AG Hogan delivers Opinion on the Blocking Regulation

Update: On the 21 December 2021 the CJEU delivered its ruling in the case between Bank Melli Iran and Telekom Deutschland GmbH. Read our blog on the decision here.

On May 12, 2020 Advocate-General Hogan delivered his Opinion in the case between Bank Melli Iran (“BMI”) and Telekom Deutschland GmbH (”Telekom”) concerning the interpretation of Regulation 2271/96 (the “Blocking Regulation”).

While this Opinion does not bind the European Court of Justice (“CJEU”), it does serve to guide the CJEU in delivering its ruling. Should the CJEU reach the same conclusions as AG Hogan, then we may see a stricter application of the Blocking Regulation than initially expected.

Background

In 2018, the EU updated the Blocking Regulation to include the US sanctions re-imposed against Iran after the US withdrew from the Joint Comprehensive Plan of Action (commonly referred to as the ‘Iran Deal’).

In the following period, a number of cases were brought against EU companies for infringement of the Blocking Regulation. Because the application of the Blocking Regulation was still in its infancy at that time, the Regulation was interpreted and applied differently by the national courts in the Member States. In one of these cases, the national court has now requested a preliminary ruling from the CJEU. While awaiting the ruling, AG Hogan’s Opinion sheds some light on how the CJEU may interpret the Blocking Regulation.

Facts of the case

In 2018, the Regional Court in Hamburg decided in a case concerning the newly updated Blocking Regulation. The case concerns whether the German telecoms provider Telekom breached Article 5 of the Blocking Regulation when it terminated its services to a German branch of the Iranian state-owned bank BMI. Article 5 prohibits EU companies from complying with blocked US sanctions, including those re-imposed against Iran.

When BMI became subject to US sanctions, Telekom notified BMI that it would terminate their contract with immediate effect. Telekom argued that the bank would no longer be able to make payments and meet its contractual obligations as it would be excluded from the SWIFT system due to the sanctions. BMI however argued that it could still make payments without using the SWIFT system via its German account. The Regional Court noted that such a termination would in general be effective if there are reasons that would make the continuation of the contract unreasonable for the terminating party. However, Telekom did not sufficiently demonstrate that this was the case. The Regional Court therefore ordered Telekom to restore its services and continue performance until the expiry of the ordinary notice period.

When Telekom thereafter terminated their contract in accordance with the ordinary notice period, BMI, again, initiated proceedings alleging that Telekom only terminated their contractual relationship in order to comply with the blocked US sanctions.

This time, the Regional Court in Hamburg ruled in favor of Telekom, and held that the ordinary termination of the contract was consistent with Article 5 of the Blocking Regulation. BMI appealed this decision to the Hanseatic Higher Regional Court, arguing that the ordinary termination was motivated by the US sanctions and therefore invalid under the Blocking Regulation. Telekom, on the other hand, maintained that Article 5 of the Blocking Regulation does not prohibit the ordinary termination of contracts, which in this case could be notified without providing a reason.

The Higher Court referred the case to the European Court of Justice (CJEU), requesting a preliminary ruling on the following questions;

If the prohibition to comply with blocked sanctions only applies where specific orders or requests have been made by US authorities – or if it also prohibits companies from voluntarily complying with the blocked sanctions?
Whether the Blocking Regulation imposes an obligation on companies to justify the reason behind their decisions regarding contractual parties subject to blocked sanctions?
If the Blocking Regulation requires national courts to order the contractual relationship to be maintained or restored in the event it was terminated in breach of the Blocking Regulation?

AG Hogan’s conclusions

As a preliminary remark, AG Hogan noted that the Guidance Note on the Blocking Regulation does not have binding normative value and can therefore not be considered when interpreting the Blocking Regulation.

The Guidance Note states that EU operators are free to choose whether to start, continue or cease business operations in Iran in accordance with EU law and national laws. This statement has been relied upon in some of the recent court cases, including the present one, to support the argument that companies are free to terminate business dealings with Iranian companies. While the statement also includes that those decisions must be made in accordance with EU law, thus including the Blocking Regulation, AG Hogan still clarified that this statement in itself cannot be used to interpret the Regulation.

As for the questions, AG Hogan stated that the Blocking Regulation also prohibits situations where EU companies comply with blocked sanctions without a prior order or request from US authorities. As he notes, the opposite would render the protection under the Blocking Regulation ineffective if it can only be applied when there is a formal notice from US authorities. Not only is it not common practice for US authorities to issue such requests, but it would also be very difficult for a party to prove that such a request or order exists.

The second question concerned whether a company can be required to justify its reasons for terminating business activities with parties that are subject to blocked US sanctions. AG Hogan considered that the Regulation must be interpreted to impose an obligation on a defendant to justify the reasons for its decision to terminate a commercial relationship. The opposite conclusion would mean that companies could just silently comply with blocked US sanctions, rendering the Regulation ineffective. In addition, as AG Hogan also noted, it would create an almost impossible burden of proof on the affected party since a company would rarely publicly admit that its decisions were motivated by blocked US sanctions. For these reasons he considers that if a claimant has brought prima facie evidence that an action was motivated by a blocked US sanctions, then the defendant must establish objective reasons for its decision other than the blocked US sanctions.

As for the third question regarding the consequences of a breach of the Blocking Regulation, AG Hogan stated that it is for the Member States to lay down the rules on penalties for infringements, but the national courts must ensure the full effectiveness of the Regulation when doing so. This requires amongst other things that national courts must re-establish the situation as it would have been in absence of the infringement, and that this result must be the outcome throughout the Member States. Therefore, if a commercial relationship is terminated for no other reason than blocked US sanctions, then the national court must order the contractual relationship to continue on the same terms as previously existing.

What does this mean for European companies affected by blocked US sanctions

AG Hogan’s conclusions confirm the general understanding that the Blocking Regulation prohibits EU companies from complying with blocked US sanctions, regardless whether the companies have received a formal request or notice from the relevant US authorities. The AG’s Opinion further stated that companies can indeed be required to demonstrate the reason for their decisions concerning parties affected by blocked US sanctions. If it is found that the reason is compliance with blocked sanctions, then companies can be ordered to (re)establish the situation is it would have been in absence of the infringement.

While the CJEU has yet to deliver its ruling there are nevertheless some important takeaways from the AG’s Opinion.

Companies should be prepared to demonstrate the motivation behind decisions to terminate or refuse a commercial relationship with parties affected by the blocked sanctions. The Opinion should not be understood to mean that companies cannot refuse business dealings with Iranian companies, but that such refusals must not be based on US sanctions. In his Opinion, AG Hogan noted that such decisions could for example very well be based on a company’s own ethical values. This however requires that the company can point to a coherent and systematic Corporate Social Responsibility policy (CSR) and demonstrate that its decisions have been made genuinely and sincerely in accordance with that policy.

As for the consequences for infringement of the Blocking Regulation, the Opinion underlines the severe penalties that have been adopted in many Member States. Substantial administrative and criminal fines have been prescribed in several Member States and in Ireland, Sweden and the Netherlands criminal penalties may also include prison sentences.

As not all US sanctions are included in the Blocking Regulation, it is crucial that companies ensure that their compliance programmes take into account which US sanctions have been blocked and which sanctions they can lawfully comply with. EU companies affected by blocked sanctions should furthermore be aware of the authorization mechanism under the Blocking Regulation, the information duty to the EU Commission and the right to recover damages.