UK & Europe
The Court of Justice of the European Union (the Court) has, for the first time, provided its interpretation of Article 5 of the EU Blocking Regulation, which prohibits EU persons from acting in compliance with certain sanctions imposed by the US on Iran and Cuba. In this update, we provide an overview of the Court’s decision and consider the implications of the issues addressed.
In summary, the reference to the Court was made in the following circumstances:
We consider below the questions referred and the Court’s analysis. In May 2021, an Advocate-General (AG) of the Court provided an opinion on the questions referred. As explained below, the Court’s ruling differs from the positions expressed by the AG in some material respects.
Yes. The Court considered that Article 5 was broadly drafted and confirmed that it prohibited EU persons from complying with the requirements or prohibitions laid down in the laws specified in the EU Blocking Regulation’s annex, even in the absence of an order directing compliance issued by a US administrative or judicial authority.
The Court recognised that certain of the US sanctions laws specified in the EU Blocking Regulation’s Annex were capable of achieving their intended objective through the threat of potential legal consequences (i.e., US secondary sanctions). Therefore, the EU Blocking Regulation would not be able to achieve its intended effect if its application was limited to compliance with the orders of US administrative or judicial authorities.
Yes. The Court confirmed that the EU Blocking Regulation does not prohibit EU persons from terminating contracts with SDNs without providing reasons. Therefore, if a contractual party is permitted by national law to terminate a contract without providing reasons, they can do so without contravening Article 5.
However, the Court went on to state that a counterparty may challenge the termination of a contract in civil proceedings on the basis that such termination was in contravention of Article 5. In this scenario, the burden of proof would fall on the terminating party to demonstrate, to the requisite legal standard, that they did not act in prohibited compliance with the US sanctions specified in the EU Blocking Regulation’s Annex.
The Court, however, did not go on to opine on the kinds of evidence that could demonstrate that an EU operator did not act in prohibited compliance with US sanctions. In this regard, the AG commented in his opinion that "there are many companies and individuals who would have ethical qualms and reservations about doing business [with Iran]", and that any "sincere" decision to terminate a contract on this basis would need to be demonstrated (such as engagement in a "coherent and systematic corporate social-responsibility policy").
However, it seems, that such broader questions as to the relevant evidence and requisite standard of proof has been left to national courts for now.
This question before the Court was important for the Telekom Deutschland group as it generated around 50 percent of its turnover in the US market. The Court concluded that a contravention of Article 5 could lead to the annulment of a contractual termination, provided that such annulment did not lead to "disproportionate effects" for the EU operator concerned.
In terms of what could amount to "disproportionate effects", the Court left this matter to be decided by national courts. They instructed national courts to balance the objectives of the EU Blocking Regulation against the probability that the EU operator in question would be exposed to severe economic losses if it was unable to terminate its contractual relationship.
The Court emphasised that it would be relevant for national courts to consider whether the EU operator in question had sought to apply to the European Commission for authorisation to comply with US sanctions targeted by the EU Blocking Regulation, suggesting that a failure to do so could weigh against the EU operator in an assessment of "disproportionate effects".
The Court’s judgment helpfully clarifies a number of important points for EU persons around the interpretation of Article 5, though it also leaves other important questions unaddressed.
The key takeaways from the Court’s judgment are that:
At the beginning of 2021, the European Commission announced that it would consider potential amendments and/or revisions to the EU Blocking Regulation with a view to streamlining its application by reducing compliance costs for EU citizens and businesses.
A public consultation closed in November 2021, and the nature and extent of any amendments or proposed replacement is forthcoming. It is anticipated that any amendments arising from this evaluation and impact assessment will be adopted in Q2, 2022.
It remains to be seen whether any such amendments can address the current uncertainties and compliance risks faced by EU persons and businesses.
 Council Regulation (EC) No 2271/96 (as amended).
 European Commission, Combined Evaluation Roadmap / Inception Impact Assessment: “Amendment 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”, available here