Out-Law / Your Daily Need-To-Know

Out-Law Analysis 8 min. read

Lessons for terminating contracts with US-sanctioned Iranian companies


The different approach that EU and US policymakers have taken on sanctions on Iran can cause difficulties for EU operators, particularly those that have economic interests in the US.

These difficulties have been highlighted by a recent case before the Court of Justice of the EU (CJEU), the EU’s highest court, and are also under current scrutiny as part of potential legislative reform in the EU.

However, the careful navigation of the tension between the EU and US positions on Iranian sanctions is possible where EU operators wish to terminate, or refuse to do, business in Iran or with Iranian nationals and entities that may be the subject of US secondary sanctions that have extra-territorial effect.

Why the tension arises

An international agreement was reached in 2015 over Iran’s nuclear programme which provided for the phased lifting of UN, EU and US sanctions on Iran up to 2025. However, the US government withdrew from the agreement in 2018 and reinstated secondary trade and economic sanctions.

Secondary sanctions are wide enough to capture non-US businesses and individuals for dealings that occur entirely outside of the US.

An EU regulation – referred to as the Blocking Regulation – is, however, intended to provide protection against and counteract the effects of the extra-territorial application of the US Iranian secondary sanctions, as well as certain US secondary sanctions relating to Cuba. The Blocking Regulation essentially provides that the decisions made by a non-EU court, tribunal or administrative authority giving effect to the secondary sanctions within the scope of the Blocking Regulation are not recognised or enforceable in the EU. 

The Blocking Regulation also provides that EU operators are prohibited from complying with the relevant US secondary sanctions and will face penalties from EU member states should they do so. An EU operator includes persons resident in the EU, nationals of an EU member state, those in the EU and entities incorporated within the EU.

However, the legislation does recognise that EU operators, and the EU itself, can face serious damage to their interests if they do not comply with the relevant US secondary sanctions. It provides scope for EU operators to request an authorisation from the European Commission to comply with the US secondary sanctions notwithstanding the general ban on complying with them.

The UK has introduced an equivalent to the EU’s Blocking Regulation following its exit from the EU.

The case before the CJEU

The case that came before the CJEU concerns a dispute that has arisen before the courts in Germany between Bank Melli Iran (BMI) and Telekom Deutschland. The dispute concerns the validity of the termination of contracts between the two companies after BMI fell within the scope of the US’ Iranian secondary sanctions.

To help it resolve the dispute, the higher Regional Court Hamburg Germany in 2020 asked the CJEU to help it interpret the EU Blocking Regulation. It was the first time the CJEU had interpreted the Blocking Regulation since its introduction in 1996. The formal judgment issued by the CJEU broadly reflects the non-binding opinion issued by one of its legal advisers in relation to the case last year.

The facts

Bank Melli Iran (BMI) is an Iranian bank owned by the Iranian State. Under several contracts, Telekom Deutschland (Telekom) provided BMI with telecommunication services.

Since the US withdrew from the international agreement on Iran’s nuclear programme in May 2018, BMI has been listed within the scope of the US secondary sanctions in relation to Iran.

On 16 November 2018, Telekom notified BMI of the termination of all of the contracts between them, with immediate effect.

However, in proceedings before the German courts BMI argued that the termination of the contracts infringed Article 5 of the EU Blocking Regulation on the basis that the sole reason for termination was Telekom’s wish to comply with secondary sanctions imposed by the US.

Article 5 prohibits EU operators from complying with the US secondary sanctions falling within the scope of the EU Blocking Regulation, or actions based thereon or resulting therefrom, unless authorised to do so. Such authorisation will only be granted by the European Commission where non-compliance with the relevant secondary sanctions would seriously damage their interests or those of the EU.

Telekom, however, cited Commission guidance issued in August 2018 on the application of the EU Blocking Regulation that it said meant it was free to end its contracts with BMI, at any time and for any reason, including “reasons related to United States foreign policy”.

What the CJEU said

While it is for the German courts to determine the outcome of the dispute between BMI and Telekom, the CJEU’s judgment provides guidance on how it should do so.

Important clarifications provided by the CJEU include that:

  • Article 5 of the EU Blocking Regulation applies even in the absence of an administrative or judicial order in the US directly or indirectly requiring that an EU operator comply with the secondary sanctions falling within the scope of the Blocking Regulation.
  • The general ban on unauthorised compliance with the relevant US Iranian secondary sanctions under Article 5 can be enforced in civil proceedings against an EU operator.
  • An EU operator is not prevented from terminating contracts concluded with a person on the US sanctions list – the Specially Designated Nationals and Blocked Persons (SDN) List – without providing reasons for that termination. However, in civil proceedings relating to an alleged infringement of Article 5, where all the evidence available to an EU member state court suggests on the face of it that an EU operator complied with the relevant US secondary sanctions without prior authorisation, it is for that EU operator to establish to the requisite legal standard that their conduct did not seek to comply with those laws.
  • A breach of Article 5 can result in the annulment of the termination of a contract by an EU operator provided that annulment does not entail disproportionate effects for that operator. In assessing proportionality, it is necessary to balance the objectives of the EU Blocking Regulation and the extent of economic losses that an EU operator may be exposed to if they cannot terminate a commercial relationship with a US sanctions target. Also relevant in that assessment is whether the EU operator applied to the European Commission for an authorisation to comply with the relevant US secondary sanctions.

Important takeaways from the judgment

There are a number of learning points from the CJEU’s ruling for EU operators.

The CJEU ruling firstly confirms that Iranian businesses and nationals have a right of action in the courts of EU member states to challenge decisions made by EU operators that are potentially in breach of Article 5 of the Blocking Regulation.

The judgment also makes it clear that EU operators terminating, or refusing to do, business with US Iranian sanctions targets, or otherwise linked to Iran, should carefully document the rationale for the decision given that the burden may fall to them in civil proceedings to prove that it was not based on compliance with US secondary sanctions. In his non-binding opinion in the case, advocate general Hogan highlighted that an EU operator may refuse to deal with any business having links to the Iranian regime based on its corporate social responsibility policy. This point was not reiterated by the CJEU in its formal judgment, however.

There are wider reasons why an EU operators may decide not to do business with US Iranian sanctions targets or business that is otherwise linked to Iran. There are practical challenges regarding receipt of payments, for example. The EU also maintains a sanctions regime against Iran in relation to the non-proliferation of weapons of mass destruction and serious human rights abuses. Iran is further considered to be high risk from a money laundering and terrorist financing perspective. These factors may justify a decision not to pursue a new business opportunity, but they could be rendered superficial in the context of terminating an existing contact or business relationship given that they are not new developments.

The relevance the CJEU has placed on seeking an authorisation to comply with the relevant US secondary sanctions in relation to the proportionately assessment indicates that it expects EU operators will apply for such authorisation where they would likely suffer significant economic loss by non-compliance with US secondary sanctions. Seeking an authorisation is not without its challenges, however, and the number of EU operators seeking authorisation has been low.

The future of the Blocking Regulation

The CJEU’s decision and the takeaways from its ruling have to be considered in the wider context in which the EU’s Blocking Regulation is under scrutiny.

The European Commission held a public consultation that closed in November 2021 on proposed amendments to the Regulation. Additional deterrence mechanisms are under consideration as are measures to streamline the application of the Regulation, including by reducing compliance costs for EU persons and businesses.

The Blocking Regulation has long been criticised as lacking bite and unable to counterbalance the threat posed by the US secondary sanctions relating to Iran. This was supported by the responses to the consultation, where the prevailing view was that the Blocking Regulation had been unsuccessful in achieving its objective of protecting EU operators from secondary sanctions leading to a general loss of business opportunities and increase in compliance costs. 

Respondents also highlighted problems with the procedure for obtaining an authorisation and the criteria for the assessment of applications was criticised as not being sufficiently clear and the procedure being too lengthy. Even where an authorisation is granted it may be capable of challenge. There is another case before the EU courts where a German based entity that is ultimately owned by the government of Iran is challenging an authorisation granted by the European Commission to its counterparty.

There is support for reform.

Examples of the most popular measures proposed to be added to the Blocking Regulation include: the provision of legal support for operators entangled in foreign legal proceedings; targeted commercial restrictions, including limitations for accessing the EU market or for EU certifications; the possibility to claim punitive damages, including against foreign sovereign assets; and financial compensation to meet the cost of operating in a sanctioned environment. 

A proposal on amendments is expected to be published in May 2022.

 The European Commission has also proposed a new tool to be added to its armoury to counter the use of economic coercion by third parties. This has been put forward in response to the EU and its member states becoming the target of deliberate economic pressure in recent years. 

The aim of the tool is to “deter countries from restricting or threatening to restrict trade or investment to bring about a change of policy in the EU in areas such as climate change, taxation or food safety”.

The anti-coercion instrument is designed to de-escalate and induce discontinuation of specific coercive measures through dialogue as a first step. Any countermeasures taken by the EU would be applied only as a last resort when there is no other way to address economic intimidation, which can take many forms. These range from countries using explicit coercion and trade defence tools against the EU, to selective border or food safety checks on goods from a given EU country, to boycotts of goods of certain origin.

The proposal needs to be discussed and agreed by the European Parliament and the Council of Ministers and feedback on the proposed regulation can be submitted until 16 March 2022.

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