Sanctions Law Latest: Article 5 of Blocking Regulation tested for first time at the ECJ

In March 2020, the European Court of Justice was asked, for the first time, for the proper interpretation of Article 5 of the Blocking Regulation in the case of Bank Melli Iran v Telekom Deutschland GmBH.  John McKendrick QC and Alex Haines examine the Bank Melli case and Blocking Regulation below.

The Background

On 28th November 2018, after US secondary sanctions on Iran came back into force earlier that month, the Hamburg District Court granted an interim injunction in Bank Melli Iran v Telekom Deutschland GmBH 319 O 265/18 on the basis of the EU Blocking Regulation (Council Regulation (EC) No 2271/96).

The court ordered Deutsche Telekom, the defendant, to reinstate internet and telephone services to the claimant, Bank Melli Iran, after it had stopped services pursuant to renewed US sanctions. The court rejected Deutsche Telekom’s reasons given for terminating services without notice.

Deutsche Telekom appealed to the Hamburg Regional Court (11 Senate) (6^th June 2019, 11 U 257/18).  The Regional Court ordered the defendant to perform the contracts pending expiry of the period of notice for ordinary termination and dismissed the action as to the remainder.  It held that ordinary termination of the contested contracts by the defendant was effective and, in particular, that it does not infringe Article 5 of the Blocking Regulation.

The Appeal

The applicant lodged an appeal against the part of the judgment dismissing the remainder of the action. It abided by its contention that the notice of ordinary termination given by the defendant infringes Article 5 of the Blocking Regulation and is, therefore, ineffective.

On 5 March 2020, the Hanseatic Higher Regional Court (11^th Civil Chamber) in Germany made a request to the European Court of Justice for preliminary ruling on the meaning of the EU Blocking Regulation (Bank Melli Iran v Telekom Deutschland GmBH (C-124/20)). The court asked the ECJ a number of questions about the proper interpretation of Article 5 of the Blocking Regulation to enable it to decide the case.

Interpreting Article 5

The following questions were referred to the ECJ for a preliminary ruling for the purposes of interpretation of the first paragraph of Article 5 of the Blocking Regulation.

1. Does the first paragraph of Article 5 of the Blocking Regulation only apply where the acting EU operator within the meaning of Article 11 of the Regulation is issued directly or indirectly with an official or court order on the part of the United States of America, or does it suffice for its application that the action of the EU operator is predicated on compliance with secondary sanctions without any such order.
2. If the answer to Question 1 is that the second alternative applies, does the first paragraph of Article 5 of the Blocking Regulation preclude an understanding under national law that the party giving notice of termination is also able to terminate a continuing obligation with a contracting party named on the Specially Designated Nationals and Blocked Persons List held by the US Office of Foreign Assets Control, including where termination is motivated by compliance with US sanctions, without the need to give a reason for termination and therefore without having to show and prove in civil proceedings that the reason for termination was not to comply with US sanctions?
3. If Question 2 is answered in the affirmative, must ordinary termination in breach of the first paragraph of Article 5 of the Blocking Regulation necessarily be regarded as ineffective or can the purpose of the Regulation be satisfied through other penalties, such as a fine?
4. If the answer to Question 3 is that the first alternative applies, considering Articles 16 and 52 of the Charter of Fundamental Rights of the European Union, on the one hand, and the possibility of an exemption being authorised under the second paragraph of Article 5 of the Blocking Regulation, on the other, does that apply even where maintaining the business relationship with the listed contracting party would expose the EU operator to considerable economic losses on the US market (in this case: 50% of group turnover)?

The Blocking Regulation

Generally speaking, a blocking statute shields companies in its jurisdiction against sanctions by prohibiting them from respecting those sanctions, and not recognising foreign court rulings enforcing them.

Regulation (EC) 2271/96, referred to as the Blocking Regulation or Blocking Statute, was first adopted on 22nd November 1996 to protect EU businesses against the effects of the extraterritorial application of legislation adopted by a third country.

The context was the Cuba situation.  In early 1996, US Congress enacted a law that strengthened the US embargo against Cuba.  The act extended the territorial application of the initial embargo (in place since the late 1950s) to apply to foreign companies trading with Cuba. The EU introduced the Blocking Regulation in response to the US’s extra-territorial sanctions legislations concerning Cuba, and also concerning Iran and Libya.  The EU’s argument was that the sanctions benefited US foreign policy interests at the expense of the sovereignty of EU Member States.
The Blocking Regulation applies with regard to the extra-territorial legislation referred to in its Annex. In other words, the Annex sets out the measures the Blocking Regulation seeks to ‘block’.  The text of the Annex is short, and only covers US acts and regulations in relation to Cuba, Iran and Libya.

The European Commission launched the process in May 2018 to activate the Blocking Regulation by updating the list of non-EU laws listed in the Annex by adding the re-imposed US sanctions on Iran.  This all started when the US pulled out of the Joint Comprehensive Plan of Action (JCPOA or Iran nuclear deal).  The Blocking Regulation was updated on 7 August 2018.

The four mechanisms of the Blocking Regulation

• Nullification of foreign court rulings (primary blocking measure) (Article 4);
• Obligation of non-compliance (Article 5, para. 1);
• The ‘clawback’ provision (Article 6); and
• Obligation to inform (Article 2)

Conclusion

The Blocking Regulation has rarely been tested and there is a dearth of jurisprudence at EU level.  In 2007, Austria brought charges for breach of the Blocking Regulation against a large national Bank (BAWAG) that had closed the accounts of 100 Cuban nationals, but matters were resolved when US authorities agreed to grant the bank an exemption and so the investigation of the breach of the Blocking Regulation was discontinued, The ECJ’s pending answers in the Bank Melli case won’t resolve all the uncertainties, but they ought to clarify some of the issues around the obligation of non-compliance allowing the German court to decide its case.

Find out more

John McKendrick QC practises in all areas of commercial and public law, and has a significant international practice as a former Caribbean Attorney General.  He is a fluent Spanish speaker.

Alex Haines, dual national and fluent in French and Spanish, is a specialist in international law, with particular expertise in international organisations. He is admitted to both the English and New York Bars, and is on the Attorney General’s London B Panel.  Alex is also a member of the Association of Certified Sanctions Specialists (ACSS).

Alex’s practice areas include:

• Business crime and corruption including global investigations
• Multilateral Development Banks
• Sanctions
• Regulatory and disciplinary proceedings
• Institutional law of international organisations
• International arbitration
• Financial services inquiries

For further information about John or Alex please contact David Smith on +44 (0)20 7427 4905 or Colin Bunyan on +44 (0)20 7427 4886 for a confidential discussion.

Legal Blogs 3 Jun, 2020