CJEU Makes First Judgment Interpreting EU Blocking Regulation
The Situation: The Grand Chamber of the Court of Justice of the European Union ("CJEU") has recently and for the first time given its opinion on interpretation and application of the EU Blocking Statute.
The Result: Partially deviating from the opinion of the Advocate General, the CJEU adopted a nuanced position, protecting the EU companies on the basis of the principle of proportionality (balancing the EU person’s potential exposure to secondary sanctions against the risk of disproportionate economic consequences).
Looking Ahead: The decision of the CJEU appears to provide much greater flexibility for national courts to assess the impact on the EU Blocking Statute based on individual circumstances of the case.
An Eagerly Awaited Decision
The Grand Chamber of the Court of Justice of the European Union ("CJEU") has recently— and for the first time—given its opinion on the interpretation and application of the controversial Council Regulation (EC) No 2271/96 of 22 November 1996, which protects against the effects of extraterritorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom (the "EU Blocking Statute"). This was designed to neutralize undesirable effects of the extraterritorial application of certain U.S. regulations sanctioning EU persons involved in commercial relations with States sanctioned by the United States.
In its decision dated 21 December 2021, known as the "Bank Melli case," the CJEU answered four preliminary rulings requested by the Hanseatic Higher Regional Court of Hamburg (Hanseatisches Oberlandesgericht) as to how the EU Blocking Statute should apply, including Article 5 of the EU Blocking Statute, which prohibits EU persons "comply[ing], directly or through a subsidiary or another intermediary person, actively or by deliberate omission, with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly from" extraterritorial measures imposed by the United States on Cuba and Iran.
As a reminder, in 2018 a dispute arose between the German company Telekom Deutschland ("TD") and the German branch of an Iranian bank, Bank Melli Iran ("Bank Melli"), when TD notified Bank Melli of the immediate termination of a framework agreement for the provision of telecommunication services to Bank Melli. Believing that this termination was secretly motivated by TD's desire to comply with U.S. sanctions regulations (Bank Melli having been sanctioned by the United States in 2018 following the U.S. decision to withdraw from the Joint Comprehensive Plan of Action) and therefore in violation of the EU Blocking Statute, Bank Melli requested that the Hanseatisches Oberlandesgericht order TD to leave all contractually agreed lines active. Given the uncertainty associated with this application of the EU Blocking Statute, the Hanseatisches Oberlandesgericht stayed proceedings and raised four questions with the CJEU.
The decision of the CJEU was eagerly awaited, especially as the opinion of the Advocate General Hogan, delivered on 12 May 2021, was highly criticized for proposing to force Telekom Deutschland to continue its contract with Bank Melli, therefore giving a strict interpretation of the EU Blocking Statute that could be to the significant disadvantage of the interests of EU persons.
Ultimately, in line with our recent analysis (Règlement européen de blocage: les entreprises européennes entre le marteau et l’enclume, La Semaine Juridique, 22 Novembre 2021), the CJEU deviated from the Advocate General’s opinion in certain important points.
Does the prohibition stated in Article 5 apply even without an order issued by the U.S. administrative or judicial authorities?
The CJEU confirmed that EU persons can be found in breach of the EU Blocking Statute even if they voluntarily comply with U.S. sanctions and are thus not subject to any direct orders or enforcement proceedings by U.S. authorities. Unsurprisingly, the CJEU followed the opinion of the Advocate General on this point, failing which the effect of Article 5 would be exceptionally limited.
Can an EU person terminate a contract concluded with a person sanctioned under U.S. law, without providing reasons for that termination?
The CJEU has confirmed that an EU person may terminate a contractual relationship with a person under U.S. sanctions without having to provide reasons for the decision if national law does not compel them to do so. However, in any civil proceedings arising from the termination, if "all the evidence available to the national court suggests prima facie" that an EU person took actions to comply with U.S. sanctions, in that specific case the burden of proof to show that this was not in fact the case is placed entirely on the EU person.
Thus, the CJEU did not entirely follow the opinion of the Advocate General, which adopted a strict approach that the burden of proof should be reversed in circumstances where the EU person "could feel concerned" by a law with extraterritorial effect. Although it remains now to be seen how the EU member state courts will interpret this general concept, this helpful clarification by the CJEU is very much in favor of affected EU persons.
Third and Fourth Questions
Must the termination of a contract by an EU person in compliance with the relevant U.S. sanctions be allowed, especially in the situation where that person risks suffering substantial economic loss if the termination is annulled?
On these last questions, the decision of the CJEU deviates most clearly from the opinion of the Advocate General. In order to give effect to "effective, proportionate and dissuasive" penalties for violation of the Blocking Statute in accordance with Article 9 of the EU Blocking Statute, the General Advocate recommended that termination of a contract with a sanctioned person which was only motivated by the desire to comply with U.S. sanctions should be considered invalid and ineffective.
Importantly, the CJEU did not follow the opinion of the Advocate General, considering that the rules of the EU Blocking Statute "cannot infringe the freedom to conduct a business by leading to disproportionate economic loss." Instead, the CJEU adopted a more nuanced approach based on the principle of proportionality. Specifically, the CJEU specified that if the national courts order reinstatement of contractual relations where it is found that the termination was in breach of the EU Blocking Statute, such a decision must be supported by a proportionality test, especially when forcing the maintenance of the contract could entail disproportionate economic consequences to the relevant EU person. This proportionality test should be made by the EU member state courts, which must weigh how invalidation of a termination serves the EU Blocking Statute's objectives against the EU person's exposure to secondary sanctions.
Here, the decision of the CJEU deviates in a positive direction, and in an interesting way in practice, from the opinion of the Advocate General, since it considers that termination can be valid if it aims to avoid disproportionate economic consequences to the EU person. This would probably have been the case in the Bank Melli case, since TD generates most of its turnover in the United States. According to the decision, the Hanseatisches Oberlandesgericht will have to decide whether upholding the contract with Bank Melli would expose TD to such a disproportionate economic loss. We are now awaiting the decision of the Hanseatisches Oberlandesgericht to see how it will interpret the decision of the CJEU on the basis of the CJEU’s new guidelines.
Three Key Takeaways
1. The CJEU confirms that the EU persons can be found in breach of the EU blocking statute if they voluntarily comply with U.S. sanctions.
2. The CJEU has confirmed that a EU person may terminate its contractual relationship with a person that is the subject of US sanctions without having to justify its decision, where national law does not compel them to do so.
3. When a court determines that an EU person has terminated an agreement in contravention of the EU Blocking Statute, the court may annul the termination of the contract, so long as that reversal of the position does not have a disproportionate effect on the EU person.
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