On 21 December 2021, the Court of Justice of the European Union (“CJEU”) delivered its judgment in Case C-124/20 Bank Melli Iran v Telekom Deutschland GmbH, which is the first case before the EU courts on the interpretation of Council Regulation (EC) No 2271/96 of 22 November 1996 protecting against the effects of the extraterritorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom (“EU Blocking Statute”).
The CJEU’s judgment follows, in broad terms, the Opinion delivered by Advocate-General Hogan (“AG”) in May 2021 (see our previous post here), but is more nuanced than the latter and does not replicate some of the more far-reaching statements made by the AG regarding the obligations that the EU Blocking Statute creates for EU companies. The CJEU’s findings will still have important implications for EU companies who, in light of this judgment, may face legal challenges over their business decisions (e.g. the termination of certain contracts) brought by third party undertakings. Importantly, following the CJEU’s reasoning, EU operators may be required in such cases to establish that these decisions were not taken in violation of the EU Blocking Statute – or otherwise face serious consequences, including the annulment of the termination of their contracts.
The case before the German courts that led to the reference for a preliminary ruling concerned Telekom Deutschland GmbH’s termination of its contractual relationship with Bank Melli Iran (“BMI”). In 2018, following the US’s withdrawal from the Iranian nuclear deal, BMI – among other Iranian entities – was (again) designated on the US Specially Designated Nationals and Blocked Persons (“SDN”) List, and also became subject to US secondary sanctions. Under those US secondary sanctions, non-US persons may themselves become subject to US sanctions for engaging in certain dealings with Iranian entities on the SDN List.
Soon after BMI re-appeared on the SDN List and became subject to US secondary sanctions, Telekom Deutschland GmbH decided to terminate its contract with the bank on 16 November 2018. BMI challenged this termination in the German courts, claiming that Telekom’s decision was motivated solely by the desire to comply with the US sanctions, which would be in violation of the EU Blocking Statute. Specifically, Article 5 of the EU Blocking Statute prohibits EU operators from adhering to the requirements or prohibitions of certain US sanctions that the EU deems to have extraterritorial application – including the sanctions at issue against Iran – as listed in the Annex to the EU Blocking Statute.
The preliminary ruling reference to the CJEU consisted of several questions regarding the interpretation of this provision. In answering these questions, the CJEU offers important guidance and clarifications about the scope of the EU Blocking Statute and the (quite strict) requirements that EU companies have to observe to comply with it.
Right of action and scope of the prohibition
At the outset, the CJEU clarified that the prohibition set out in Article 5 of the EU Blocking Statute may be relied on in civil proceedings, such as those that were at issue, brought by a third country entity that is subject to US sanctions, against EU persons to whom that prohibition is addressed. This is an important point as it confirms that third country undertakings have a right to challenge before the national courts of EU Member States commercial decisions made by EU companies that are potentially in violation of the EU Blocking Statute.
Unsurprisingly, the CJEU found that the prohibition laid down in Article 5 of the EU Blocking Statute applies even in the absence of an order or instruction directing compliance with foreign sanctions issued by an administrative or judicial authority. According to the CJEU, this interpretation is supported by the broad wording of the provision as well as the overall objectives of the EU Blocking Statute, which include achieving, to the greatest extent possible, the free movement of capital between EU Member States and third countries. The CJEU observed in this respect that the sanctions laws listed in the Annex to the EU Blocking Statute are capable of producing their effects by the mere threat of legal consequences; thus, the EU Blocking Statute would not be capable of counteracting these effects if its application was subject to the adoption of orders by a foreign administrative or judicial authority.
Burden of proof
The termination of contracts does not infringe Article 5 of the EU Blocking Statute if it is based on purely economic considerations rather than aiming to comply with US sanctions listed in the Annex to the EU Blocking Statute. However, the CJEU found that EU operators may have an obligation to justify their business decisions when these are challenged in civil proceedings before national courts. As regards the allocation of the burden of proof, the CJEU stated that where all the evidence available to a national court tends to indicate prima facie that, by terminating a contract, the EU person in question sought to comply with foreign sanctions, the burden of proof would shift to it to establish “to the requisite legal standard” that his or her conduct did not seek to comply with those laws.
Unfortunately, the CJEU’s judgment does not offer more guidance as to what would constitute such “prima facie” evidence, nor as to what evidence EU operators would have to provide to prove “to the requisite legal standard” that their decisions were motivated by reasons other than compliance with US sanctions. On the latter point, the AG had suggested, for instance, that EU persons could demonstrate for this purpose that they are actively engaged in a coherent and systematic corporate social responsibility (CSR) policy leading them to have ethical qualms and reservations about dealing with companies having links with the Iranian regime.
Of note, the CJEU did not entirely follow the AG’s conclusions in relation to the burden of proof. One of the most important conclusions that was reached by the AG was that Article 5 of the EU Blocking Statute should be understood as entailing an obligation for EU persons to give reasons justifying the termination of a commercial relationship with a person subject to foreign sanctions. Additionally, in the AG’s view, once the claimant had provided prima facie evidence that (i) the EU operator may feel concerned by the blocked sanctions; and (ii) the claimant fulfilled the expected conditions for becoming or remaining a customer of that EU operator, the burden would turn to the EU operator to justify its business decision. The CJEU, by contrast, did not conclude that Article 5 of the EU Blocking Statute lays down a general obligation for EU operators to provide reasons each time they decide to terminate a commercial contract with a person included in the SDN list, noting simply that no such requirement can be derived from the text of Article 5.
Consequences of breach: annulment of termination of the contractual relationship
The CJEU lastly considered whether, in light of Articles 16 and Article 52(1) of the EU Charter of Fundamental Rights, a termination of the contractual relationship in violation of Article 5 can be annulled even if the EU operator is threatened with substantial economic losses by maintaining the business relationship with the US sanctioned contractual partner.
The CJEU concluded that a breach of Article 5 of the EU Blocking Statute may lead to the annulment of the termination of contracts, provided however that this annulment does not entail disproportionate effects for the EU person concerned. In this context, the CJEU observed the freedom to conduct a business guaranteed under Article 16 is not absolute but must be weighed in the balance with other interests protected by the EU legal order. Accordingly, the CJEU instructed that national courts must in each case weigh in the balance, on the one hand, the pursuit of the objectives of the EU Blocking Statute served by the annulment and, on the other hand, the probability that the EU company in question would be exposed to severe economic losses if it would be unable to terminate its commercial relationship. Importantly, the CJEU also highlighted that in this assessment, it would be relevant for the national court to consider whether the EU company in question sought to apply to the Commission for an exemption from the prohibition laid down in Article 5; suggesting that, if it did not, this would probably weigh against it in the context of the proportionality assessment.
The CJEU’s description of US secondary sanctions
The CJEU asserts that under the US sanctions at issue, “it is prohibited for any person to trade, outside the territory of the United States, with” BMI. This is unfortunately not an accurate description of the relevant US law: US secondary sanctions laws – including the laws at issue in this case – do not establish any prohibitions for non-US persons. Instead these laws establish categories of sanctionable activities, and present non-US persons with a choice: if they choose to engage in a sanctionable activity (such as knowingly providing significant financial or other support to an Iranian entity on the SDN List), then US law provides a basis for the US government to impose sanctions affecting their US business interests. This important distinction between satisfying the legal criteria to be named a target of sanctions, on the one hand, and breaching a sanctions prohibition, on the other hand, is overlooked in the CJEU opinion. The risk Telekom faced was that it might be named a US sanctions target, not that it might breach a requirement or prohibition of US law. From a business perspective, the outcome is not that different; but from the perspective of Article 5 of the Blocking Statute, a proper understanding of US secondary sanctions would call into question whether Telekom can be said to have “complied” with a “requirement or prohibition” of US law.
It is, however, unlikely that the CJEU would have reached a different conclusion about the scope of Article 5 even if it had taken into account this distinction. While the language of Article 5 could have been drafted more carefully given the nature of US secondary sanctions, it is clear that the intention of the Blocking Statute is to also cover behavior influenced by such secondary sanctions. Therefore, the CJEU would in all likelihood have in any event considered that Article 5 also encompasses choices influenced by the threat of a US sanctions listing.
The key findings and implications stemming from the CJEU’s judgment in Bank Melli Iran v Telekom are as follows:
- The prohibition to comply with certain US sanctions under Article 5 of the EU Blocking Statute may be relied on in civil proceedings before a national court.
- The prohibition laid down in Article 5 of the EU Blocking Statute applies even in the absence of an order or instruction directing compliance with foreign sanctions issued by an administrative or judicial authority.
- EU persons are not obliged under Article 5 to provide reasons ab initio for the termination of a contract with a sanctioned entity. However, in civil proceedings relating to the alleged breach of that provision, where there is prima facie evidence that the EU person terminated the contract in order to comply with certain US sanctions, it would be for that person to establish that his or her conduct was not intended to comply with those laws.
- A breach of Article 5 of the EU Blocking Statute can lead to the annulment of the termination of a contract by an EU person, on the condition, however, that this annulment does not entail disproportionate effects for the EU person concerned.
These findings have significant implications for EU companies. Most notably, they effectively confirm that certain commercial decisions that EU companies might take to avoid serious losses for their business may be subject to legal scrutiny, and may even be overturned by EU Member States’ courts.
It remains to be seen how the US Government would approach a situation whereby an EU court were to invalidate a EU company’s termination of contracts with an Iranian SDN. Specifically, that EU company would probably claim that it should not risk being sanctioned, because it had attempted to extricate itself from the SDN but is now legally compelled to reinstate the contract and perform. Of note, in the case underlying the Bank Melli Iran case, the relevant national legislation was the German legislation which provides explicitly (paragraph 134 of the German Civil Code) that “[a]ny legal act contrary to a statutory prohibition shall be void except as otherwise provided by law.” As stressed by the CJEU, in the absence of harmonisation at EU level in the field of applicable penalties, the Member States retain the power to choose the penalties which seem to them to be appropriate. It is thus not excluded that we may see courts in other EU Member States declaring a breach of the contract (because the termination was not justified due to Article 5) by the EU company and order damages as opposed to invalidating the termination and ordering specific performance.
Looking ahead, the Commission intends to issue a proposal to amend the EU Blocking Statute in the second quarter of 2022. The objective of the amendment would be twofold: i) it would aim at further deterring and counteracting the extra-territorial application of sanctions to EU operators by countries outside the EU; and ii) it would also aim at streamlining the application of the current EU rules, including by reducing compliance costs for EU citizens and businesses. The Bank Melli Iran judgment will doubtless be read very attentively by those drafting this revision.