Opinion by AG Hogan on EU Blocking Regulation
Opinion by AG Hogan on EU Blocking Regulation
On May 12, 2021 Advocate-General Hogan delivered his Opinion in the case between Bank Melli Iran and Telekom Deutschland GmbH concerning the interpretation of the EU Blocking Regulation.
While this Opinion does not bind the European Court of Justice (CJEU), it does serve to guide the Court in delivering its ruling. If the CJEU should reach the same conclusions as AG Hogan, then we may see a much stricter application of the Blocking Regulation than seen thus far.
In 2018 the EU updated the Blocking Regulation to include the sanctions that were re-imposed on Iran after the US withdrew from the Joint Comprehensive Plan of Action (commonly referred to as the ‘Iran Deal’).
At the time a number of cases concerning the Blocking Regulation came before the national courts of the Member States. Since the application of the Regulation was still in its infancy, some of these court cases led to different results. One of these cases was appealed and before deciding, the Higher Court referred the case to the European Court of Justice (CJEU) for a preliminary ruling.
While awaiting the ruling from the CJEU, AG Hogan’s Opinion sheds some light on how the CJEU may interpret the Blocking Regulation.
Facts of the case
In 2018, the Regional Court in Hamburg decided in a case concerning the newly updated EU Blocking Regulation. The case concerns whether a German telecoms provider breached the Blocking Regulation when it terminated its services to a German branch of an Iranian bank. When the Iranian bank became subject to US sanctions, the telecoms provider issued a termination letter with immediate effect, followed by an ordinary termination. The telecoms provider argued that the bank would no longer be able to make payments and meet its contractual obligations as it would be excluded from the SWIFT system due to the sanctions. The bank however argued that it could still make payments without using the SWIFT system via its German account. The Court of first instance noted that such a termination would in general be effective if there are reasons that would 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 and continue performance until the expiry of the ordinary notice period.
The bank appealed the decision to the Hanseatic Higher Regional Court, arguing that the ordinary termination was motivated by the US sanctions and therefore invalid under the Blocking Regulation. The telecoms provider in turn argued that the Blocking Regulation does not prohibit ordinary termination which under German law did not require a reason. The Higher Court referred the case to the European Court of Justice (CJEU) for a preliminary ruling.
Among other things, the Higher Court specifically asked the CJEU to consider;
1) If the prohibition to comply with blocked sanctions only applies where specific orders or requests have been made by US authorities – or if it also prohibits companies from voluntarily complying with the blocked sanctions?
2) Whether the Blocking Regulation imposes an obligation on companies to justify the reason behind their decisions regarding contractual parties subject to blocked sanctions?
3) If the Blocking Regulation requires national courts to order the contractual relationship to be maintained or restored in the event it was terminated in breach of the Blocking Regulation?
AG Hogan’s conclusions
As a preliminary remark, AG Hogan noted that the Commission Guidance Note on the Blocking Regulation does not have binding normative value and can therefore not be considered when interpreting the Blocking Regulation.
The Guidance Note states that EU operators are free to choose whether to start, continue or cease business operations in Iran in accordance with EU law and national laws. This statement has been relied upon in some of the recent court cases, including the present one, to support the argument that companies are free to terminate business dealings with Iranian companies. While the statement also includes that those decisions must be made in accordance with EU law, thus including the Blocking Regulation, AG Hogan still clarified that this statement in itself cannot be used to interpret the Regulation.
As for the questions, AG Hogan stated that the Blocking Regulation also prohibits situations where EU companies comply with blocked sanctions without a prior order or request from US authorities. As he notes, the opposite would render the protection under the Blocking Regulation ineffective if it can only be applied when there is a formal notice from US authorities. Not only is it not common practice for US authorities to issue such requests, but it would also be very difficult for a party to prove that such a request or order exists.
The second question concerned whether a company can be required to justify its reasons for terminating business activities with parties that are subject to blocked US sanctions. AG Hogan first noted that affected foreign third parties, such as the Iranian bank in this case, can indeed rely on the Blocking Regulation.
He further considers that the Regulation must be interpreted to impose an obligation on a defendant to justify the reasons for its decision to terminate a commercial relationship. The opposite conclusion would mean that companies could just silently comply with blocked US sanctions, rendering the Regulation ineffective. In addition, as AG Hogan also noted, it would create an almost impossible burden of proof on the affected party since a company would rarely publicly admit that its decisions were motivated by blocked US sanctions. For these reasons he considers that where a claimant has brought prima facie evidence that an action was motivated by a desire to comply with blocked US sanctions, then the defendant must establish objective reasons for its decision other than the blocked US sanctions.
As for the third question regarding the consequences of a breach of the Blocking Regulation, AG Hogan stated that it is for the Member States to lay down the rules on penalties for infringements, but the national courts must ensure the full effectiveness of the Regulation when doing so. This requires amongst other things that national courts must re-establish the situation as it would have been in absence of the infringement, and that this result must be the outcome throughout the Member States. Therefore, if a commercial relationship is terminated for no other reason than blocked US sanctions, then the national court must order the contractual relationship to continue on the same terms as previously existing.
What does this mean for European companies affected by blocked US sanctions
AG Hogan’s conclusions confirm the general understanding that the Blocking Regulation prohibits EU companies from complying with blocked US sanctions, regardless whether the companies have received a formal request or notice from the relevant US authorities. The AG’s Opinion further stated that companies can indeed be required to demonstrate the reason for their decisions concerning parties affected by blocked US sanctions. If it is found that the reason is compliance with blocked sanctions, then companies can be ordered to (re)establish the situation is it would have been in absence of the infringement. This means that companies could in fact be ordered to perform or enter into commercial relations prohibited under US sanctions.
While the CJEU has yet to deliver its ruling there are nevertheless some important takeaways from the AG’s Opinion.
Companies should be prepared to demonstrate the motivation behind decisions to terminate or refuse a commercial relationship with parties affected by the blocked sanctions. The Opinion should not be understood to mean that companies cannot under any circumstances refuse business dealings with Iranian companies, but that such refusals must not be based on US sanctions. In his Opinion, AG Hogan noted that such decisions could for example very well be based on a company’s own ethical values. This however requires that the company can point to a coherent and systematic Corporate Social Responsibility policy (CSR) and demonstrate that its decisions have been made genuinely and sincerely in accordance with that policy.
As for the consequences for infringement of the Blocking Regulation, the Opinion underlines the severe penalties that have been adopted in many Member States. In many Member States substantial administrative and criminal fines have been prescribed. Additionally, in Ireland, Sweden and the Netherlands criminal penalties may even include prison sentences.
As not all US sanctions are included in the Blocking Regulation, it is crucial that companies ensure that their compliance programmes take into account which US sanctions have been blocked and which sanctions they can lawfully comply with. EU companies affected by blocked sanctions should furthermore be mindful of the authorisation possibility under the Blocking Regulation, as well as their information duty to the EU commission.
For more information on this, please contact Kneppelhout’s Export Control and Sanctions team.