Judging the EU Sanctions Blocking Regulation: Bank Melli v Telekom Deutschland

Background

The background to the case is summarised in our earlier article. In brief, the EU Blocking Regulation prohibits EU entities from directly or indirectly complying with certain foreign extra-territorial sanctions. Its operation has been under increased scrutiny recently because of the US decision to re-impose "secondary" sanctions (targeted primarily at non-US based individuals and entities dealing with Iran and Iranian counterparties) that had been removed pursuant to the Joint Comprehensive Plan of Action.

Bank Melli Iran (an Iranian bank with a branch in Hamburg), commenced proceedings in the German courts after the defendant, Telekom, gave notice of its decision to terminate the contract between the parties with immediate effect. Telekom also sent identical notices of termination to at least four other clients with Iranian connections. Telekom's notices of termination were sent shortly after the re-imposition of secondary sanctions on Iran by the US. No reason for termination was provided.

The decisions of the German courts

At first instance, the Landgericht Hamburg held that Telekom had not infringed Article 5 of the EU Blocking Regulation but granted an interim injunction ordering Telekom to perform its contractual obligations until the end of the notice period for ordinary termination.

Bank Melli appealed, arguing that termination was in breach of Article 5 and therefore ineffective. Telekom submitted (referencing the Commission Guidance Note on the EU Blocking Regulation) that Article 5 does not change a party's right to lawfully terminate a contract. Neither the contract nor German law required the disclosure of reasons for a decision to lawfully terminate. The Hanseatic Higher Regional Court referred four questions to the CJEU for a preliminary ruling. The CJEU's judgment on these questions is summarised below.

The CJEU decision

Question 1: Does the first paragraph of Article 5 of the EU Blocking Regulation only apply where the acting EU entity (in this case, Telekom) is issued (directly or indirectly) with an official order by the US, or is it sufficient for the EU entity to only be seeking to comply with secondary sanctions?

The CJEU agreed with the AG's view that EU entities complying with secondary sanctions covered by the EU Blocking Regulation are caught by Article 5, whether compliance has been directly compelled by the state imposing those secondary sanctions or not. Article 5 therefore applied despite Telekom not having been expressly ordered to terminate its contract with Bank Melli. 

Question 2: Does the first paragraph of Article 5 override a national (German) law which permits the termination of a continuing contractual obligation without the provision of reasons?

Adopting a somewhat differing interpretation to the AG, the CJEU determined that Article 5 does not override a national law allowing for obligations to be terminated without providing reasons. However, it held that where all the evidence in civil proceedings before a national court "tends to indicate prima facie" that a party has complied with the relevant secondary sanctions legislation without authorisation, the burden of proof shifts to that party to prove to the requisite legal standard that it did not act in breach of Article 5. The Court considered that requiring the party alleging a breach of Article 5 to prove its case to a higher standard would be impossible or excessively difficult and so would not ensure that Article 5 is fully effective. 

Question 3: Must ordinary termination in breach of Article 5 be deemed ineffective, or can an alternative penalty be imposed? and Question 4: Given Articles 16 and 52 of the Charter of Fundamental Rights of the European Union, and the possibility of an exemption being authorised under the second paragraph of Article 5, does that apply even where maintaining the business relationship with the sanctioned contracting party (here, Bank Melli) would cause the EU operator (here, Telekom) to suffer considerable economic losses on the US market?

The CJEU answered Questions 3 and 4 together. It held that the combined effect of Articles 5 and 9 of the EU Blocking Regulation and Articles 16 and 52 of the Charter of Fundamental Rights of the European Union did not preclude the annulment of contractual termination in breach of the EU Blocking Regulation but only insofar as "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." This reference to the need to consider proportionality is a significant departure from the AG's Opinion, who saw no role for the principle given his interpretation of the relevant EU law.

The CJEU's decision confirms that national courts have the power to annul a contractual termination where it is in breach of Article 5, provided that doing so would not expose the party that sought termination to disproportionate effects such as economic loss. This proportionality assessment requires the national court to strike a balance between the effects on the party that sought termination if that termination is annulled and the objectives of the EU Blocking Regulation, namely the protection of the established legal order and the interests of the EU in general to achieve the objective of free movement of capital between EU Member States and third countries. In undertaking that proportionality assessment, the CJEU held that a failure of the party that sought termination to seek prior authorisation from the European Commission (as is provided for in Article 5) would be a relevant factor. However, the CJEU did not go as far as indicating this would be determinative. 

It is worth noting that Member States may impose a fine on a party that has sought to terminate a contract in breach of Article 5, and without seeking prior authorisation from the European Commission, even if a mandatory injunction to continue the contract would have disproportionately adverse economic consequences.  

Commentary

This decision emphasises the importance of parties ensuring that they have a full understanding of the risks of laws with extraterritorial effect, and particularly of the difficult interaction of US secondary sanctions with the EU Blocking Regulation. While the CJEU has potentially offered businesses caught in the crossfire between US and EU legislation a lifeline, it remains to be seen how national courts will assess the principle of proportionality. It is also worth noting that the CJEU highlighted the ability of parties at risk of breaching Article 5 to apply for an exemption from the European Commission, and its observation that this was not a route Telekom had taken in this case. We may see some divergence amongst national courts, when making their assessment of proportionality, as to how much weight they place on whether EU operators have first sought authorisation before seeking to terminate a contract.

This case is also notable because of the suggestion that the services provided by Telekom are "essential" to Bank Melli's internal and external communication in Germany. The CJEU was not asked to consider any arguments in relation to Bank Melli's fundamental rights and so it remains to be seen whether these are considered by national courts

Pending clear decisions from national courts within the EU, there remains a risk that the EU Blocking Regulation (and any subsequent UK legislation) may require the continuation of contractual arrangements in breach of US secondary sanctions unless a party seeks and is granted prior authorisation from the European Commission.  

Application of the EU Blocking Regulation in the UK

The EU Blocking Regulation has been retained in UK law post-Brexit by The Protecting against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020. These regulations amended the EU Blocking Regulation and the related Implementing Regulation (Commission Implementing Regulation (EU) 2018/1101) to take account of the UK's departure from the EU. The retained EU regulations and the domestic implementing legislation, as amended, together form the UK Blocking Regulations. 

The ultimate power to apply and interpret the UK Blocking Regulations now lies with the UK courts. While not bound by the CJEU's decision in this case, the UK courts may have regard to it. In this regard, it is worth noting that the CJEU decided that a proportionality assessment was required by reference to the EU Charter of Fundamental Rights, Article 16 (freedom to conduct business) and Article 52 (the principle of proportionality). However, the UK decided not to incorporate the Charter into UK law when the UK left the EU. There is no express equivalent to Article 16 of the Charter in the European Convention on Human Rights (the "ECHR", to which the UK remains a party), even though the European Court of Human Rights has recognised elements of the right in the ECHR, in particular, in the freedom to enjoy the right to property (Article 1 of Protocol 1 to the ECHR) and freedom of expression (Article 10 of the ECHR, freedom of 'commercial' expression). It is therefore uncertain whether UK courts will interpret the UK Blocking Regulation in the same way as the CJEU has now interpreted the EU Blocking Regulation. 

More to come

Finally, following the AG's expressed hope that the EU legislature would "ponder and consider" the implications of the EU Blocking Regulation, we expect the European Commission to publish a proposed revision of the legislation in the second quarter of 2022. Having at long last obtained some clarity from the CJEU on the EU Blocking Regulation, the ground may be about to shift beneath the feet of EU businesses. 

Authors

Sue Millar
Stephen Ashley
Harriet Campbell
Alexander Goodman