Exact has delivered ERP-software to state-owned companies and governmental organisations in Cuba since 1996. The Cuban users of Exact’s software represent 80% of the Cuban economy. The software is distributed exclusively through PAM International, established for that purpose in 1996, based on a distribution agreement. The agreement qualifies as an open-ended continuing performance agreement. In March 2019, Exact terminated this distribution agreement with immediate effect. This meant that the Cuban users of Exact’s software no longer received maintenance and support. Exact explained to PAM that it was forced to terminate the agreement because, after the takeover by KKR in May 2019, the US Helms Burton Act would apply, forbidding Exact from trading with Cuba. PAM subsequently initiated preliminary relief proceedings to force Exact to keep performing its obligations under the distribution agreement.
In its defence, Exact invoked force majeure, claiming that it had no choice but to follow its indirect shareholder’s instructions. The court, however, dismissed this defence, stating that Exact’s situation was the result of a deliberate choice made by its new shareholder, KKR. Exact and KKR’s risk of exposure to criminal and financial liability under US sanctions falls on Exact.
US sanctions and the EU Blocking Statute
US sanctions are usually strict and vigorously enforced. US sanctions are binding upon “US persons,” but in the case of US sanctions against Iran and Cuba, this includes subsidiaries of US companies. US sanctions prohibit them from carrying out virtually any type of business activities with these countries. Given the strict enforcement of US sanctions, US buyers tend to require that target companies terminate any business dealings with Iran or Cuba before the purchase transaction closes. This is what KKR appears to have done in this case.
The EU Blocking Statute, on the contrary, prohibits EU companies from complying with designated third-country sanctions regimes notably, certain US sanctions against Cuba and Iran. Violation of this prohibition constitutes an economic offence under Dutch criminal law.
Thus far, the Netherlands has not seen any significant enforcement of the EU Blocking Statute in the Netherlands. Other EU member states have seemed equally hesitant to actively enforce it. Finding themselves between a rock and a hard place, many companies have opted to comply with relevant US sanctions instead of the EU Blocking Statute, as Exact seems to have done here. This matter shows the inherent risks of that approach.
Enforcement risk under the EU Blocking Statute
First, the investigation into Exact shows that the risk of enforcement of the EU Blocking Statute is not entirely remote. No other such investigations have been reported in the Netherlands. Whether this investigation will result in further enforcement action remains to be seen. Nevertheless, companies should be aware that if they choose to comply with US sanctions, any affected counterparts may – and, based on the EU Blocking Statute, are in fact required – to inform the European Commission. In turn, the European Commission may then request that the relevant authorities initiate an investigation.
In the Netherlands, these investigations are carried out by Team Poss, which forms part of the Dutch Customs Authority. If Team Poss decides that the case merits a criminal investigation, they may refer it to the FIOD and ultimately, to the Public Prosecutor. It is then up to the Public Prosecutor to decide whether to prosecute. Even if the Public Prosecutor decides not to prosecute the matter, an investigation could lead to undesirable media attention for the companies involved.
Exposure under US sanctions – no grounds for termination of contract
Second, aside from the EU Blocking Statute, companies that want to terminate their contractual obligations because of their exposure to US sanctions may be unable to do so if their contractual counterparties claim performance under the relevant contract before the court.
The Exact case demonstrates that similarly situated companies cannot invoke force majeure as a defence if the exposure to US sanctions is the result of their own, or their shareholders’ actions – in this case, the takeover of Exact by KKR.
The Exact case also demonstrates that exposure to US sanctions does not automatically equate to a pressing ground to terminate a contract. According to the court, a continuing performance contract which does not provide for a termination clause, like Exact’s distribution agreement with PAM can, in principle, be terminated. However, requirements of reasonableness and fairness relating to the contents of the contract and the circumstances of the case may mean that termination of the contract is only possible based on sufficiently pressing grounds or, after observance of a reasonable notice period, or it must be accompanied by an offer to pay damages. Exposure to US sanctions does not constitute such a pressing ground, the court found.
The Exact judgment is similar to a 2012 case, which also involved a company taken over by a US buyer. This company tried to terminate a contract for the export of products to Syria, but was similarly ordered by the court to abide by the contract. Also in this case, the court did not accept the defendant’s force majeure argument.
The Exact judgment echoes a small number of cases recently decided in Italian and German courts, which also show that companies generally cannot refuse to perform their contractual duties or perform certain services to specific parties because of compliance with US sanctions.
Termination may be possible if performance has become practically unfeasible for reasons of US sanctions
Although mere exposure to the enforcement of US sanctions does not provide valid grounds for terminating a contract, a valid reason may exist if performance of the contract has become practically unfeasible because of US sanctions. In that case, the defendant may in fact be able to claim force majeure or a pressing ground for termination, provided that the unfeasibility cannot be attributed to the claimant in any way. In a recent case decided in Germany, the court refused to order the defendant, a savings bank, to maintain the claimant’s saving account. The defendant successfully argued that it could not maintain the claimant’s savings account, as its correspondent banks, which are necessary to perform its services, might not cooperate with it for reasons of exposure to US sanctions.
Insofar as the relevant sanctions are covered by the EU Blocking Statute, the practical unfeasibility of performance may also constitute a valid ground for exculpation under criminal law.
Non-US companies facing potential exposure to US sanctions, should be aware that this mere risk does not constitute force majeure or a pressing ground for termination of a contract under Dutch civil law. Moreover, if the relevant US sanctions are covered by the EU Blocking Statute, such termination may constitute an economic offence under Dutch criminal law. Even though the investigation into Exact for potential violation of the EU Blocking Statute seems to be a first for the Netherlands, and it is still unclear whether it will result in prosecution, it does show that enforcement of the EU Blocking Statute constitutes an actual risk.
Only if performance under the relevant contract has become practically unfeasible due to a reason not attributable to the company, may there be a valid ground for termination and a valid defence under criminal law.
How to deal with a situation like this will depend on the specific circumstances of the individual matter. Companies facing such a dilemma are advised to seek counsel as early as possible. In the meantime, we will continue to follow developments concerning the enforcement of the EU Blocking Statute.