The reimposition in early August 2018 of US sanctions against Iran will have serious economic consequences for many EU businesses with Iranian trading interests. EU businesses that choose to comply with US sanctions may, in doing so, cause loss to their trading partners (for example, by denying access to trade finance). As a result of measures introduced by the EU Commission to counteract the effects of US sanctions, EU businesses that suffer loss in this way may have a legal right to seek compensation.
Marc Jones and Elaina Bailes consider the circumstances that may give rise to private law claims for damages as a result of these new EU measures.
US Iran sanctions
Under the Joint Comprehensive Plan of Action (“JCPOA”) (aka the Iran Nuclear Deal), entered into on 14 July 2015, Iran agreed to eliminate/reduce its uranium stockpiles and limit uranium-enrichment activities in return for receiving relief from US, EU and UN Security Council nuclear-related economic sanctions.
On 8 May 2018, President Trump announced that the US was withdrawing from the JCPOA and would begin reimposing the US sanctions that were lifted on the entering into the JCPOA. The US stated it would be implementing a 90-day (ending on 6 August 2018) and a 180-day wind-down period (ending on 4 November 2018) in relation to certain listed activities.
US government sanctions can be grouped into two categories:
- Primary sanctions which target Iranian entities and apply to US persons or circumstances where there is a nexus with the US ie any involvement of a US entity/person, or any transaction that is taking place in US jurisdiction.
- Secondary sanctions which target non-US persons doing business with or proving material support to sanctioned parties or carrying out other specified activities and which activity takes place entirely outside US jurisdiction.
To begin with, there are no secondary sanctions. But if EU businesses continue to deal with Iranian entities, they can expect to be made the subject of secondary sanctions. The effect of that could be to prevent US persons from dealing with the sanctioned EU businesses, cutting off them off from the US economy and, perhaps more significantly, the US financial system. This powerful threat is designed to force EU businesses to act in accordance with the primary sanctions and sever their Iranian business interests. The expectation is that many businesses will do so. That will lead, for example, to the termination or non-renewal of commercial agreements and the denial of finance and banking services to EU businesses with Iran-related trading interests that will, as a result, suffer significant losses.
The Blocking Regulation
As the EU continues to support the JCPOA, the US’s actions triggered retaliation from the EU Commission via the EU “Blocking Regulation” (Council Regulation (EC) 2271/96). The European Commission has proposed amending the annex to the Blocking Regulation to include the extra-territorial sanctions that the US will reimpose on Iran. If no objection is raised by the European Parliament and Council, the updated regulation will enter into force by the time the first batch of reimposed US Iran sanctions take effect on 6 August 2018. The effect (in theory, if not in practice as discussed below) will be to shelter the Iran-related business interests of EU persons from the extra-territorial effects of the US Iran sanctions, by requiring EU persons not to comply with the US Iran sanctions. And where one EU person suffers loss as a result of another EU person’s compliance with US sanctions, the Blocking Regulation will provide the injured EU person with a right to claim damages.
The definition of “EU Person” (Article 11) is very wide and includes all EU-incorporated companies (including subsidiaries of US companies) and all EU and non-EU nationals residing or doing business in the EU. Similarly, the commercial interests that the Blocking Regulation protects are equally widely drawn. Article 1 of the Blocking Regulation “provides protection against and counteracts the effects of the extra-territorial application of the laws specified in the Annex of this Regulation, including regulations and other legislative instruments, and of actions based thereon or resulting therefrom, where such application affects the interests of persons, referred to in Article 11 , engaging in international trade and/or the movement of capital and related commercial activities between the Community and third countries.”.
The intent is clear but in reality, what effect will the Blocking Regulation have in practice?
Impact of the Blocking Regulation in practice
It is widely accepted that whilst the activation of the EU Blocking Regulation in relation to Iran is a political statement, it does not offer an effective legal protection for EU persons to rely upon in the face of US secondary sanctions. The implementation of penalties for failing to comply with the Blocking Regulation differ widely between member states (with some, such as the UK, imposing criminal penalties but in others only administrative penalties, and in some no penalties at all). This is in contrast to the robust enforcement of secondary sanctions by US authorities and the potential consequences for EU persons being effectively banned from doing business with the US.
The result of this is that in order to avoid exclusion from the US market, regulators and advisors may encourage EU persons to abide by the US Iran sanctions regime – leading them to withdraw from contracts, business arrangements and negotiations in relation to activities caught by US Iran sanctions – and face the consequences of defying the Blocking Regulation. If that is right, the impact on EU persons doing any business with an Iran connection will be highly significant given that the US Iran sanctions listed cover the major industry and trade sectors in Iran. It is here that the right to recover damages under the Blocking Regulation may assist affected parties.
Right to recover damages under the Blocking Regulation
Assuming the EU process proceeds as described above, by early August 2018 Article 6 of the Blocking Regulation will provide EU persons with the right to recover damages caused by the application of the US Iran sanctions. It states:
“Any person referred to in Article 11, who is engaging in an activity referred to in Article 1 shall be entitled to recover any damages, including legal costs, caused to that person by the application of the laws specified in the Annex [the US Iran sanctions] or by actions based thereon or resulting therefrom. Such recovery may be obtained from the natural or legal person or any other entity causing the damages or from any person acting on its behalf or intermediary.”
Given the imminent expiry of the first wind-down period on 6 August 2018, after which the first tranche of US Iran sanctions bite, businesses could start to see their counterparties reacting in the next few weeks and taking steps to terminate their Iran-related business connections. Where one party, in order to comply with US sanctions, simply terminates a contract, there is (probably) no need to look to the Blocking Statute. The injured party can simply claim in statute. But the variety of circumstances in which EU persons may suffer actionable loss will be varied, and in some cases may not be obvious at first. Consider the following examples:
- EU company A has a supply contract with EU company B, with a parent company in the US, for the export of Iranian gold. Company B decides that the threat to its parent company of being banned from the US market for breach of US Iran sanctions is more significant than the value of the export contract, and therefore serves notice to lawfully terminate the contract. Company A is a person engaging in an activity specified in Article 1 and is therefore entitled to recover damages caused by the actions of company B resulting from the application of the US Iran Sanctions specified in the Annex.
- US company C and EU company D have been exclusively negotiating a contract for an energy project in Iran since the lifting of Iran sanctions due to the JCPOA. The deal was due to complete shortly before the US announced it would reimpose sanctions. Company C withdraws from negotiations and refuses to sign the contracts. Company D suffers a loss and must start from scratch in finding a partner for its venture. Company D may be entitled to recover damages from company C.
- EU company E has a long-standing relationship with EU bank F under which bank F has extended a series of letters of credit in order to finance company E’s worldwide aircraft projects, including in Iran. Following the imposition of sanctions, bank F, which has US branches, decides to cancel the facility. Company E may be entitled to recover damages from bank F.
- An EU company G enters into a joint venture with an Iranian company H owned by persons who do business in the EU relating to car-making activities in Iran, agreeing to invest sums over a five-year period. In light of the threat of US sanctions and its desire to enter the US market, company G withdraws from the joint venture. As a result, the owners of company H suffer loss, and as persons doing business inside the EU, may be entitled to recover damages from company G.
Whether such claims are open to particular parties may depend on the facts of the case.
The likelihood of increased civil litigation as a result of Article 6 has already been recognised. In a paper of 11 July 2018, UK Finance, a trade association representing 300 of the leading firms providing finance, banking and payments-related services in or from the UK, stated: “Our members view the risk of civil litigation as significant … Our assessment is that in comparison to pre-JCPOA days the risk of civil litigation under the updated Blocking Regulation has significantly increased.”
EU persons doing business with an Iran connection should be alive to the risk that they may suffer loss as a result of trading partners withdrawing from (or failing to renew or even enter into) transactions and contracts or refusing to provide banking or other services to ensure they are not falling foul of the US sanctions regime. If so, they should consider seeking legal advice as to whether they can make use of Article 6 of the EU Blocking Regulation to recover their damages and legal costs.
 The amendments to the annex add the following US Iran Sanctions to it: Iran Sanctions Act of 1996; Iran Freedom and Counter-Proliferation Act of 2012; National Defense Authorization Act for Fiscal Year 2012; Iran Threat Reduction and Syria Human Rights Act of 2012; and the Iranian Transactions and Sanctions Regulations
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