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In 1996, the EU introduced the EU Blocking Regulation (the “Blocking Regulation”) with the aim of countering U.S. extra-territorial sanctions legislation concerning Cuba, Iran and Libya. On 7 August 2018, the EU amended the Blocking Regulation as part of its response to President Trump’s announcement on 8 May 2018 that the U.S. would withdraw from the Joint Comprehensive Plan of Action in relation to Iran and would reinstate Iran-related secondary sanctions.
Article 5 of the Blocking Regulation prevents any EU operator from complying with the U.S. sanctions listed in its annex in any way. This provision is widely drafted to prohibit any form of compliance “with any requirement or prohibition […] based on or resulting” from the listed sanctions, irrespective of whether such compliance happens “actively or by deliberate omission”, and whether it be direct or via a subsidiary or intermediary. Compliance with U.S. sanctions against e.g. Iran may result in the committing of an offence by the violation of the Blocking Regulation.
The European Commission has issued guidance on the Blocking Regulation and Article 5, stating that “EU operators are free to conduct their business as they see fit in accordance with EU law and national applicable laws”. According to the European Commission, this means “that EU operators are free to choose whether to start working, continue, or cease business operations in Iran or Cuba, and whether to engage or not in an economic sector on the basis of their assessment of the economic situation”.
Nonetheless, the scope of Article 5 has given rise to several court cases in Germany, in which the courts have had to deal with the question of whether the termination of contracts with Iranian counterparties was valid or violated Article 5 of the Blocking Regulation and therefore null and void.
The Higher Regional Court (Oberlandesgericht) in Hamburg considered an appeal in which the appellant, an Iranian bank, disputed the validity of an ordinary termination of a contract for provision of telephone and internet services (case no. 11 U 116/19). In the appeal proceedings, the bank argued that the termination was motivated solely by the desire not to infringe the secondary sanctions imposed by the U.S. However, it was not shown that the termination was preceded by direct or indirect administrative or judicial orders from the U.S.
In a judgment of 7 February 2020, the Higher Regional Court of Cologne took the view that Article 5 para. 1 of the Blocking Regulation was not applicable in such a situation (case no. 19 U 188/19). The Cologne court held that Article 5 contained a ban on compliance with administrative, legislative or judicial acts by the U.S. of a direct or indirect nature. However, there was no indication that ordinary termination within an existing private law contractual relationship is ineffective or void, where it is not based on an official or court order issued directly or indirectly by the U.S. to an EU economic operator.
Conversely, the Higher Regional Court Hamburg held that the existence of secondary sanctions alone was sufficient, because only in this way could the prohibition to comply with such sanctions be effectively implemented.
Given these conflicting viewpoints, on 2 March 2020, the competent senate of the Higher Regional Court Hamburg referred several questions to the European Court of Justice (“ECJ”) (case no. C-124/20). The first one deals specifically with the question of whether the applicability of Article 5 requires an official or court order on the part of the U.S. In essence, the Hamburg court has asked for clarity as to whether the motivation for a termination needs to be shown and demonstrated, i.e. whether it needs to be proven that the reason for the termination was something other than compliance with U.S. sanctions.
Depending on the answer the ECJ gives, further questions follow. Is a termination made in breach of the Blocking Regulation invalid or could a fine, for example, be a sufficient penalty? Could it be regarded as disproportionate to terminate the relationship with a contractual counterparty in light of the fear of economic losses on the U.S. market while at the same time taking into account the entrepreneurial freedom protected in Article 16 of the Charter of Fundamental Rights of the European Union?
As the case was only referred to the ECJ in March, there is as yet no indication as to when a decision will be forthcoming. However, developments should be monitored closely since the ECJ will hopefully provide practical guidance in terms of how to interpret the scope of the prohibition in Article 5.
30 June 2020
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