knowledge 16 June 2021 |

Disputes – Investigations and White Collar Crime: Sanctions Update

The EU blocking statute is designed to sterilise the extraterritorial effects of third country sanctions within the EU.¹ It prohibits EU undertakings from complying with such extraterritorial measures.

In this case,² an Iranian bank had a contract for telecommunication services with Telekom Deutschland. The bank claimed that these telecommunications services were indispensable to its business activities. When Telekom Deutschland served a notice of termination of the contract, the bank challenged the validity of this notice before the German courts.

The bank claimed that the notice was motivated solely by Telekom Deutschland’s desire to comply with US legislation prohibiting non-US undertakings from trading with Iranian undertakings subject to US primary sanctions and providing for secondary sanctions against such non-US undertakings in case of breach. The bank said that in serving the notice, Telekom Deutschland infringed the EU blocking statute.

For its part, Telekom Deutschland, contended that the EU blocking statute did not change its right under national law to terminate the contract without giving reasons for this action. It maintained that the EU blocking statute left it free to end its business relationship with the bank at any time and that its motives for doing so were immaterial.

Given the arguments raised, the German courts asked the Court of Justice for a preliminary ruling on the scope of the EU blocking statute.

Advocate General’s Opinion

Advocate General Hogan found that the general restriction in the EU blocking statute, prohibiting compliance with certain third country legislation providing for secondary sanctions, applied to an EU undertaking even in the absence of compulsion from a foreign administrative or judicial agency.

He said that while the EU blocking statute was not aimed at protecting third-country undertakings targeted by US sanctions, it conferred a right of action on those undertakings. If this was not so, then the enforcement of that legislation would depend on the willingness of the Member States and indirectly, of the Commission.

This would mean that if certain Member States were reluctant to enforce the blocking statute, a large economic operator such as Telekom Deutschland could actively decide to comply with the US sanctions regime by taking steps to terminate a contract as in this case. Their example would influence others and the entire public policy behind the EU blocking statute could be quickly undermined by a state of affairs in which many European entities quietly decided to comply (even indirectly) with those sanctions.

For the same reasons, the EU blocking statute must be understood as imposing an obligation to give reasons justifying the termination of a commercial relationship with a person subject to primary sanctions. Otherwise, an entity could quietly decide to give effect to the US sanctions legislation and, by maintaining an obscuring silence, impenetrable as to its reasons and (effectively) unreviewable as to its methods, the major policy objectives of the EU blocking statute would be compromised and set at naught.

Advocate General Hogan did acknowledge, however, that economic operators could demonstrate for this purpose in particular that they were actively engaged in a coherent and systematic corporate social responsibility policy which led them to refuse to deal with any company having links with the Iranian regime.

On the question of proof before the national court, he said that given that the parties here were already in business with each other and that neither of them had changed their business activity, it was for Telekom Deutschland to establish that there was an objective reason - other than the fact that the bank was subject to primary sanctions – which justified the termination of the contract. The national court should verify the veracity of such grounds. What mattered was the intention of the economic operator to comply with the sanctions, irrespective of whether it was actually concerned by their application.

He said that in the event of non-compliance with the EU blocking statute, the national court must order the EU undertaking to maintain their contractual relationship.

He concluded by saying that the prohibition contained in the EU blocking statute was not as such contrary to the freedom of enterprise guaranteed by the Charter of the Fundamental Rights of the European Union, given that economic operators could apply to the European Commission for authorisation to derogate from it.

Conclusion

This case is the first in which the CJEU has been asked to consider the EU blocking statute, which has however, given rise to a number of cases before the courts in EU Member States. These cases reflect the difficulties to which the EU blocking statute gives rise, and the fact that when faced with US secondary sanctions on the one hand, and the EU blocking statute on the other, EU undertakings frequently find themselves somewhere between a rock and a hard place.

Significantly, in his Opinion, Advocate General Hogan acknowledges that the EU blocking statute may mean that an EU undertaking may find itself facing impossible – and quite unfair – dilemmas brought about by the application of two different and directly opposing legal regimes. However, he saw no other alternative if the court was to uphold the public policy objectives the EU blocking statute. The Advocate General suggested that the nature of these dilemmas, together with the failure to provide clear guidance on important legal issues which directly arise from the operation of the EU blocking statute, was such that the EU legislature might consider reviewing the manner in which that statute presently operates.

Advocate General Hogan’s opinion is not binding on the Court of Justice and it remains to be seen whether it will follow the same approach in its judgment, which will issue at a later date.