Op-Ed: “Request for a preliminary ruling in Bank Melli Iran case: to what extent can EU operators be compelled to maintain their business relationship with Iranian companies?” by Celia Challet
A highly interesting judgment of the Court of Justice is expected in the field of sanctions against Iran. In the framework of its Bank Melli Iran case (C-124/20), the Hanseatic Higher Regional Court of Hamburg (Germany) has requested a preliminary ruling on the interpretation of Article 5(1) of the Blocking Regulation. This provision states that no EU legal and natural persons shall comply with any requirement or prohibition, including requests of foreign courts, that result from laws that are listed in the Annex of the Regulation. In other words, this Article prohibits, inter alia, EU operators from complying with US sanctions against Iran.
The background to this case lies in a dispute between an Iranian operator, Bank Melli Iran, and Telekom Deutschland GmbH, a leading German telecommunications service provider. A framework contract concluded by the parties grouped all Bank Melli’s company connections in Germany under one contract. These contracts allow it to conduct business through its German branch.
Following their withdrawal from the Iran deal of 2015, the US adopted new sanctions against Iran, targeting primarily the financial, banking and oil sectors. These measures were complemented by secondary sanctions which prohibit non-US citizens from engaging in any business with the listed Iranian persons and companies. Bank Melli Iran was included in the US sanctions list.
A few days after the US sanctions targeting the financial and banking sectors entered into force, Telekom Deutschland gave Bank Melli notice of termination of all contracts with immediate effect.
Bank Melli challenged the termination of the contracts before the Regional Court of Hamburg. The latter ordered Telekom Deutschland to perform the contracts until the end of the period of notice for ordinary termination. It ruled, however, that ordinary termination of the contested contracts by Telekom Deutschland was effective. Bank Melli appealed the judgment before the Hanseatic Higher Regional Court (‘the referring court’). It argues that the defendant’s notice of ordinary termination infringes Article 5(1) of the Blocking Regulation, and is therefore ineffective. It thus falls on the referring court to determine whether ordinary termination by the defendant is effective or not.
This case emphasises a key issue of the implementation of the Blocking Regulation: to what extent can EU operators be compelled to maintain their business relations with Iran?
In order to rule the case, the referring court has asked four questions on the interpretation of Article 5(1) of the Blocking Regulation to the Court of Justice. The first question relates to the scope of this provision: does it only apply where the acting EU operator is issued with an official or court order on the part of the US, or does it suffice that the termination of relations by the EU operator is predicated on compliance with secondary sanctions without such order? Indeed, there is no evidence that Telekom Deutschland was subject to an official or court order from the US. According to Bank Melli, however, the defendant’s sole reason for terminating the contracts was to comply with the secondary sanctions imposed by the US. The referring court stresses that in its view, the mere existence of secondary sanctions should be considered as sufficient to trigger the application of Article 5(1). Otherwise, the ban on compliance with such sanctions as pursued by this provision would fail to be implemented effectively.
The second question relates to the evidence that can be required from the party giving notice of termination. Should the Court consider that Article 5(1) can apply in the absence of an official or court order, does this mean that the party that ends its business relationship with an operator listed in the US sanctions would need to give a reason for termination? In other words, would EU operators have to prove that the reason for termination was not to comply with US sanctions? Telekom Deutschland argues that the right of ordinary termination as provided by German law does not depend upon a reason for termination, and that this is not affected by Article 5(1) of the Blocking Regulation. On the contrary, as stressed by the defendant, the purpose of this Regulation is precisely to ensure that EU operators remain free to conduct their business, and that their decisions are not forced upon them by US sanctions.
Interestingly, and after explaining that several German Courts concur with the defendant’s understanding of Article 5(1), the referring court stressed its disagreement with such an interpretation. According to the Hanseatic Regional Court, in order for this provision to achieve its purpose, termination should be considered as infringing Article 5(1) where its decisive motive is compliance with US sanctions. A termination based on purely financial considerations, however, would not infringe Article 5(1). Therefore, an EU operator that ends its business relationship with an Iranian co-contractor would have to establish that this decision was not ‘taken out of fear of reprisals on the US market’.
By its third question, the referring court asks for a clarification of the legal consequences of an infringement of Article 5(1) of the Blocking Regulation: must ordinary termination that breaches this provision be considered ineffective, or could other penalties, such as a fine, be imposed? This question echoes an issue that is clearly stressed by the referring court: if they cannot terminate their contracts with Iranians, EU operators face a risk of exclusion from the US market and, thus, of important economic losses. In the case at hand, Telekom Deutschland’s group generates 50% of its turnover in the US, whereas its contractual relationship with Bank Melli represents a turnover of 2000 euros per month. The referring court concludes that it might be more proportionate to impose a fine on Telekom Deutschland, rather than preventing it from terminating its contracts with the applicant. Moreover, as stressed by the Hanseatic Regional Court, the direct purpose of the Regulation is not to protect Iranian but EU operators.
This reveals the paradox of the Blocking Regulation: ensuring its full effectiveness might lead to considerable economic losses for the very persons that it intends to protect.
Lastly, the fourth question highlights the need for a balance between the effectiveness of the Block Regulation on the one hand, and the protection of EU operators’ economic situation and fundamental rights on the other. Should the Court rule that infringement of Article 5(1) of the Blocking Regulation can only to lead to the ineffectiveness of the termination, the referring court asks if that should apply in a case such as the one at hand (where maintaining the business relationship with the Iranian company would expose the EU operator to considerable economic losses on the US market).
The court acknowledges the possibility of an exemption to the prohibition to comply with US sanctions. Pursuant to Article 5(2) of the Blocking Regulation, EU operators may be authorised to comply with those sanctions to the extent that ‘non-compliance would seriously damage their interests or those of the [EU]’. However, such exemption should be used on a restrictive basis since the very purpose of the Regulation is to protect EU operators against enforcement of secondary sanctions. In addition, the referring court considers that the risk of economic losses is not adequately counterbalanced by the possibility of a recovery claim provided by Article 6 of the Regulation.
Even more interestingly, the referring court doubts whether compelling an EU operator to maintain its relations with a business partner, potentially at the cost of heavy economic losses on the US market, would be compatible with the freedom to conduct business as provided by Article 16 of the Charter of Fundamental Rights. It could also be incompatible with the principle of proportionality under Article 52 of the Charter.
To conclude, this referral from the Hanseatic Regional Court provides a very clear and critical overview of the issues raised by the Blocking Regulation, particularly in the context of US sanctions against Iran. As stressed by the court itself, EU operators ‘face a dilemma. If they comply with EU law, they are at risk of exclusion from the US market; if they comply with the sanctions, they are in breach of EU law’. This lack of legal certainty for EU operators is even more problematic now that national courts themselves are not sure how the Blocking Regulation should be applied. As explained by the referring court, several German jurisdictions have taken different approaches in similar cases. A clarification by the Court of Justice is, thus, more essential than ever.
Celia Challet is an Academic Assistant in EU law at the College of Europe and Ph.D. candidate at Ghent University (Belgium)