Foreign sanctions: CJEU interprets EU Blocking Statute

In a Grand Chamber judgment of 21 December 2021 in preliminary ruling case Bank Melli Iran v Telekom Deutschland GmbH ( C-124/20), the Court of Justice of the European Union (“CJEU”) was asked to interpret for the first time Regulation 2271/96 protecting against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom ("EU Blocking Statute").

The EU Blocking Statute aims to protect EU natural and legal persons against the effects of the extra-territorial application of certain foreign laws specified in its annex. Its Article 5 prohibits such persons from complying with any requirement or prohibition imposed by such foreign laws unless authorisation to be exempt from this prohibition is granted by the European Commission. One of the laws listed is the US Iran Freedom and Counter-Proliferation Act of 2012, which prohibits any person to trade, outside the US territory, with any person or entity included in the Specially Designated Nationals and Blocked Persons List of the United States Office of Foreign Assets Control (OFAC) ("SDN List").

In the case at hand, Telekom Deutschland GmbH terminated, prior to their expiry, all contracts it had concluded with Bank Melli Iran ( "BMI") after BMI was added back to the SDN List in 2018, without providing reasons for termination and without obtaining Commission authorisation. BMI challenged this termination in the German court on the grounds that it infringed Article 5 of the EU Blocking Statute.

In the judgment, the CJEU first clarifies the scope of the EU Blocking Statute, indicating that the prohibition set out in its Article 5 is broadly drafted and applies even in the absence of a foreign administrative or judicial order directing compliance. In addition, after confirming that Article 5 may be directly relied upon by EU natural and legal persons in civil proceedings, the CJEU indicates that such persons can terminate contracts concluded with sanctioned entities despite having no authorisation from the Commission and without giving reasons for that termination. However, where all the evidence seems to indicate that the termination was motivated by compliance with third countries’ prohibition laws, the terminating party must prove that its decision was motivated by other reasons.

As to sanctions in the event of a breach of the Blocking Statute (Article 9), the CJEU had to consider whether, in view of the freedom to conduct a business guaranteed by the Charter of fundamental rights of the European Union, the annulment of a termination should be precluded where the terminated party risks suffering substantial economic loss as a result. The CJEU holds that any such annulment must not have disproportionate effects. It is up to the national judge to weigh in the balance the pursuit of the EU objectives served by the annulment of the termination of a contract in breach of the EU Blocking Statute and the probability that the person concerned may be exposed to economic loss, as well as the extent of that loss, if he or she cannot terminate his or her commercial relationship with a person on the SDN List.