In connection with the US withdrawal from the Iran nuclear deal in 2018, the US reenacted secondary sanctions against Iran by prohibiting non-US citizens from dealing with persons and entities in Iran under the Iran Freedom and Counter-Proliferation Act of 2012, once again stirring the international debate regarding secondary sanctions with extra-territorial effects.

As a reaction hereto, the EU updated the Annex to EU Regulation no. 2271/91 of 22 November 1996 protecting against the effects of the extra-territorial application of legislation adopted by a third country (the "Blocking Statute") to include the Iran Freedom and Counter-Proliferation Act of 2012.

Consequently, and pursuant to Article 5 of the Blocking Statute, no natural or legal person resident in or incorporated in the EU may comply with the US secondary sanctions set out in the Iran Freedom and Counter-Proliferation Act of 2012 without the authorization of the Commission.

This naturally creates an unpleasant dilemma for EU companies dealing with Iranian business partners subject to US secondary sanctions, who must decide between breaching the Iran Freedom and Counter-Proliferation Act of 2012 or the EU Blocking Statute.

With this new case, the European Court of Justice has delivered a judgment setting out how the Blocking Statute affects the termination of contracts by EU companies who intend to comply with the US secondary sanctions.  

The specifics of the case

Bank Melli Iran ("BMI"), an Iranian bank owned by the Iranian state and with a German branch, became listed as a Specially Designated National (or an "SDN") upon the reenactment of US secondary sanctions against Iran. Less than two weeks after the reenacted US secondary sanctions entered into force, Deutsche Telekom AG ("Telekom AG"), a German telecommunications company (with a US subsidiary), which was providing BMI with telecommunication services, terminated its contract with BMI with immediate effect without further notice or reason. BMI believed this to be a breach of Article 5 of the Blocking Statute and brought an action before the German courts to have the termination declared void.

When the case was heard before the Higher Regional Court of Hamburg, Germany, the court made a preliminary reference to the European Court of Justice requesting an interpretation of Article 5 of the Blocking Statute.

Some of the most important remarks from the European Court of Justice can be summed up as follows:

• Companies incorporated in the EU may be in breach of the Blocking Statute if they voluntarily comply with the US secondary sanctions against Iran by prematurely terminating contracts with sanctioned entities. 
• As a starting point, the terminating party does not have to demonstrate that the decision to terminate a contract complies with the Blocking Statute. However, in the context of civil proceedings, where all evidence available to the court suggests prima facie that the terminating party has terminated the contract to comply with the US secondary sanctions, the terminating party must be able to prove that the termination was based on other reasons in compliance with the Blocking Statute.
• The sanctions for breach of Article 5 of the Blocking Statute must be decided by the national courts based on domestic laws. In the case in question, the consequence of the breach of the Blocking Statute under national German law was the annulment of the termination. Thus, specific performance is an available remedy for parties seeking legal action under the Blocking Statute if provided for in domestic laws. This means that national courts can reinstate contractual relations if it is found that a contract was terminated in breach of the Blocking Statute. 
• Notwithstanding the above, courts must consider the principle of freedom to conduct a business under the Charter of Fundamental Rights of the European Union as well as the risk of disproportionate losses when considering whether a termination of a contract in breach of the Blocking Statute shall be void under domestic law. 

The judgment is unlikely to provide much reassurance for European companies dealing with entities subject to US secondary sanctions, as the judgment only seems to reinforce that observance of US secondary sanctions may entail legal consequences under EU law.

The Commission has announced in its communication from 19 January 2021 that it will work to further improve the Blocking Statute, hopefully taking this issue into consideration. 

Read the judgment