Iranian companies may not benefit from court opinion on EU blocking statute

In May an advocate general of the Court of Justice of the EU (CJEU) issued an opinion which found that a decision by an EU entity to terminate a contractual relationship with an Iranian party subject to US primary sanctions should be regarded as invalid if it cannot be justified on any ground other than the desire to comply with US secondary sanctions that fall under the EU blocking statute. In such a case, the EU national court should order that the contractual relationship is maintained.

Advocate general Gerard Hogan said the EU blocking statute must be understood – as a matter of public policy – as imposing an obligation on an EU entity in this scenario to give reasons justifying the termination of the relationship, and to satisfy the relevant court that it did not terminate a valid contract because of a desire to comply with the relevant US secondary sanctions.

The case was referred to the CJEU by a court in Germany, seeking clarification over the scope of the EU blocking statute. The statute protects against the effects of the extraterritorial application of laws adopted by a non-EU country. It was amended in June 2018 in response to the decision by then-US president Donald Trump to reimpose sanctions over Iranian companies that had originally been suspended in 2015.

Bank Melli Iran brought proceedings in the German courts against Telekom Deutschland, claiming it infringed the blocking statute after terminating a contract. The bank said notice given by Telekom Deutschland was invalid because it 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 a breach.

Telekom Deutschland argued that the EU blocking statute did not change its ordinary right to terminate a contract without giving reasons for doing so. It said the EU blocking statute left it free to end its business relationship with Bank Melli Iran at any time, and its motives for doing so were immaterial.

The advocate general’s opinion is not binding on the CJEU, which will give judgment at a later date.

Although it looks positive for Iranian companies, the practical application is likely to be limited.

If the CJEU adopts the same approach, it would assist Iranian companies that were the target of US sanctions, where an existing relationship had been terminated and the only factor that had changed from a risk perspective was the imposition of the US Iranian secondary sanctions.

Many business relationships between EU and Iranian entities were terminated when the US reinstated its Iranian secondary sanctions, and in some instances before the blocking statue was updated to address those sanctions. There may be a lack of appetite by Iranian businesses to now raise proceedings relating to those terminations.

The opinion is also unlikely to be of assistance where an EU entity refuses to contract with an Iranian business given that there are many risks associated with business in, or connected, to that country that can be put forward.

The EU maintains a sanctions regime against Iran in relation to the non-proliferation of weapons of mass destruction and serious human rights abuses. Iran is also considered to be high risk from a money laundering and terrorist financing perspective, and advocate general Hogan highlighted that an EU entity may refuse to deal with any business having links to the Iranian regime based on its corporate social responsibility policy.

Iranian and EU businesses alike will be awaiting the CJEU judgment with interest to assess what the final impact of its decision will be.