Advocate-General calls for stronger application of EU Blocking Regulation

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management

21-06-2021

The Advocate-General of the European Court of Justice, Gerard Hogan, has issued a non-binding opinion on the scope of the EU Blocking Regulation, in the ongoing German case of Bank Melli Iran v Telekom Deutschland GmbH (the “Opinion”).

We set out below the headline points from the Opinion – a copy of the full Opinion can be accessed here.

Although the Court of Justice (“CJ”) is not bound by the Opinion, it is significant and the Advocate-General’s views may be an early indication of how the CJ will interpret the limitations of the EU Blocking Regulation. Any clarity on how Member States should be interpreting these provisions will be welcomed by EU businesses, which are often caught between the EU Blocking Regulations and U.S. extra-territorial sanctions.

For a refresher on the EU Blocking Regulation please see our previous briefing notes, here, here and here.

Case Background

Bank Melli Iran, an Iranian bank with a branch in Hamburg issued proceedings against Telekom Deutschland, a telecommunication provider in Germany, after Telekom Deutschland terminated its contracts. Telekom Deutschland is part of the Deutsche Telekom group, which generates approximately 50% of its turnover in the U.S.

Bank Melli argued that this termination occurred as a result of the former U.S. President Donald Trump re-imposing sanctions against Iran in 2018 and that this action is in breach of the EU Blocking Regulation.

Key Points from the Opinion

• The Article 5 prohibition, which prohibits EU Persons from complying with US sanctions in respect of Iran, Cuba and Libya, applies, even in the absence of any compulsion on the part of foreign authorities, i.e. where an EU entity voluntarily complies with foreign extra-territorial sanctions.
• There is a burden of proof on an EU entity to evidence that a business relationship with an Iranian entity subject to U.S. sanctions was not terminated based solely on a desire to comply with U.S. sanctions.
• Article 5 gives third country entities targeted by U.S. sanctions the right to bring an action against EU entities.

The Advocate-General suggests that this is an unintended consequence of the EU Blocking Regulation, noting that the aim of the EU Blocking Regulation is not to protect third-country entities directly targeted by U.S. measures. Nevertheless, he concludes that the first provision of Article 5 is to be interpreted as giving third parties such rights due to the language of the provision.

• The EU Blocking Regulation must be understood in a way that it imposes an obligation to give reasons justifying the termination of a commercial relationship with persons subject to primary sanctions.

It was concluded that if an EU entity was seeking to terminate a contract that would otherwise be valid, with an Iranian entity subject to U.S. sanctions, that EU entity must be able to demonstrate that it did not terminate the contract as a result of complying with U.S. sanctions alone.

• Where parties are already in business and there has been no change to business activity, it is for the terminating party to show there is an objective reason for the termination, other than a party becoming subject to U.S. sanctions.

In reaching this decision, it was acknowledged that many individuals and entities would not want to do business with Iran due to ethical qualms. However, it was noted that the terminating party would have to show that it engaged in a “coherent and systematic corporate social-responsibility policy (CSR) which requires them… to refuse to deal with any company having links to the Iranian regime.”

• National courts must order that a contractual termination by a EU entity of a relationship with a third party subject to U.S. primary sanctions is invalid and the contractual relationship should be maintained.

However, the Advocate-General did note that economic operators do still have the ability to seek the Commission’s authorisation to derogate from the EU Blocking Regulation.

• Calls for review by EU legislature

The Advocate-General acknowledges the “impossible” and “quite unfair” dilemma which EU business face with the application of two different and opposing legal regimes. He also comments that the EU has failed to provide clear guidance and suggests that EU legislature should undertake a review of how this statute currently operates (as opposed to this being a matter for the courts).

• Commission Guidance¹ and Implementing Regulation² cannot be taken into account when interpreting provisions of the EU Blocking Regulation

Whilst these preliminary remarks are in the context of the Opinion, they will be of interest to practitioners and business alike, who often refer to, or rely on this supporting guidance in order to interpret the provisions in the absence of any other clear guidance.

What does this mean?

As a matter of principle, the Opinion of an Advocate-General is sought in every case tried by the CJ, unless there is no new point of law. Such opinions are commonplace, however, this one is particularly significant in that it is the first time a member of Europe’s highest Court has opined on the EU Blocking Regulation since the snap back of U.S. sanctions in 2018. Whilst the role of an Advocate-General is simply an advisory one and the Opinion is not legally binding, the courts will take the points raised into account when deliberating a judgment and it remains to be seen whether the judgment in the Bank Melli case carries views similar to those expressed in this Opinion.

The Advocate-General’s comments are notable in that they show a strong stance in respect of the application of the EU Blocking Regulation and the need for enforcement of its objective, to protect European companies from the extra-territorial reach of third country legislation. However, these comments are balanced with criticism of the legislation, referring to it as a “very blunt instrument” that would inevitably cause “casualties in its wake”.

Issues which EU entities should consider:

• When attempting to terminate a business relationship with an entity subject to primary U.S. sanctions, the burden of proof will be on the terminating party to show that the reason for this is not in order to comply with U.S. sanctions;
• The balance between compliance with EU legislation and U.S. sanctions will become even more complex and could result in higher risk for companies;
• There will be an increased risk of litigation against businesses choosing to terminate commercial relationships with parties which are subject to extra-territorial sanctions; and
• Entities wishing to terminate contractual relationships with sanctions targets, on the basis of genuine CSR concerns, will need to ensure that these can be objectively evidenced. Properly documented CSR policies and procedures are one way in which businesses can demonstrate this.

The EU Blocking Regulation creates a juxtaposition; it was implemented to protect EU entities from the extra-territorial application of sanctions regimes, specifically US sanctions, however, it does this by penalising the same EU entities with unlimited fines where they are considered to be complying with the relevant extra-territorial sanctions. The Bank of Melli case is an opportunity for the EU to clarify the operating parameters for EU entities in order to make the act of balancing extra-territorial sanctions concerns with the legal protections (and risks) associated with complying with the provisions of the EU Blocking Regulation clearer. On the face of it, the Opinion of The Advocate-General has not made this difficult position for EU entities any easier.

Impact for UK business

As a result of Brexit, the UK implemented the Protection of Trading Interests legislation, known as the Retained Blocking Regulation. This transposes the EU Blocking Regulation into domestic UK law and, as such, provisions reflecting those of the EU Blocking Regulation are enforceable in the UK.

As the UK is no longer part of the EU, any decision reached in the Bank of Melli case will not be binding on the UK. As such, the interesting question is whether, irrespective of the non-binding nature of the Melli decision, the UK follows it. As a common law system, the UK has existing extensive and complex doctrines, a number of which go to the heart of interpreting the EU Blocking Regulation, such as contractual rules of interpretation and disclosure requirements in litigation proceedings. On the basis of such doctrines, it would be difficult to imagine that the UK courts would follow verbatim the principles set out in the Opinion of the Advocate-General, if such position were to be adopted by the CJ. However, under the provisions of the Withdrawal Agreement, when a UK court interprets retained EU law post-Brexit, they should have due regard to any relevant CJ case law decided from 1 January 2021. Generally, UK courts are likely to be heavily influenced by non-binding EU decisions where they are interpreting the same obligations (i.e. retained EU law). As such, it is not inconceivable that UK courts will choose to follow a similar approach – especially in light of the fact that any decision by the UK courts in relation to the Retained Blocking Regulation will be the first of its kind, so the UK courts will be lacking domestic guidance.

[1] Commission Guidance Note – Questions and Answers: adoption of Update of the Blocking Statute of 7 August 2018, C/2018/5344 (OJ 2018 C 2771, p. 4).
[2] Implementing Regulation 2018/1101

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