Navigating between U.S. secondary sanctions and the EU Blocking Regulation
Navigating between U.S. secondary sanctions and the EU Blocking Regulation – Compliance challenges for EU companies
With the U.S. withdrawal from the JCPoA, U.S. sanctions were re-imposed against Iran and the EU Blocking Regulation was updated to prohibit EU companies from complying with these sanctions. These developments have left some EU companies challenged with either complying with U.S. sanctions and thus violating the EU Blocking Regulation, or complying with the EU Blocking Regulation and in turn exposing themselves to the risk of US secondary sanction. Our previous article on the updated Blocking Regulation can be found here.
Recently, there have been reports of cases in which courts of Member States have applied the EU Blocking Regulation. These judgments give some clarity on how national courts interpret and apply the regulation, including which factors they take into consideration. This article will address these judgments and consider the practical and legal issues arising out of these developments for EU companies.
Application of the Blocking Regulation by national courts
In 2018, two cases concerning the Blocking Regulation have been decided by the Regional Court in Hamburg. The first case concerns a telecoms provider that terminated its services to a German branch of an Iranian bank. The Iranian bank was subject to US sanctions and the telecoms provider therefore assumed that the bank would no longer be able to make payments and meet its contractual obligations. The bank demonstrated that it could make payments without using the SWIFT system through a German account with sufficient cover. The Court noted that in general, such a termination would be effective if there are reasons that make the continuation of the contract unreasonable for the terminating party. However, the telecoms provider did not sufficiently demonstrate that this was the case. On that basis, the Court granted an interim injunction ordering the telecoms provider to restore its services. It is noteworthy that the case suggests that termination would otherwise have been successful if the insolvency was sufficiently proven, even when such insolvency was caused by blocked U.S. sanctions.
In the other case, a logistics company requested an injunction ordering its German bank to restore its banking services. The bank terminated its services when the logistics company became subject to U.S. sanctions. The general terms and conditions provided that the bank may terminate its services if it provides an appropriate reason.The court held that this requires that the reason must not be arbitrary but justified. It considered that the risk of U.S. secondary sanctions and the risk that other corresponding banks would terminate their cooperation to avoid exposing themselves to secondary sanctions, constitutes such a justified reason. The Court determined these risks sufficiently demonstrated and consequently rejected the request for the injunction. The Court noted that the Blocking Regulation does not oblige EU companies to continue trading with Iranian companies when it would be contrary to their commercial interests, but rather aims to ensure that such business decisions can be taken independent of U.S. sanctions.
In Italy, the first case concerned an Italian company controlled by persons resident in Iran. Despite that the Iranian persons were not subject to U.S. sanctions, the Italian company was notified by its bank that it would terminate its banking services due to concerns over US sanctions. The Italian Court ruled that in doing so the bank would breach the EU Blocking Regulation, and it consequently awarded an injunction preventing the bank from terminating their services. The second case concerns an Italian company that had previously concluded and performed a supply contract with an Iranian company that became subject to US sanctions. The final payment by the Iranian company was frozen by the Italian company’s bank. The Court ordered the release of the funds as the U.S. designation had no effect in the EU, and the Iranian bank was not subject to any sanctions in the EU. As the Italian judgments have apparently not been made publicly available, the specific details of the cases remain unclear. The outcome of the cases nevertheless indicate a stricter application in comparison to the German cases.
Similar consideration can be made about a recent case between the Dutch company Exact B.V. and Curaçao-based PAM International N.V. (‘PAM’). Pursuant to the parties’ distribution agreement, PAM distributed software supplied by Exact to companies in Cuba. Exact terminated this agreement following its acquisition by a US-based investment company. Exact argued that it was legally obliged to terminate the agreement following the acquisition and that the circumstances amounted to force majeure. The Court however ordered Exact to restore its services, finding that Exact and its shareholders’ exposure to the risk of US sanctions, as a result of the continuation of the agreement, constitutes a risk that is for them to bear, and which cannot be passed onto PAM. The Court further noted that Exact may have breached the Blocking Regulation by terminating the agreement. In regards to this, it has recently been reported that the Dutch authorities are now investigating Exact for breach of the Blocking Regulation upon a request by the European Commission.
Enforcement of the Blocking Regulation is still in its infancy, and it is too early to determine a practice on the basis of these cases. A few remarks can however be made regarding the different factors the courts have considered. While the two German cases ultimately led to different outcomes, the reasoning of the German court in both cases suggests that much consideration was placed on the commercial consequences and impact of U.S. sanctions on the companies. In contrast, this seems to have been less the case in the Italian and Dutch judgments, instead emphasising whether the actions were based on blocked U.S. sanctions, suggesting a stricter application of the regulation. On the basis of these judgment, there in any event appears to be an inconsistent application of the regulation. Considering that Member States have already adopted different penalties for violation of the regulation, there is a clear risk that EU companies may experience that certain actions which are not considered unlawful in one Member State may be in another. Overall, the recent cases nevertheless confirm the increased focus on enforcement of the Blocking Regulation.
What does this mean for EU companies
EU companies are free to determine whether to start, continue or cease business activities, provided that those reasons are not based on listed U.S. sanctions (currently related to Cuba and Iran). Companies may therefore lawfully terminate or decide not to engage in business activities on the basis of their assessment of the economic situation and their commercial interests. This could be the case if for example the activity is not commercially viable, or due to compliance with non-listed U.S. sanctions, anti-money laundering legislation or general compliance costs. Moreover, companies may request the Commission for an authorisation to comply with U.S. sanctions. Noting that this indeed is an exception, it is however possible if non-compliance would cause serious damage to the interests of the company or the EU/Member States. This could particularly be relevant for EU companies with U.S. subsidiaries/parent companies. On the other hand, if business activities are terminated or not engaged in breach of the Blocking Regulation, this may lead to public as well as private enforcement. Penalties in Member States for breach of the Blocking Regulation, including breach of the information duty, may include substantial administrative or criminal fines, and even prison sentences in the case of Ireland, Sweden and the Netherlands. In addition, the regulation provides an express legal basis to recover damages, including legal costs from any natural or legal person that has caused the damage. Hence, even if the regulation is not enforced heavily by public authorities, EU companies may still face claims for damages by private parties. Similarly, if public authorities find that a company breached the Blocking Regulation, it may strengthen damage claims against it.
Companies engaged in commercial activities that may be affected by U.S. sanctions should therefore carefully consider the practical and legal issues arising from these developments, and adjust their approach accordingly – both in terms of their own compliance, but also if performance by their contractual parties become affected by U.S. sanctions.