US Sanctions - landmark case on Blocking Statues

The landmark CJEU judgment in Bank Melli Iran v Telekom Deutschland GmbH at the end of last year places EU companies under a high degree of pressure over their explanations in relation to whether or not they are complying with US extraterritorial sanctions, as blocked by the EU and UK blocking legislation¹.

Under this legislation, EU or UK persons are prohibited from complying with US extraterritorial measures that have been blocked under the relevant legislation. The US measures currently blocked relate to Cuba and Iran. 

The case

In this case, Telekom Deutschland (TD) had a contract with Bank Melli for telecoms services supplied in Germany. After the US pulled out of the multilateral JCPOA in 2018, and reinstated certain extraterritorial sanctions on the Bank (among others), TD served a termination notice on the Bank, without giving any reasons. The Bank took the case to a German court, which ordered TD to perform the contracts, pending the expiry of the notice periods for ordinary termination. The Bank appealed, arguing that TD's only reason for termination was to comply with US measures that were blocked under the EU Blocking Regulation. 

The appeal court referred four questions to the CJEU:

1. Is it only a positive act by a US court or administrative agency that triggers the principle prohibition in Article 5 of the Blocking Regulation? Or is Article 5 engaged by the mere blocking of the US measure under the Blocking Regulation?
2. If the mere act of blocking is enough, does Article 5 override Member State law to the effect that, in civil proceedings, the terminating party is not required to give reasons as to why it terminated the contract?
3. If the answer to 2 is that if the terminating party has to give reasons, and does not, would annulment of the termination be the only remedy available to deal with the breach of Article 5, or would other remedies, such as damages for the terminated party, be appropriate?
4. If the answer to 3 is that annulment of the termination is required, does that conclusion hold where the terminating party will suffer considerable economic loss in the US by being required to continue with a party sanctioned under US extraterritorial sanctions?

The CJEU Ruling

The CJEU responded, largely following the Opinion of Advocate General Hogan (see our earlier briefing):

1. Article 5 is engaged by the act of blocking and does not require any specific act from a US court or agency;
2. While it was usually for the claimant to make out its claim, in this case “the application of such a general rule relating to the burden of proof is liable to make it impossible or excessively difficult for the referring court to make a finding that there was an infringement of ….. Article 5 …. thereby undermining the effectiveness of that prohibition”. Therefore, “where, in civil proceedings relating to the alleged infringement of the requirements laid down in that provision, all the evidence available to a national court tends to indicate prima facie that, by terminating the contracts in question, [an EU] person, who does not have an authorisation within the meaning of the second paragraph of Article 5 of that regulation, complied with the laws specified in the annex, it was for that person to establish to the requisite legal standard this his or her conduct did not seek to comply with those laws”;
3. Annulment is consistent with Article 5 “provided that that annulment does not entail disproportionate effects for that person having regard to the objectives of that regulation consisting in the protection of the established legal order and the interests of the European Union in general.” In dealing with proportionality, “it is necessary to weigh in the balance the pursuit of those objectives served by the annulment of the termination of a contract effected in breach of the prohibition laid down in Article 5 and the probability that the person concerned may be exposed to economic loss, as well as the extent of that loss, if he or she cannot terminate his or her commercial relationship with a person included in the list of persons covered by the secondary sanctions at issue resulting from the blocked laws.”

Key takeaways

• the CJEU agreed with the Advocate General that an entity wishing to act in a way that might be consistent with Article 5 is required to explain what reasons it has for acting;
• in most cases, annulment of the infringing act will be required, but in limited cases, a national court can balance that requirement against the commercial loss that might be suffered by the terminating party.

English law position

As to the English law position under the retained UK version of the Blocking Regulation, it seems unlikely that an English court would come to a similar conclusion as the CJEU, since the English legal system has extensive disclosure in litigation that would permit the reasoning behind a decision to terminate a contract to be revealed, thus demonstrating how the relevant decision was made.

The interests of justice would also not require that a positive duty be imposed on a party to provide reasons for terminating.

We also doubt whether, in these circumstances, an English judge would:

1. reverse the burden of proof (requiring the defendant to prove that it did lawfully terminate the contract); or
2. order continuation of the contract, rather than some other remedy such as damages.

However, UK companies should be aware that the guidance on the UK Blocking Regulation states: "Breaches of […] the retained Blocking Regulation are criminal offences in the UK, punishable by a fine. However, the intention of the Protection of Trading Interests legislation is to protect UK persons from the extraterritorial effect of legislation imposing the proscribed sanctions".

This conveys the tension within the Blocking Regulation architecture: it exists to protect EU/UK companies from the extraterritorial reach of U.S. sanctions, but its primary means of achieving this is to criminalise conduct of the same EU/UK companies. European entities with significant turnover or activities in the U.S. or dealing in U.S. Dollars are left in a very difficult position.  This preliminary ruling does not make the position easier for them.

Case Reference: Bank Melli Iran (Commercial policy - Protection against the effects of the extraterritorial application of legislation adopted by a third country - United States of America against Iran - Judgment) [2021] EUECJ C-124/20 (21 December 2021)

1. These being: in the EU- Regulation 2271/96 (as amended) and; in the UK - The Protecting Against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2019.