On 21 December 2021, the Court of Justice of the European Union (‘’ECJ’’ or ‘’the Court’’) delivered its first judgment on the interpretation of Council Regulation (EC) No 2271/96 of 22 November 1996 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’’), offering guidance on the provisions of the legal text.
Facts and context
Bank Melli Iran (‘’BMI’’) is an Iranian state-owned bank with a German branch. When the US withdrew from the Joint Comprehensive Plan of Action (‘’Iranian Nuclear Deal’’) in 2018 under the Trump administration, it re-imposed secondary sanctions against Iran and those Specially Designated Nationals and Blocked Persons (‘’the SDN List’’) pursuant to the Iran Freedom and Counter-Proliferation Act, thereby including BMI.
Following this decision, the EU included this US law in the Annex of EU Blocking Statute. The EU Blocking Statute prohibits EU operators from complying with the laws listed in the Annex (Article 5 para. 1), unless they request and receive an EU Commission authorisation allowing them to comply with the annexed laws (Article 5 para. 2).
BMI had several contracts with Telekom Deutschland GmbH (‘’Telekom’’), a telecommunication provider and subsidiary of Deutsche Telekom AG, which earns half of its turnover from business in the US. When Telekom terminated all contracts with BMI in 2018 – and this before the expiration date of the contract, without reason and without Commission authorisation – BMI challenged the termination in the German civils courts. BMI referred to Article 134 of the German civil code that provides that any legal act contrary to a statutory prohibition shall be void except as otherwise provided by law, relying on Article 5 of the Blocking Statute to constitute a statutory prohibition. It claimed that Telekom’s decision was motivated solely by the desire to comply with extraterritorial US sanctions, which would be contrary to the EU Blocking Statute.
The first instance court found the termination of the contracts to be consistent with Article 5 of the Blocking Statute and BMI appealed before the Higher Regional Court of Hamburg. The latter court requested a preliminary reference from the ECJ on several issues:
1. the interpretation of Article 5 para. 1 of the EU Blocking Statute and whether it only applies where the US issues an administrative or judicial order against an EU operator or if it applies in all circumstances where an EU operator looks to comply with secondary sanctions;
2. the interpretation of Article 5 para. 1 of the EU Blocking Statute and whether it prevents an EU operator that does not have an EU Commission authorisation of Article 5 para. 2 from terminating contracts without reason with a person on the SDN List;
3. the interpretation of Articles 5 and 9 of the EU Blocking Statute, and if they must prevent the annulment of a termination of contracts by an EU operator so as to comply with annexed laws, where the EU operator would risk suffering substantial economic loss as a result of that annulment.
Takeaways from the ruling
1. The prohibition to comply with extraterritorial laws even where EU operators simply intend to comply without having received an order from the US authorities
Considering the broad wording, the aims and context of the legislation, the ECJ considers that Article 5 para. 1 must be interpreted as prohibiting EU operators from complying with the laws in the Annex of the EU Blocking Statute, even if they are not specifically instructed to comply by a foreign administrative or judicial authority. It recalls the objective of the EU Blocking Statute, of protecting the established legal order, free movement of capital and the interests of the EU.
2. The EU Blocking Statute can be invoked in civil proceedings before EU member states courts
The Court considers that the wording of the prohibition in Article 5 can be relied upon in civil proceedings as a statutory prohibition, given that national courts must ensure the full effect of EU aw and regulations such as the EU Blocking Statute are directly applicable in EU member states. Accordingly, the Court appears to allow third party undertakings to challenge commercial decisions of EU operators that they would consider in breach of the EU Blocking Statute.
3. The burden of proof may be reversed in national civil proceedings
The Court considers that it is not clear from the EU Blocking Statute that an EU operator is required to provide reasons for the termination of a commercial contract with a person on the SDN List. EU operators could thereby terminate those contracts, and this without the authorisation from the EU Commission and without providing a reason for that termination.
However, the Court also noted that in the case at hand, and pursuant to German law, the termination of a contract in breach of a statutory prohibition would be null and void and the burden of proof would be on the party arguing such a breach. The Court is of the opinion that this would result in the proof of the violation of the EU Blocking Statute being difficult or impossible to prove, thereby undermining the effectiveness of the prohibition in the EU Blocking Statute.
Consequently, the Court considers that where all the evidence available to the national court in civil proceedings suggests, prima facie, that an EU operator sought to comply with the laws in the EU Blocking Statute Annex and this without an authorisation to do so, the burden of proof should shift to said EU operator. The latter would then have to demonstrate, ‘’to the requisite legal standard’’, that its conduct did not seek to comply with laws listed in the EU Blocking Statute Annex.
4. The freedom to conduct business and the risk of disproportionate losses should be taken into account when assessing the annulment of a termination of contract in breach of the EU Blocking Statute
The ECJ recalls Article 16 of the Charter of Fundamental Rights of the European Union (‘’Charter’’), which provides the freedom to conduct a business, and Article 52(1), which lists the conditions applicable when limiting the exercise of rights and freedoms in the Charter, including the freedom to conduct a business.
The Court considers that the Charter does not prevent the annulment of the termination of the contracts by an EU operator, provided that it does not entail disproportionate effects for said EU operator. If such annulment constitutes a limitation of the Charter’s freedom to conduct business, the annulment must be in compliance with the conditions in Article 52 of the Charter.
The ECJ is of the view that the annulment of the termination of the contract is a limitation, not a deprivation, of Telekom’s possibility to assert its interests. Furthermore, this limitation on the freedom of business as a result of the annulment of the termination of the contract appears necessary in order to counteract the effects of the laws listed in the EU Blocking Statute Annex, which protects the legal order and interests of the EU.
Recalling that the freedom to conduct business is not absolute and that it is for the national courts to establish whether such a limitation would be proportionate, the Court invites the German court to balance the proportionality on the freedom to conduct business for Telekom with the objectives of the EU Blocking Statute and the probable economic loss suffered by Telekom as a result of the annulment of the termination. The ECJ also indicates that is relevant to the assessment, whether the EU operator applied for an EU Commission authorisation to not comply with the prohibition of the EU Blocking Statute.
From this ruling, it thereby appears that EU operators’ commercial decisions to avoid loss for their business may be challenged and subject to legal scrutiny in civil proceedings. From this ruling however, it also appears that EU operators are provided with the opportunity to demonstrate that the limitation to their freedom to conduct a business would be disproportionate to the objectives of the EU Blocking Statute, which could thereby warrant non-compliance with its prohibition.
With the ongoing proposal to amend the EU Blocking Statute, it remains to be seen whether the takeaways from this judgment will still be relevant.