US sanctions, based only on the desire to comply with those US sanctions, should be regarded as invalid and ineffective, with the consequence that national courts are obliged to treat the contractual relationship as having continued on the same commercial terms as those previously existing. As such, he held that a national court should order EU persons in such a situation to continue the contractual relationship in question, on pain of a periodic penalty payment or other appropriate sanction.7
Importantly, the CJEU did not follow this view. In light of the need to take account of Articles 16 and 52 of the Charter, it was also necessary to consider the principle of proportionality. Specifically, whether forcing the maintenance of the contract could entail disproportionate economic consequences in the circumstances of the case. The CJEU left it to the German higher regional court, to assess how proportionality applied in the present case, and weigh the pursuit of the objectives of the EU Blocking Regulation against the probability and extent of potential economic losses for Telekom, if their termination of the contract with Bank Melli would be annulled. It noted that one factor that should be taken into consideration is that Telekom had not attempted to apply for an exemption from the EU Blocking Regulation, before terminating the business relationship with Bank Melli.
It will now be up to the German higher regional court to decide the case, based on the guidance provided by the CJEU.
More generally, the case highlights the uncertainties and potential dilemmas faced by EU companies when dealing with persons designated under US law that are covered by the EU Blocking Regulation. If EU operators are contemplating acts or omissions related to such persons for reasons other than an intention to comply with the specified US sanctions: for example driven by economic, commercial or operational considerations, or compliance with other rules, it is important to ensure these reasons are properly documented. It is also important to document the economic consequences that a violation of US sanctions could entail on a company level. The CJEU judgment also suggests that a more appropriate route, if an EU operator considers that non-compliance with the relevant US sanctions would create disproportionate consequences, is to first seek an exemption from the European Commission. However, given the high threshold for granting such authorisations, it is unclear how realistic this route is.
In the meantime, the European Commission is preparing to propose a revision of the EU Blocking Regulation, expected in Q1 2022. It remains to be seen whether it can be recalibrated to reduce the uncertainties and risks faced by EU companies, while still countering the extra-territorial effect of the sanctions in question.