January 6, 2022

European Court of Justice issues judgment interpreting EU Blocking Statute

On December 21, 2021, the Grand Chamber of the Court of Justice of the European Union issued its judgment in the case of Bank Melli Iran v. Telekom Deutschland GmbH, interpreting Article 5 of Regulation (EC) No 2271/96, known as the EU Blocking Statute, for the first time.*  The so-called Blocking Statute is designed to protect against the effects of extra-territorial application of legislation adopted by a third country, and actions resulting therefrom.  Article 4 of the regulation provides that non-EU court and administrative decisions implementing or enforcing any of the laws listed in the regulation’s annex – among them the Iran Freedom and Counter-Proliferation Act of 2012 — shall not be recognized. 

The case arose when Telekom Deutschland terminated its contracts with Bank Melli after sanctions were re-imposed on Iranian entities included on the US list of Specially Designated Nationals and Blocked Persons in November 2018.  In an interim proceeding brought by Bank Melli in the Landgericht Hamburg, the court ordered Telekom Deutschland to perform its obligations under the contracts until the end of the termination period provided in the contract and in accordance with applicable law.  Telekom re-terminated the contracts at the conclusion of this period, and Bank Melli applied to the German court, asserting that Telekom’s termination was motivated solely by the desire to comply with US sanctions and avoid the consequences of secondary sanctions. Telekom focused instead on economic motives, claiming that half of the business of its parent group is derived from the United States, and  continuing to do business with Bank Melli would jeopardize that revenue.  Following additional proceedings, the Hanseatisches Oberlandesgericht Hamberg stayed the action and referred four questions to the European Court of Justice.  On May 12, 2021, the Advocate General of the Court of Justice issued his non-binding (but influential) opinion in the case.  There, and in the context of the court’s final judgment, the questions, summarized, are:

  1. Whether the first paragraph of Article 5 of the Blocking Statute only applies when an administrative or judicial order has been issued against an EU operator?
  2. If not, and the provision is triggered when an EU economic operator takes action to comply with secondary sanctions, must the operator demonstrate that the action was not taken for the purpose of complying with the sanctions?
  3. If the operator need not show the reason for terminating the contracts, then should such termination in breach of the first paragraph of Artcle 5 be deemed ineffective, and the regulation be satisfied through other penalties such as fines?
  4. If a judicial or administrative order is necessary to trigger application of the first paragraph of Article 5, does it apply even when complying would result in considerable economic losses for the EU operator?

The court answered the first question in the affirmative:  the Blocking Statute applies to persons covered under Article 11 of the regulation, whether or not an administrative or judicial order has been issued to compel compliance with one of the laws listed in the annex. 

The second question, whether Deutsche Telekom has the right to terminate its contracts with Bank Melli without providing any justification for its action, in light of the bank’s assertion that the termination infringes on the first paragraph of Article 5 of the Blocking Statute, was answered in the negative.  The court first affirmed that the national courts are responsible for applying the provisions of EU law, including the Blocking Statute, and went on to state that if the termination at issue infringes the first paragraph of Article 5 of Regulation No 2271/96, it is rendered null and void, by virtue of Paragraph 134 of the German Civil Code.  This raises the question whether annulment of an EU operator’s action entails a limitation on the freedom to conduct one’s business, as set forth in Article 16 of the Charter of Fundamental Rights of the European Union – to which the court responded that the freedom to conduct business might be infringed if Telekom were deprived of the opportunity effectively to assert its interest in contractual freedom, but this is not the case, and there is no prohibition against limiting contractual freedom, subject to an analysis of proportionality.  The court noted, further, that Telekom had not taken advantage of its right, pursuant to the second paragraph of Article 5 of the Blocking Statute, to apply to the Commission for authorization to comply with one of the laws listed in the annex. 

Hence, in answer to the third and fourth questions, the court stated that the Blocking Statute does not preclude a national court from annulling the action taken by Telekom to terminate Bank Melli’s contracts, provided that the annulment does not have a disproportionate effect on the operator.

In sum, the court ruled that the Blocking Statute applies whether or not a court or administrative ruling has been issued directing compliance with one of the laws listed in the regulation’s annex,  and although Telekom was not required, under the statute, to provide reasons for terminating the contracts, the burden does fall on it, in the context of a civil proceeding, to establish the requisite legal standard that its conduct was not intended to comply with one of the laws listed in the annex.  Furthermore, Telekom did not need authorization to act contrary to the first paragraph of Article 5 of the blocking statute, but the court’s annulment of Telekom’s termination of the Bank Melli contracts must be proportional, and serve the objectives of the Blocking Statute.

The ruling left it up to the national courts to conduct proportionality analyses, including economic hardship, and decide on a case by case basis how to apply Regulation 2271/96.

*The Blocking Statute was amended by Regulation (EU) No 37/2014 of the European Parliament, and by Commission Delegated Regulation (EU) 2018/1100 of June 6, 2018, modifying the annex to the regulation, which lists the laws that must not be recognized pursuant to the regulation.

ECJ Judgment