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14 May 2021

Unpacking the EU Sanctions Blocking Regulation: Bank Melli v Telekom Deutschland


This week saw the first commentary from a member of the EU's highest Court on the EU Blocking Regulation1 since it was brought into renewed focus following the US withdrawal in 2018 from the Joint Comprehensive Plan of Action (the "JCPOA") between Iran and the EU/E3+3. Advocate General Hogan's opinion in Bank Melli Iran v Telekom Deutschland GmBH2provides much-needed guidance for companies navigating the choppy waters where US sanctions meet the EU Blocking Regulation. Although not binding on the EU's highest Court, the European Court of Justice (the "CJEU"), the AG's opinion will inform its decision.

The opinion pulls no punches in its criticism of the drafting of the EU Blocking Regulation ("a very blunt instrument"). Of note is the AG's view that Article 5 of the EU Blocking Regulation does require member state courts to compel parties to maintain contractual relationships where termination of that contract would otherwise give effect to certain extra-territorial "secondary" sanctions. In particular, the opinion provides that, where a party terminates a contract without providing – and without any obligation to provide – reasons but with the intention to comply with those extra-territorial sanctions, termination is contrary to Article 5 of the EU Blocking Regulation.


The EU Blocking Regulation prohibits EU entities from directly or indirectly complying with certain foreign extra-territorial sanctions. Although adopted in 1996, it has been the subject of considerable attention more recently in light of the reinstatement by the US in 2018 of sanctions against Iran and, in particular, the re-designation of numerous Iranian individuals and entities (referred to as "SDNs") and the re-introduction of "secondary" sanctions (targeted primarily at non-US based individuals and entities dealing with Iran and Iranian counterparties) that had been removed pursuant to the JCPOA.

Bank Melli Iran (an Iranian bank with a branch in Hamburg), commenced proceedings in the German courts after the defendant, Telekom Deutschland GmbH ("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 on 16 November 2018, shortly after the imposition of fresh sanctions on Iran on 5 November 2018. Although no reason for the termination was provided, AG Hogan observed that the fact the termination notice was issued within two weeks of the coming into force of renewed US sanctions "may be thought to tell its own tale".

The decisions of the German courts

On 28 November 2018, the German court of first instance (the Landgericht Hamburg) granted an interim injunction ordering Telekom to perform its contractual obligations until the end of the notice period for ordinary termination, but held that Telekom had not infringed Article 5 of the EU Blocking Regulation.

Bank Melli appealed to the Hanseatic Higher Regional Court, arguing that Telekom's decision to terminate 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 and Telekom therefore argued that its motives for termination were legitimately undisclosed as they were immaterial. The Hanseatic Higher Regional Court referred four questions to the CJEU for a preliminary ruling. The AG's opinion on these questions is summarised below.

The Advocate General's opinion

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?

EU entities complying with secondary sanctions will be caught by Article 5, regardless of whether this compliance has been directly compelled by the state imposing those secondary sanctions. In the present case, it is therefore not necessary for Telekom to have been ordered to terminate its contract with Bank Melli: Article 5 is still applicable. Although another German court of appeal had taken a different position in early 2020, the AG's view is unlikely to be controversial.

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?

Yes, Article 5 must be interpreted as overriding a national law which allows for such obligations to be terminated without justification. Although Article 5 does not expressly provide that a party must give reasons justifying termination of a contract, this obligation must be inferred given the purpose of the statute. "If it were otherwise, an entity could quietly decide to give effect to the US sanctions legislation and, by maintaining an obscuring silence, impenetrable as to its reasons and (effectively) unreviewable as to its methods, the major policy objectives…of Article 5 of the EU blocking statute would be compromised and set at naught."

Question 3: Must ordinary termination in breach of Article 5 be deemed ineffective, or can an alternative penalty be imposed?

Under Article 9 of the EU Blocking Regulation, national courts may determine the penalties applicable to provisions adopted in national law, provided that they are effective, proportionate and dissuasive. However, given that regulations are directly enforceable, national courts must ensure the full effect of provisions in regulations. In practice, this means a national court must order the breach be remedied (for example, injunctive relief) rather than simply imposing a penalty for non-compliance.  

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 first paragraph of Article 5 confers rights on persons and entities subject to sanctions. Entities operating in the EU cannot comply with Article 5 simply by compensating those persons and entities after terminating contractual arrangements. Where appropriate, national courts must order that such contractual relationships remain in place. This conclusion is not in conflict with Article 16 of the Charter. As the AG noted, the EU Blocking Regulation entitles parties to seek authorisation to derogate from the first paragraph of Article 5 and an unjustified refusal by the European Commission to grant such an exemption could be challenged.

Application of the EU Blocking Regulation in the UK

The EU Blocking Regulation has been retained in UK law post-Brexit by The Protecting against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2020. These regulations amended the EU Blocking Regulation and the relating Implementing Regulation (Commission Implementing Regulation (EU) 2018/1101) to take account of the UK's departure from the EU. The retained EU regulations and the domestic implementing legislation, as amended, together form the UK Blocking Regulations.

The ultimate power to apply and interpret the UK Blocking Regulations now lies with the UK courts. While not bound by the CJEU's upcoming decision in this case, the UK courts may have regard to it.


The AG acknowledged that the conclusions reached on the four questions referred by the German court were not entirely satisfactory, observing that "[i]t gives me no pleasure to arrive at this particular result". The opinion contains a forceful critique of the EU Blocking Regulation which, "designed as it is to sterilise the intrusive extraterritorial effects of US sanctions", will "inevitably bring casualties in its wake".

This opinion highlights 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. It remains to be seen whether the CJEU will follow the AG's lead. In the meantime, parties must ensure that they are aware of the risk that the EU Blocking Regulation might place on national courts to order the continuation of contractual arrangements in breach of US secondary sanctions. While lawful termination of a contract may be seen as the least controversial route for minimising liability in respect of US secondary sanctions, private operators targeted by those sanctions may be able to challenge the termination in EU member state courts. In the AG's view, the burden should be on the party terminating the contract (i.e. the defendant in any such case) to demonstrate that it did not do so in order to comply with the US secondary sanctions covered by the EU Blocking Regulation.

While the AG has expressed the hope that the EU legislature will "ponder and consider" the implications of the EU Blocking Regulation, it remains to be seen how the UK's position post-Brexit will evolve, and the extent to which the UK Blocking Regulations can shield parties from the effects of extraterritorial sanctions. As we have noted previously, one difference to the EU position is that the UK publishes authorisations allowing compliance with US sanctions. The AG commented that the EU approach is understandable because "it would allow the foreign authorities concerned to know which company has not applied for an exemption and is therefore supposed not to comply with the legislation in question". However, more transparency in the operation of the EU Blocking Regulation would be welcome.

1 Regulation (EC) No 2271/96 (as amended, the "EU Blocking Regulation")

2 Case C-124/20