19 January 2022

EU court addresses Blocking Statute's Catch-22, but important questions remain

The Blocking Statute prohibits EU persons from complying with certain US sanctions against Cuba and Iran. In its first ever preliminary ruling on the topic, the CJEU found that the termination of a contract that violates this prohibition does not necessarily need to be annulled if this would have a disproportionate effect on the terminating party. This ruling seems to somewhat ease the dilemma of EU companies that want to end contracts to avoid potentially severe US sanction enforcement measures. How this will work out in practice remains to be seen. But companies terminating contracts to comply with US sanctions may still face other measures, such as monetary penalties, that aim to protect the interests of the affected counterparties to a contract.


The case concerns the interpretation of EU Regulation 2271/96, generally referred to as the "Blocking Statute". Article 5 (1) prohibits EU persons – citizens of any EU member state and any legal person incorporated within the EU – from complying with certain foreign sanctions listed in the Annex to the Blocking Statute (the "Annex"), unless they have obtained prior authorisation from the Commission to comply with these sanctions pursuant to article 5 (2). Member states must penalise violations of the Blocking Statute. In the Netherlands, a violation qualifies as a criminal offence.

The relevant US sanctions against Cuba and Iran included in the Annex provide that:

  • for purposes of the relevant sanctions, foreign subsidiaries of US corporations qualify as US persons and as such are prohibited from engaging in virtually any business with Cuba and Iran respectively; or
  • a statutory basis for imposing certain punitive measures (also referred to as secondary sanctions) against any non-US legal person engaging in certain significant transactions with Cuba or Iran, regardless if the relevant person or the relevant transaction has any US nexus.

These sanctions seek to apply extra-territorially, restricting the economic freedom of persons falling outside US jurisdiction. The Blocking Statute seeks to protect EU persons against such extra-territorial sanctions, for example, by providing that any foreign court judgment or administrative decision giving effect to the laws specified in the Annex, is not to be recognized or enforceable in the EU (article 4).


In practice, the EU Blocking Statute creates a difficult dilemma for EU persons, forcing them to: either comply with relevant US sanctions and violate the Blocking Statute; or comply with the Blocking Statute and violate US sanctions. Many companies choose to comply with the US sanctions because these are vigorously enforced, while active enforcement of the Blocking Statute thus far has been notoriously lacking across the EU. Furthermore, companies rarely opt to ask for prior authorisation to comply with the relevant sanctions (pursuant to article 5 (2) of the Blocking Statute), as the applicant would put itself on the Commission's radar. If the requested authorisation is refused, the applicant has no choice but to comply with the Commission's decision – exposing the applicant to the risk of US enforcement.

In recent years, various EU companies that chose to terminate existing contracts with Cuban and Iranian parties – apparently for reasons relating to US sanctions – have been sued in civil court by these parties. Claimants have argued that, pursuant to the Blocking Statute, the companies could not legitimately terminate their contracts and demanded that the court order performance of existing contracts. In various Member States, these cases have raised questions about the Blocking Statute's interpretation and application. Bank Melli v Telekom Deutschland is the first of these cases to have led to prejudicial questions to the Court of Justice of the European Union (CJEU).

Bank Melli v Telekom Deutschland - background

Telekom Deutschland GmbH (TD), a subsidiary of Deutsche Telekom AG, provided Bank Melli Iran (BMI), an Iranian bank with a German branch, with telecommunication services based on multiple contracts.

In 2018, the US withdrew from the Iran Nuclear Deal and re-instated its secondary sanctions against Iran. These sanctions prohibited any person outside the US from engaging in certain significant transactions with any person designated by the US Office of Foreign Assets Control (OFAC) as a Specially Designated National (SDN). At the same time, BMI was relisted as an SDN. These sanctions became effective per 5 November 2018. On 16 November 2018, TD informed BMI about the immediate termination of all contracts between them. TD apparently did so before the relevant contracts expired and without applying to the Commission for authorisation to terminate the contracts.

BMI subsequently brought an action against TD before the Landgericht Hamburg, seeking an order that TD leave all contractually agreed telephone and internet connections active. The Landgericht ordered TD to perform these contracts and to observe the notice periods for ordinary termination. It also held that in accordance with the applicable notice periods, TD's ordinary termination of those contracts did not violate article 5 (1) of the Blocking Statute. BMI appealed to the Hanseatisches Oberlandesgericht Hamburg, alleging that the sole reason for terminating these contracts was TD's wish to comply with US secondary sanctions. BMI further alleged that terminating these contracts infringed article 5 (1) of the Blocking Statute.

The CJEU's findings

The Oberlandesgericht asked the CJEU for a preliminary ruling on four questions.

First, it asked whether article 5, paragraph 1 of the Blocking Statute (prohibiting EU persons to comply with the laws specified in the Annex), applies in the absence of an order directing compliance, issued by the administrative or judicial authorities of the third country that adopted those laws. The CJEU answered this question in the affirmative. Thus, EU persons are not only prohibited from giving effect to an administrative or judicial order from any US authority to comply with the relevant sanctions, but also from complying with such sanctions on their own initiative.

Second, the Oberlandesgericht asked the CJEU whether article 5 (1) of the Blocking Stature precludes EU persons from terminating a contract with an SDN without providing a reason for such termination. The CJEU found that this does not follow clearly from article 5 (1). Therefore, in general, an EU person may terminate a contract with an SDN without providing a reason. However, in cases where the evidence available to a national court tends to indicate, prima facie, that by terminating the relevant contract, the terminating party complied with the laws specified in the Annex, it is for that person to establish that its conduct did not seek to comply with those laws.

Third, the Oberlandesgericht asked whether if a contract is found to have been terminated with an eye to complying with any laws specified in the Annex, such termination must necessarily be regarded as ineffective. And fourth, if yes, whether that would also be the case if the terminating person risked substantial economic loss as a result. In response to these two questions, which the court examined together, the CJEU admitted that such an annulment would limit the terminating party's freedom to conduct a business, as enshrined in article 161 of the Charter of Fundamental Rights of the European Union. However, the CJEU noted, this freedom is not unrestricted and may be limited, provided that the relevant limitation: (i) is provided for by law, (ii) respects the essence of that freedom, and (iii) complies with the principle of proportionality, is necessary, and actually meets its objective. These questions go to the heart of the issue with the Blocking Statute, which by prohibiting EU persons from complying with relevant US sanctions, exposes them to the risk of severe US sanction enforcement measures, putting them between a rock and a hard place.

This dilemma was aptly highlighted by the Advocate General at the Court, who called the Blocking Statute "a very blunt instrument" that "will inevitably bring casualties in its wake". Nevertheless, in his opinion of 21 May 2021, he found that, in the event of a failure to comply with the prohibition of article 5 (1) of the Blocking Statute, the national court would have to order the relevant contractual relationship to be maintained. According to the Advocate General, this would even apply if this would put the party seeking to terminate the contractual relationship at risk of being severely penalised by the foreign authorities that enforce the relevant sanctions. The Advocate General explicitly noted that it gave him "no particular pleasure to arrive at this particular result", but apparently saw no possibility to arrive at another conclusion.

The CJEU, however, took a more nuanced approach and did find some room to address the dilemma that the Blocking Statute has created. It found that article 5 (1) of the Blocking Statute is duly provided by law and respects the essence of the freedom to conduct a business. However, as regards the third condition, the CJEU found that to determine the proportionality of annulling the termination of a contract, the national court must weigh:

  • the pursuit of the objectives served by the annulment, including the protection of the interests of the EU and EU persons by neutralising the effects of the relevant foreign sanctions;


  • the probability, and the extent of, the loss that the terminating party may suffer, if the termination of the contract is annulled – and the relevant party is thus forced to continue or resume performance of the contract in breach of the relevant sanctions.

As part of that assessment, the national court must take into account whether the terminating party has applied for authorisation to comply with the relevant foreign sanctions.

Based on the CJEU's preliminary ruling, it is now for the Oberlandesgericht to decide on Bank Melli vs TD.


The Court has taken a nuanced approach to the dilemma facing companies who want to terminate a contract to avoid severe penalties from US authorities for violating US sanctions, but, in so doing, would violate the Blocking Statute. If the risk of such penalties outweighs the objectives served by annulling the termination of the relevant contract, the termination does not necessarily have to be annulled.

However, important questions remain. First, the CJEU states that national courts must take into account whether the terminating party applied to the Commission for authorisation to comply with the relevant foreign sanctions. But the CJEU gives no guidance as to how this is to be weighed. If this ruling is to have any weight, then the room to address the dilemma that the Blocking Statute has created, may be limited: many companies will simply not find this an attractive option when faced with this dilemma. Second, if annulment (of the termination of the contract) is found to be disproportionate, the question becomes whether any other measures must or may be imposed on the terminating party to satisfy the objectives of the Blocking Statute, including the protection of the interests of the affected party (for example, through monetary penalties).

Practical takeaways

Companies seeking to terminate a contract that may trigger allegations of complying with relevant US sanctions (notably contracts with Cuban and Iranian counterparties), must remain attentive to the risk of violating the Blocking Statute as well as to the related civil litigation risk, including discovery. This CJEU ruling shows that companies may need to clarify their reasons for terminating such a contract and to establish that termination was not motivated by a desire to comply with relevant US sanctions. In view of the Blocking Statute, companies should carefully consider their reasons before acting. In terms of discovery proceedings, companies should make sure that all relevant internal communication on contemplated termination is aligned with such reasons, in keeping with the Blocking Statute.

For now, the Commission is working on a proposal to amend the Blocking Statute. It remains to be seen, however, to what extent any proposed amendments can alleviate the issues faced by EU companies exposed to the risk of enforcement of the sanctions seeks to block. We will continue to update you on further developments.