Clifford Chance

The Advocate General ("AG") of the ECJ has issued a long-awaited opinion on the meaning of the EU Blocking Regulation concerning US sanctions on Iran. If adopted by the Court, the effects could be significant and wide-ranging.

The long-awaited opinion of the AG on 12 May in the case of Bank Melli Iran v Telekom Deutschland GmbH is not binding on the ECJ, but is likely to be adopted. In the views of this author, its reasoning appears flawed in places and yet the consequences could be significant.

The AG describes the EU Blocking Regulation as a "blunt instrument", which he recommends should be reviewed by the European Parliament given it places EU companies in an invidious position – or as we have described in a previous blog, between a rock and a hard place. It presents a text book example of a conflict of laws situation.

But having criticised its flaws, the AG then offers an interpretation which maximises the difficulties EU companies will face as a result.

First, the AG's view is that EU operators are prohibited from complying with the US extraterritorial sanctions listed in the Annex to the Blocking Regulation, even if they have not been compelled expressly by a US court order or other directive to do so. In giving this view, the AG offered no analysis of the meaning of the words "to comply" (as prohibited by Article 5 of the EU Blocking Regulation) in the context of the specific US legislation referenced in the Annex, which does not impose any "compliance" obligation in the manner ordinarily understood. Instead, he noted only that such compliance (whatever that means in this context) is prohibited. The question of whether the relevant party did or did not comply is for the national courts to determine.

Second, where an EU operator terminates a contract in compliance with the US sanctions listed in the Annex, according to the AG this gives a right of action to the affected party to bring a claim and seek an injunction prohibiting termination (and effectively, therefore, requiring specific performance). The AG's view is that such a consequence is difficult, but necessary, as otherwise there might not be any means of giving effect to the policy behind the EU Blocking Regulation. The AG did not offer any detailed analysis as to why specific performance is necessary in view of the express right of action to claim damages which the legislature already provided for in Article 6 of the EU Blocking Regulation.

Third, having afforded an additional right to demand specific performance of terminated contracts, the AG determined that the EU operator being sued in such a situation has the burden of establishing that its acts were not motivated by compliance with the relevant US sanctions – even where, as a matter of express Member State contractual law, they would otherwise be permitted to terminate a contract with full discretion and without giving reasons. This is, as the AG acknowledges, an extraordinary and unusual interference with ordinary commercial freedoms.

Fourth, having created this burden, the AG opined that, in the present case, to avoid the liability Telekom Deutschland would need to show that its decision was not motivated by compliance with the US sanctions, by demonstrating that it is actively engaged in a coherent and systematic corporate social-responsibility policy which requires them, inter alia, to refuse to deal with any company having links with the Iranian regime.

This conclusion was reached, seemingly, without any analysis of whether Telekom Deutschland's decision to terminate the contract was in fact taken in order to comply with the relevant US sanctions. As it happens, there appear to be compelling reasons for saying it was not – at least in a legal sense. When the decision to terminate was taken, Bank Melli was already designated as an SDN under the Global Terrorism Sanctions Regulations (compliance with which is not prohibited by the EU Blocking Regulation) and not just the US Iran Transactions and Sanctions Regulations (the "ITSR"). The ITSR are listed in the Annex to the EU Blocking Regulation, but the ITSR do not impose secondary sanctions and did not apply to Telekom Deutschland as a non-US Person, as long as it did not involve US elements in its activities with SDNs. In addition, the ITSR provide a general license to involve US elements in the provision of telecommunications services to ITSR SDNs. There was therefore no obligation under the ITSR for non-US companies to terminate business with Bank Melli and strong reputational reasons for terminating business with a terrorism SDN.

Notwithstanding the above, if the AG's opinion is adopted by the ECJ, there is a risk that European companies, already exposed to a conflict of law risk, may now face additional practical difficulties.

In particular, for European companies that refuse Iran related transactions or payments, they may be on the receiving end of a demand to demonstrate that such decisions were not taken in order to comply with US sanctions, or face being ordered to continue. This could force uncomfortable decisions at best, and cause collateral breaches of undertakings in other agreements, or even of US sanctions themselves at worst.

Companies faced with these dilemmas should take advice on how to resolve the dilemma on a risk-sensitive basis.