- BACKGROUND
On 12 May, the Advocate General delivered his Opinion in Case C-124/20 (Bank Melli Iran v. Telekom Deutschland). We would like to make it clear from the outset that these conclusions are not binding in the Court of Justice of the European Union, but we would also like to point out that in its judgments the Court of Justice of the European Union agrees with the Advocate General’s opinion in more than 80% of cases.
The facts of the dispute are as follows: the plaintiff is Bank Melli Iran, an Iranian bank, primarily engaged in the management of Iran’s foreign trade, which has a branch in Germany with 36 employees, and is therefore not a very large establishment. The Defendant is one of the most important companies in Germany as regards the provision of telecommunications services; it is a subsidiary of Deutsche Telekom AG, a large business group with more than 50 000 employees in the United States, where it has a turnover of approximately 50 % of its total turnover. It therefore has many interests in North America, which is a key market for it.
The parties agreed on a contractual framework whereby the plaintiff bundled all connections at different locations in Germany into one contract. All of the plaintiff’s telecommunications in Germany, both external and internal, were based on that contract, so that without the services to be provided by the defendant, it was impossible for the plaintiff to engage, through its German branch, in commercial transactions. The monthly turnover between the parties was just over EUR 2 000, i.e. a negligible amount for the German branch. The plaintiff always fulfilled its payment obligations.
In 2018, when the United States withdrew from the Joint Comprehensive Plan of Action (JCPA) of 14 July 2015, the US sanctions against Iran were reactivated and the applicant found itself on the list of sanctioned persons (primary sanction) (SDN) of the Office of Foreign Assets Control (OFAC). On the basis of the so-called Secondary Sanctions, the United States prohibits non-US persons from doing business with Iranian natural and legal persons on the SDN list. Violation of this prohibition can result in severe sanctions, such as the inability to do business in the United States.
By letter of 16 November 2018, the defendant terminated with immediate effect all of its contracts with the applicant. On that day and on the following days, it did the same with up to 10 other customers related to Iran, which were included in the SDN list. The plaintiff initiated interim relief proceedings and the Landgericht Hamburg, by its judgment of 28 November 2018, provisionally imposed an obligation on the defendant to perform the existing contracts until the expiry of the notice period for termination.
By letter of 11 December 2018, the defendant again terminated the contracts, making it clear that the notice periods would be observed. Bank Melli requested that the defendant be ordered to maintain all contracted services. The Landgericht ordered the latter to perform the contracts until the expiry of the relevant notice period, but held that the defendant’s termination of the disputed contracts was valid, as it was not contrary to Article 5 of Regulation (EC) 2271/96 (EU blocking statute).
The applicant appealed against the part of the judgment in which its claims had been dismissed, arguing that the termination by Telekom Deutschland was contrary to Article 5 and therefore ineffective.
In that situation, the Hanseatisches Oberlandesdericht Hamburg, aware that the outcome of the case depended on the interpretation of the first paragraph of Article 5 of the European Blocking Statute, referred four questions to the Court of Justice for a preliminary ruling.
- THE OPINION OF THE ADVOCATE GENERAL
The first question is whether Article 5(1) of the European Blocking Statute only applies when EU operators have been given administrative or judicial orders, directly or indirectly, by the United States authorities or whether it is sufficient for its application when those operators intended to comply with secondary sanctions, even if they have not been given such orders.
In this regard, the Advocate General maintains that the first paragraph of Article 5 of the European Blocking Statute must be interpreted as meaning that it “does not apply only where an administrative or judicial authority of a country whose laws and regulations are listed in the Annex to that statute has given direct or indirect orders to a person referred to in Article 11[1]. Consequently, the prohibition contained in this provision applies even if an operator complies with these regulations without having been previously ordered to do so by a foreign administrative or judicial body”. Consequently, the first paragraph of Article 5 of the blocking statute means that EU operators cannot cease to do business because of the existence of US secondary sanctions.
The Advocate General reaches this first conclusion essentially for the following reasons: firstly, because of the wording of the provision itself, which supports the interpretation that the provision is applicable even in the absence of orders or notifications from an American authority, since the wording is very broad; secondly, account must be taken of the objectives pursued by the European blocking statute, which was adopted in order to act against the effects produced by the legal texts containing the Secondary Sanctions and not only the actions based on them or deriving from them; thirdly, because the blocking statute would not have autonomous and real scope if its application were conditional on EU operators receiving an order or notification from the US authorities; and finally, because co-contractors with the parties subject to primary sanctions can be sanctioned on the basis of secondary sanctions without a prior request from the US administration or the US courts. In conclusion: the only way to counteract the effects of Secondary Sanctions is to understand that Article 5, first paragraph of the European Blocking Statute applies in any situation falling within its scope.
The second question referred to the Court of Justice was whether an interpretation of national law according to which the party terminating the contract may terminate it, where the contract has been concluded with a co-contractor included in the SDN, without a cause for termination being required for that purpose and without that party having to prove in civil proceedings that the cause of termination of the contract is not compliance with the American sanctions, is contrary to the first paragraph of Article 5 of Regulation (EC) No 2271/96.
The Advocate General understands the answer to this question to be that the first paragraph of Article 5 of the Blocking Statute, must be interpreted as precluding an interpretation of the national legal order, according to which an EU operator may terminate any successive-tract contract concluded with a co-contractor which has been placed by OFAC on the SDN List, without having to justify such a termination decision. In other words, in order to act properly, the EU operator must prove that the termination of the contract is due to objective reasons other than a desire to comply with US secondary sanctions.
In reaching this conclusion, the Advocate General raises two questions; the first is whether Article 5(1) of the Blocking Statute gives an entity the right to invoke it in order to prevent an EU operator from breaching its provisions, i.e. whether Bank Melli can invoke it to challenge Telekom Deutschland’s intended termination of the contracts.
While acknowledging that the blocking statute must be interpreted restrictively in so far as it seriously affects the freedom to conduct a business, the Advocate General considers that the first paragraph of Article 5 confers such a right on natural and legal persons in Bank Melli’s situation. In this regard, the Advocate General puts forward the following reasons: the wording of that provision, which is clearly mandatory; the fact that the US extraterritorial legislation infringes international law; the fact that the Court of Justice must give real effect to the provisions of the blocking statute and, above all, the fact that if the right of Bank Melli, or of any other subject in its situation, to take legal action is not recognised, compliance with the objectives pursued by the European legislature would depend exclusively on the attitude of the States in applying the blocking statute, with the result that undertakings in the position of Telekom Deutschland could decide to comply actively with the American sanctions regime.
Furthermore, the Advocate General questions whether the first paragraph of Article 5 can be interpreted as imposing an obligation on EU operators to state the reasons for which they intend to terminate a contractual relationship with an entity subject to primary US sanctions. He replies that such an obligation must necessarily be inferred from the objectives pursued by the blocking statute and refers in this respect to what has already been said in justifying the existence of the right to take legal action to enforce Article 5(1) of the European blocking statute. The Advocate General states that if he were to take the opposite position “An entity could decide to apply US sanctions law with discretion and, by maintaining an ambiguous silence, impenetrable as to its motives and (effectively) unyielding as to its methods, the main public policy objectives set out in the recitals and the first paragraph of article 5 of the Union’s blocking statute would be jeopardised and reduced to nothing.”
The Advocate General accepts that many natural and legal persons have ethical misgivings and reservations about doing business with countries such as the Islamic Republic of Iran and with large Iranian entities controlled by the Iranian government. But in order to demonstrate that the reasons for the decision to terminate a contract were sincere, an EU operator would have to prove that, “as a result of its active implementation of a consistent and systematic corporate social responsibility policy, it does not do business with any company that has links with the Iranian regime”. At the very least, it must prove, and must bear the burden of proof, that the termination of the contract is not motivated by its desire to comply with the US Secondary Sanctions. In conclusion: an EU operator seeking to terminate its business relations with an Iranian company subject to primary sanctions is required not only to give reasons for its decision but also to justify it by providing evidence of the existence of a reason other than the fact that its Iranian co-contractor is sanctioned by the United States.
The third question referred for a preliminary ruling was whether an ordinary termination of a contract contrary to the first paragraph of Article 5 of the Blocking Statute is necessarily ineffective or whether other sanctions, such as the imposition of a fine, are also sufficient to achieve the purpose of the Blocking Statute. The fourth question was whether, in the light of Articles 16 and 52 of the Charter of Fundamental Rights of the European Union and taking into account the possibility of exceptionally granting authorisations under the second paragraph of Article 5 of the blocking statute, the ordinary termination of the contract must be regarded as ineffective even if the EU operator who chooses to maintain the contract faces the threat of heavy economic losses on the US market.
The Advocate General addresses these two issues together. He begins by recalling that Article 9 of the Blocking Statute provides that EU Member States must regulate the penalty regime applicable to breaches of the provisions of the Blocking Statute. Penalties must be effective, proportionate and dissuasive. Therefore, in line with what has been argued in the previous pages, the Advocate General concludes that the term “sanction” in this area must be understood in a broad sense, including both criminal or administrative sanctions and civil sanctions, which may have a purpose which is not repressive, but aimed at ensuring the useful effect of the provisions in question.
Likewise, national courts are obliged to re-establish the situation that would have existed if the illegality had not been committed. It thus concludes that “… in the event of an infringement of a provision laying down a permanent rule of conduct (as in the present case), national courts are obliged to order the infringer to put an end to the infringement, or face a periodic penalty payment or other appropriate sanctions, since only then can the continuing effects of the illegality committed be brought to an end and compliance with EU law be fully ensured”. This leads him to conclude that “… national courts must order an EU operator to continue the contractual relationship in question, or face a periodic penalty payment or other appropriate sanction”.
In this context, the Advocate General questions the compatibility of Article 5 of the Blocking Statute with Article 16 of the Charter of Fundamental Rights of the European Union, which enshrines the freedom to conduct a business. In that regard, he refers to Article 52(1) of the Charter, which permits the restriction of any of the freedoms recognised by that text if it is laid down by law, respects the essential content of those rights and freedoms and is proportionate, in the sense that only limitations which are necessary and which meet objectives of general interest recognised by the EU are permissible.
There is no doubt that the restriction on their freedom to conduct a business suffered by EU operators as a result of the blocking status is established by law. As regards the respect of the essential content of the right, it must be borne in mind that freedom of contract is not an absolute prerogative and “… the Court of Justice has already accepted that EU law may impose an obligation on an operator to contract, in particular on grounds relating to competition law”. Consequently, the right not to contract, which is part of the freedom to conduct a business, may legitimately be limited. Finally, the Advocate General considers that this is a proportionate measure, since Article 5(1) of the Blocking Regulation seeks to protect the Union, its Member States and natural and legal persons operating in the EU against the extraterritorial application of rules contrary to international law and in this respect the provision appears to be appropriate to achieve those objectives and also necessary in order to attain them.
All of the above leads the Advocate General to conclude that Article 5(1) of the blocking statute is not contrary to Article 16 of the Charter of Fundamental Rights of the European Union.
III. CONCLUSIONS AND FINAL REFLECTIONS
The Advocate General proposes very favourable interpretations for the subjects of primary US sanctions; in particular, the following should be highlighted:
- A) The first paragraph of Article 5 of the European blocking statute does not apply only where an administrative or judicial authority of a country whose laws and regulations are listed in the annex to that statute has given direct or indirect orders to a person referred to in Article 11 of that statute. Consequently, the first paragraph of Article 5 of the blocking statute means that EU operators cannot cease to do business because of the existence of US secondary sanctions.
- B) Article 5 of the Blocking Statute precludes an interpretation of the national legal system according to which an EU operator may terminate any successive contract concluded with a co-contractor that has been placed by OFAC on the SDN List without having to justify such a termination decision. In other words, in order to act properly, the EU operator must prove that the termination of the contract is due to objective reasons other than the desire to comply with US secondary sanctions.
- C) Article 5, first paragraph of the blocking statute gives a subject of US primary sanctions the right to invoke it to prevent an EU operator from violating its provisions.
- D) EU operators have an obligation to state the grounds on which they intend to terminate a contractual relationship with an entity subject to US primary sanctions.
- E) National courts must order an EU operator to continue the contractual relationship in question, or face a periodic penalty payment or other appropriate sanction.
- F) Article 5 of the Blocking Regulation is not contrary to Article 16 of the Charter of Fundamental Rights of the European Union.
As the Advocate General himself acknowledges, going so far as to say that “I am not particularly happy to reach this particular result”, the interpretations he proposes will inevitably lead to collateral victims among EU operators who will be caught in the difficult dilemma between respecting the US Secondary Sanctions or complying with the European blocking statute.
In any case, we must await the definitive solution that the Court of Justice of the European Union will eventually hand down in its ruling.
[1] En este artículo se enumeran los llamados operadores de la UE.
Written by:
Lupicinio Rodríguez Jose Luis Iriarte
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