FINANCE LITIGATION UPDATE – JULY 2022 5 whether compliance has been directly compelled by the state imposing those secondary sanctions or not. Article 5 therefore applied despite Telekom not having been expressly ordered to terminate its contract with Bank Melli. Question 2: Does the first paragraph of Article 5 override a national (German) law which permits the termination of a continuing contractual obligation without the provision of reasons? Adopting a somewhat differing interpretation to the AG, the CJEU determined that Article 5 does not override a national law allowing for obligations to be terminated without providing reasons. However, it held that where all the evidence in civil proceedings before a national court "tends to indicate prima facie" that a party has complied with the relevant secondary sanctions legislation without authorisation, the burden of proof shifts to that party to prove to the requisite legal standard that it did not act in breach of Article 5. The Court considered that requiring the party alleging a breach of Article 5 to prove its case to a higher standard would be impossible or excessively difficult and so would not ensure that Article 5 is fully effective. Question 3: Must ordinary termination in breach of Article 5 be deemed ineffective, or can an alternative penalty be imposed? and Question 4: Given Articles 16 and 52 of the Charter of Fundamental Rights of the European Union, and the possibility of an exemption being authorised under the second paragraph of Article 5, does that apply even where maintaining the business relationship with the sanctioned contracting party (here, Bank Melli) would cause the EU operator (here, Telekom) to suffer considerable economic losses on the US market? The CJEU answered Questions 3 and 4 together. It held that the combined effect of Articles 5 and 9 of the EU Blocking Regulation and Articles 16 and 52 of the Charter of Fundamental Rights of the European Union did not preclude the annulment of contractual termination in breach of the EU Blocking Regulation but only insofar as "that annulment does not entail disproportionate effects for that person having regard to the objectives of that regulation consisting in the protection of the established legal order and the interests of the European Union in general." This reference to the need to consider proportionality is a significant departure from the AG's Opinion, who saw no role for the principle given his interpretation of the relevant EU law. The CJEU's decision confirms that national courts have the power to annul a contractual termination where it is in breach of Article 5, provided that doing so would not expose the party that sought termination to disproportionate effects such as economic loss. This proportionality assessment requires the national court to strike a balance between the effects on the party that sought termination if that termination is annulled and the objectives of the EU Blocking Regulation, namely the protection of the established legal order and the interests of the EU in general to achieve the objective of free movement of capital between EU Member States and third countries. In undertaking that proportionality assessment, the CJEU held that a failure of the party that sought termination to seek prior authorisation from the European Commission (as is provided for in Article 5) would be a relevant factor. However, the CJEU did not go as far as indicating this would be determinative. It is worth noting that Member States may impose a fine on a party that has sought to terminate a contract in breach of Article 5, and without seeking prior authorisation from the European Commission, even if a mandatory injunction to continue the contract would have disproportionately adverse economic consequences. Commentary This decision emphasises the importance of parties ensuring that they have a full understanding of the risks of laws with extraterritorial effect, and particularly of the difficult interaction of US secondary sanctions with the EU Blocking Regulation. While the CJEU has potentially offered businesses caught in the crossfire between US and EU legislation a lifeline, it remains to be seen how national courts will assess the principle of proportionality. It is also worth noting that the CJEU highlighted the ability of parties at risk of breaching Article 5 to apply for an exemption from
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