Finance litigation update - July 2022

FINANCE LITIGATION UPDATE – JULY 2022 4 Judging the EU Sanctions Blocking Regulation: Bank Melli v Telekom Deutschland Following Advocate General Hogan's opinion in Bank Melli Iran v Telekom Deutschland GmBH10 (on which we reported here), the Court of Justice of the European Union ("CJEU") gave its judgment. While the CJEU adopted much of the AG's analysis, there is a significant divergence in the interpretation of Article 5 of the EU Blocking Regulation11. Many EU businesses will be relieved by the CJEU's conclusion that (contrary to AG Hogan's Opinion) Article 5 does not require member state courts to compel parties to maintain contractual relationships where termination of that contract would otherwise give effect to extra-territorial "secondary" sanctions. This decision was based on the principle of proportionality. Whether or not it would be proportionate to force the parties to remain in business together (given the potential economic losses for Telekom Deutschland GmbH ("Telekom") in this case) was remitted to the German higher regional court. Background The background to the case is summarised in our earlier article. In brief, the EU Blocking Regulation prohibits EU entities from directly or indirectly complying with certain foreign extra-territorial sanctions. Its operation has been under increased scrutiny recently because of the US decision to reimpose "secondary" sanctions (targeted primarily at non-US based individuals and entities dealing with Iran and Iranian counterparties) that had been removed pursuant to the Joint Comprehensive Plan of Action. Bank Melli Iran (an Iranian bank with a branch in Hamburg), commenced proceedings in the German courts after the defendant, Telekom, gave notice of its decision to terminate the contract between the parties with immediate effect. Telekom also sent identical notices of termination to at least four other clients with Iranian connections. Telekom's notices of termination were sent shortly after the re-imposition of secondary sanctions on Iran by the US. No reason 10 Case C-124/20 for termination was provided. The decisions of the German courts At first instance, the Landgericht Hamburg held that Telekom had not infringed Article 5 of the EU Blocking Regulation but granted an interim injunction ordering Telekom to perform its contractual obligations until the end of the notice period for ordinary termination. Bank Melli appealed, arguing that termination was in breach of Article 5 and therefore ineffective. Telekom submitted (referencing the Commission Guidance Note on the EU Blocking Regulation) that Article 5 does not change a party's right to lawfully terminate a contract. Neither the contract nor German law required the disclosure of reasons for a decision to lawfully terminate. The Hanseatic Higher Regional Court referred four questions to the CJEU for a preliminary ruling. The CJEU's judgment on these questions is summarised below. The CJEU decision Question 1: Does the first paragraph of Article 5 of the EU Blocking Regulation only apply where the acting EU entity (in this case, Telekom) is issued (directly or indirectly) with an official order by the US, or is it sufficient for the EU entity to only be seeking to comply with secondary sanctions? The CJEU agreed with the AG's view that EU entities complying with secondary sanctions covered by the EU Blocking Regulation are caught by Article 5, 11 Regulation No 2271/96