On December 21, 2021, the Court of Justice of the European Union (“CJEU”), sitting as a Grand Chamber, issued its interpretation in the case of Bank Melli (BMI) v. Telekom Deutschland, highlighting the European “Blocking Statute” (Regulation EC 2271/96 of November 22, 1996).
The Judgment follows a preliminary ruling by German courts on the interpretation of Article 5 of Regulation 2271/96, protecting against the effects of the extraterritorial application of legislation adopted by a third country, as well as actions based on it or arising from it.
This request was made in the context of a dispute concerning the validity of the termination of the contracts concluded between two companies following the inclusion of BMI on a list of persons targeted by a sanctions regime instituted by the United States of America, in relation to the nuclear program of Iran.
Indeed, BMI, an Iranian bank owned by the Iranian state, has a branch in Germany. It has concluded several contracts with Telekom, whose business in the United States accounts for almost half of its turnover, for the provision of telecommunications services. Following Iran’s withdrawal from the Iran nuclear deal, the US has re-imposed sanctions on the country (Iran Freedom and Counter-Proliferation Act of 2012) and on listed individuals, including BMI. This “secondary sanction” measure prevents foreign operators from conducting business outside the United States with the persons on this list.
As a result of these sanctions, the European Union adopted Delegated Regulation 2018/1100 amending and incorporating the US decision into the Annex of the Blocking Statute.
The EU Regulation provides that the extraterritorial application of texts and other legislative instruments promulgated by a third country, aimed at regulating the activities of natural or legal persons under the jurisdiction of Member States, violates international law by preventing the objective of the movement of capital between Member States and third countries. The regulation specifies that these legislative texts, as well as the actions based on them or resulting from them, are likely to affect the legal order and interests of the Union.
Under these conditions, the provisions of the Blocking Statute allow for an action to be taken at the level of the Union in order to protect its interests and of natural and legal persons, by eliminating, neutralizing or blocking in any way the effects of the foreign legislation in question.
Specifically, Article 5 paragraph 1 provides that: “No person referred to in Article 11 shall comply, directly or through subsidiaries or intermediaries, actively or by deliberate omission, with the requirements or prohibitions, including summonses, of foreign jurisdictions based directly or indirectly on the laws listed in the Annex or on actions based on or resulting from them.”
However, the second paragraph of the article provides that “a person may be permitted to comply wholly or partly with the said requirements or prohibitions insofar as failure to do so would seriously harm his interests or those of the Union.”
On the other hand, German law provides in Article 4 of its Civil Code that “any legal act contrary to a legal prohibition is void unless the law provides otherwise“. In this case, Telekom had terminated its contracts with BMI as of 2018, i.e., before they expired, without giving any express reasons and without the Commission’s authorization. BMI therefore challenged these contractual terminations before the German courts, which in turn interrogated the CJEU.
With its judgment, the CJEU calls on the referring courts to proceed (albeit with difficulty) to a strict interpretation of Regulation 2271/96, but also to a complex proportionality test.
Firstly, the Court indicates that the prohibition to comply with prescriptions or indications provided for and adopted by a third country in violation of international law, applies even in the absence of a specific summons or instruction by an administrative or judicial authority. Given the threat of legal consequences that such a law poses for the persons to whom it applies, the regulation would not be able to effectively block these effects if the prohibition provided for in Article 5 paragraph 1 were to be made conditional on the adoption of instructions by a foreign administrative or judicial authority.
Secondly, the Court considers that the prohibition provided for in Article 5 paragraph 1 is formulated in clear, precise and unconditional terms, so that it can be invoked in civil proceedings. The Court also stated that a person in a situation, covered by the Blocking Statute who does not have an authorization from the Commission may, under this Article, terminate contracts with a person on the list without giving reasons for such termination.
However, in the context of a civil action, it is up to the person to whom the said prohibition is addressed to establish that his conduct was not intended to comply with a foreign law covered by the Regulation. Here, Telekom would have to establish that the termination of a set of contracts was not intended to comply with US law. Furthermore, German law allows a party who raises the invalidity of a legal act (section 4 of the German Civil Code) to invoke this invalidity in court. In this case, however, the burden of proof would fall entirely on the party claiming the violation of Article 5, whereas the evidence is generally not available.
Thirdly and finally, the CJEU establishes that Articles 5 and 9 of the Regulation, interpreted in the light of Articles 16 and 52 of the Charter (freedom to conduct a business), do not preclude the annulment of a contractual termination, provided that this does not entail disproportionate effects, in particular economic effects for the person concerned. In the present case, the Court held that the annulment of the termination of the contracts between BMI and Telekom would have the effect not of depriving but of limiting Telekom’s ability to assert its interests in the context of a contractual relationship. The limitation of the freedom to conduct a business appears to be necessary in order to counteract the effects of the foreign legislation at issue and thus to protect the legal order and the interests of the Union.
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