On Tuesday 21 December, the EU Court of Justice delivered its long-awaited judgment in the Bank Melli Iran case (Case C-124/20) on the interpretation of the EU Blocking Statute regarding compliance with third country sanctions. According to the Court, the prohibition imposed by EU law on complying with secondary sanctions laid down by the United States against Iran may be relied on in civil proceedings. Following the Court’s judgment, anyone seeking to terminate a contract with a person or business subject to US sanctions must thoroughly consider if the termination is motivated by other reasons than the existing sanctions and reflect on whether to apply to the Commission for a derogation from the Blocking Statute.
In May 2018 the United States withdrew from the Iranian nuclear deal (Joint Comprehensive Plan of Action “JCPOA”), signed in 2015, the aim of which was to control Iran’s nuclear programme and lift economic sanctions against Iran. Following the withdrawal, the United States adopted an executive order reintroducing its secondary sanctions with respect to Iran and persons (natural or legal) included on the US Specially Designated Nationals and Blocked Persons List (“the SDN list”), including Bank Melli Iran. As a result, sanctions imposed by the United States do not only target businesses in the United States trading with or investing in Iran (primary sanctions), but also activities outside of the United States, including in the EU (secondary sanctions). In particular, the US secondary sanctions forbid any person to trade, outside the territory of the United States, with any person included on the SDN list.
The questions referred to the EU Court of Justice (“CJEU” or “Court”) in the present case, concern the interpretation of Regulation (2271/96) protecting against the extraterritorial application of legislation adopted by a third country and actions based thereon or resulting therefrom (the “EU Blocking Statute”). The EU Blocking Statute prohibits persons concerned from complying with the US sanctions unless an exemption from the prohibition is obtained from the EU Commission. Based on the EU Blocking Statute, Bank Melli Iran initiated proceedings against the German company Telekom Deutschland which had terminated the contracts between them after the reintroduction of the US sanctions.
In its judgment, the Court held that the prohibition in the EU Blocking Statute on complying with the requirements or prohibitions laid down in the laws adopted by a third country applies even in the absence of an order or instruction directing compliance issued by an administrative or judicial authority.
Notably, with regard to that prohibition in the EU Blocking Statute, the CJEU considered that the freedom to conduct a business, protected by Article 16 of the Charter, which it recognised may be threatened by the measures to which persons not complying with third country sanctions are exposed, is sufficiently protected simply by the possibility for those persons to apply to the Commission for an exemption from the EU Blocking Statute.
The CJEU further found that the prohibition laid down in the EU Blocking Statute is drafted in clear, precise and unconditional terms. It may therefore be relied on in civil proceedings before national courts.
The Court also held that the EU Blocking Statute does not preclude a person from terminating a contract concluded with a person on the SDN list without providing reasons for doing so. However, in the context of civil proceedings regarding an alleged breach of the EU Blocking Statute, the terminating party has the burden of proof that the contract was not terminated for the purpose of complying with the US sanctions, or any other third country legislation specified in the Annex to the Blocking Statute.
Moreover, the CJEU held that the EU Blocking Statute, read in the light of the EU Charter of Fundamental Rights (“the Charter”), does not preclude the annulment of the termination of a contract effected in order to comply with the laws specified in the Annex, provided that that annulment does not entail disproportionate effects for the persons having terminated the contract.
Also with regard to the annulment under national law of a termination of a contract effected in order to comply with third country sanctions listed in Annex to the Blocking Statute, the Court recognised that it entails a limitation on the freedom to conduct a business enshrined in the Charter. Nevertheless, in this context it underlined that that freedom does not constitute an absolute prerogative and that any limitation of the rights and freedoms recognised by the Charter must respect the requirements of Article 52(1) of the Charter. The Court found that the limitation is provided for by law, that it respects the essence of the freedom to conduct business and that it meets objectives of general interests recognised by the EU, but that it also has to be assessed in the light of the principle of proportionality.
According to the Court, the proportionality requirement implies that the pursuit of the objectives of the Blocking Statute, served by the annulment of a termination, must be balanced against the probability that the terminating party would be exposed to economic loss, and the extent of that loss, if it were not able to terminate the contract.
In its judgment, the CJEU provided a rather broad interpretation of the prohibition in the EU Blocking Statute on complying with the requirements or prohibitions laid down in the laws adopted by a third country. This prohibition is applicable also if it is the result of an act of a general and abstract nature and not only where an order or instruction directing compliance with third country requirements has been issued by an administrative or judicial authority.
However, the CJEU did leave open a possibility, albeit rather restricted, for EU companies potentially threatened with third country sanctions, such as the US secondary sanctions, to terminate a contract with a company subject to such sanctions under certain circumstances. The terminating party must be able to establish (i) that other objectively motivated grounds for the termination exists, and that they were the reason for the termination, or (ii) that the prohibition of the termination would be disproportionate compared to the consequences suffered.
As to the first condition, it may be noted that in his Opinion the Advocate General considered that if a company consistently and systematically applies a CSR policy which provides for other grounds to terminate business relationships such a ground could be a valid reason. Nonetheless, it is important to bear in mind that the CJEU held that, where all the evidence available suggests prima facie that the terminating party complied with third country sanctions, it is that party that has the burden of proof that contracts were not terminated for the purpose of complying with those sanctions.
In view of the CJEU’s judgment, anyone seeking to terminate a contract with a person subject to third country sanctions covered by the EU Blocking Statute must thoroughly consider the reasons for terminating the contract and the consequences, in particular the economic consequences, in case a termination of the contract would not be possible. It is also clear from the judgment that the CJEU puts a lot of weight on the possibility under the Blocking Statute for anyone seeking to terminate a contract with a person subject to third country sanctions to apply to the Commission for an exemption from the prohibition in the EU Blocking Statute has been made.
The judgment adds to the considerations that EU companies must take account of with regard to US sanctions. EU companies face both contractual liabilities and Member State regulatory sanctions should they seek to terminate contracts due to United States’ secondary sanctions against Iran and also Cuba, which at the time of writing are the countries concerned by the third-party legislation that the Blocking Statute refers to. Companies are well advised to carry out a review of their regulatory strategy regarding US sanctions.
Read the judgment in full text here.