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EU Blocking Regulation – where are we now?

  • United Kingdom
  • Competition, EU and Trade

08-10-2019

One of the most pondered questions following the U.S.’s withdrawal from the Joint Comprehensive Plan of Action (“JCPOA”) has been - how will the EU Blocking Regulation fair in protecting the interests of EU businesses trading with Iran against the weight of U.S. extra-territorial sanctions?. To date, answers to this question have been, largely, hypothetical as the EU Blocking Regulation has remained untested in court. Most claimants that have sought to rely on the terms of the EU Blocking Regulation have been told – in no uncertain terms – that it did not apply to the facts of their case.

For a refresher on the EU Blocking Regulation and the U.S.’s withdrawal from the JCPOA, please see our previous briefing notes, available here (U.S.’s withdrawal from the JCPOA), here (EU Blocking Regulation) and here (EU Blocking Regulation update).

However, over the past week, several EU Blocking Regulation-related cases have been publicised, which may give some clarity on how Member States are interpreting the provisions of the EU Blocking Regulation.

Case Summaries

• An Italian court ordered an injunction against a bank that had notified its client, an Italian company, that it was terminating its banking services as the company was controlled by partners in Iran. The court determined that terminating the banking services would be a breach of the EU Blocking Regulation and awarded an injunction to prevent termination of the services.

• An Italian court ordered the release of funds frozen by an Italian company’s bank. The funds were a payment made under a supply contract between the Italian company and an Iranian company. The court ordered the release of the funds amid a finding that the U.S. designations do not have effect in the EU.

• The German courts rejected a claimant’s request for an injunction preventing its banking facilities being withdrawn due to the bank’s fear of U.S. sanctions in relation to Iran. The claimant was an international logistics company, and it was notified that its banking facility was being withdrawn due to its re-listing on OFAC’s SDN list. In its termination notice, the bank cited the serious risk of OFAC taking enforcement action against it for acting contrary to U.S. sanctions as its reason for the termination.

The claimant requested an injunction preventing its account closure until alternative appropriate banking facilities could be obtained. The court determined that the termination was not unlawful as the EU Blocking Regulation does not oblige EU businesses to continue trading with Iranian entities, particularly when to do so would be contrary to their commercial interests. Instead, the purpose of the EU Blocking Regulation is to ensure that EU businesses have the freedom to continue Iranian transactions, if they wish to do so. Therefore, the termination of any Iranian transactions should be treated as standard terminations and carried out in accordance with standard practice. According to the banking facility terms, the bank could terminate an account if it had a valid reason to do so.

The bank provided evidence that there was a real risk that the U.S. correspondent banks (which are necessary for its functions), may terminate their relations if the bank did act contrary to U.S. sanctions. The judge considered this to be a valid reason for termination and, therefore, the injunction was rejected.

• In a separate German case, a telecoms provider terminated, without notice, all telecoms services that it was providing to an EU-based branch of an Iranian bank affected by the re-imposition of U.S. sanctions on Iran. The telecoms provider reasoned that it did not need to respect a termination notice period in these circumstances, as the bank would be unable to fulfil its obligations under the contract during the notice period (i.e. payment for the services), considering the sanctions against it. Further, the telecoms provider stated that it was concerned about the risk of acting contrary to U.S. sanctions.

The bank sought an interim injunction preventing the termination (and, therefore, requiring all telecoms services to be restored immediately), as the immediate removal of such services had a profound and detrimental effect on the bank, as it was no longer able to carry out its business. The court determined that, had there been a real risk that the bank was going insolvent due to the re-imposition of sanctions, termination of the contract without notice would be permitted. However, in the absence of evidence to demonstrate this, the court ordered the injunction against the telecoms company that was to last for, what would have been, the notice period. The injunction was granted at an interim hearing due to the urgent need of the bank to have its telecoms services restored, the main proceedings are still pending.

It is clear from the application of the EU Blocking Regulation in the German cases that Member State courts are concerned with the commercial realities for EU businesses when considering whether there has been a breach of the EU Blocking Regulation. It appears that there will be significant latitude given to EU businesses to terminate Iran related-transactions where there are U.S. extra-territorial sanctions risks. However, in other cases, it seems that the commercial impact of U.S. sanctions on EU businesses will be carefully weighed against those of EU companies that wish to continue to trade with Iran.

In light of the above, there is an inherent risk that application of the EU Blocking Regulation may not be consistent across Member States. This could result in EU businesses in one Member State being afforded greater protection from U.S. extra-territorial sanctions than is available to EU-businesses in other Member States. In the absence of further information from the Italian courts (at the time of writing, the courts have not made the full Judgments available), it appears that the courts’ approach could be seen to favour the interests of EU companies that wish to continue to trade with Iran rather than those who struggle to comply with conflicting laws. Only time will tell whether there will be inconsistencies in the protection offered by the EU Blocking Regulation across other Member States as and when cases from other courts become available.

While these cases do not appear to settle many of the questions about the EU Blocking Regulation, they have crystallised the fact that EU businesses may be stuck between the proverbial rock and a hard place, as the EU Blocking Regulation can be wielded as a weapon against EU businesses attempting to avoid the adverse consequences associated with U.S. extra-territorial sanctions, rather than shielding them from such consequences.

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