Is it possible to keep the benefits of the Iran nuclear deal even with US sanctions?

Amending the EU’s Blocking Regulation to counter the re-imposition of sanctions by the United States is ineffective and does not ensure that EU enterprises will invest in, or do business with, Iran. The problem this note shows is that more effective measures to protect individual EU enterprises doing business with Iran may not be available. It also shows that action in international law would be difficult and its outcome could weaken the international legal order.

The Iran nuclear deal

The Government of the United States of America has withdrawn from the 2015 Iran nuclear agreement known as the Joint Comprehensive Plan of Action (JCPOA). On 6 August next, it will re-impose one tranche of the sanctions that were lifted pursuant to that deal. This date marks the expiry of a 90 day wind-down period that started on 8 May 2018. The remaining sanctions will be re-imposed after a wind-down period of 180 days which ends on 4 November 2018.

The EU has not withdrawn from the deal and has, along with the signatories other than the US, (China, France, Russia, United Kingdom and Germany), reaffirmed its commitment to its full implementation. The EU will not therefore re-impose the economic sanctions against Iran that were lifted on the signing of the deal. The EU considers the agreement part of public international law as it was endorsed by the UN Security Council.

Iran signed on to the deal to limit its production and use of nuclear materials and to subject itself to inspections by the International Atomic Energy Agency so as to have the sanctions lifted and to allow enterprises and financial institutions to invest and do business in Iran so as to stimulate the local economy.

Many consider JCPOA the most comprehensive nuclear containment agreement ever concluded as it has strict compliance criteria, a dispute settlement provision and the automatic re-instatement of sanctions should Iran not comply with its terms. It is also seen as a success for the very idea of sanctions. Iran’s economy had become isolated and starved of investment and had suffered as a consequence.

The chilling effect of US sanctions

Even though remaining signatories including Iran have declared their intention to stick to the terms of JCPOA the re-imposition of sanctions by the United States causes severe problems for EU entities wishing to take advantage of the lifting of sanctions by doing business in Iran.

The United States considers that their sanctions also apply to non-US persons (so called “secondary sanctions”). Therefore, a non-US person (or entity), acting in breach of the US sanctions against Iran, could be sanctioned under US law for such a breach just like a US entity. In addition, secondary sanctions may be enforced if the sanctioned party has business in the US and/or against US persons doing business with the sanctioned person/entity. Examples of the application of US secondary sanctions include the December 2012 fining of HSBC bank of US$ 1.9b, the fining of Standard Chartered of US$ 327m and in July 2014, the fining of BNP Paribas of US$ 8.97b.

Given that many EU enterprises doing business with Iran have investments in, or at a minimum, have business relations with, the US they can be subject to US sanctions. This will most likely cause these entities to stop doing business with Iran (unless, in an unlikely scenario, they obtain a waiver from the US government).

In this scenario how can the EU and the other signatories maintain their side of the bargain.

The EU Blocking Regulation

EU Regulation 2271/96 from November 1996 is a law protecting EU persons and entities from the negative effects of the extra-territorial application of legislation adopted by a third country. The law was originally adopted in connection with the US sanctions (the embargo) against Cuba and sanctions against Iran and Libya.

In May 2018 the European Commission, under delegated powers adopted in 2014, started the process to extend the application of the Blocking Regulation to the re-imposed US sanctions against Iran. Unless the European Parliament or the Council block the changes, they will come into effect on 6 August, the day that the first tranche of re-imposed sanctions come into effect.

Article 5 provides of the Blocking Regulation provides that no EU person (or entity) shall comply with any requirement or prohibition, including requests of foreign courts, based on or resulting, directly or indirectly, from the laws specified in the annex of the Blocking Regulation, unless specifically authorized by EU authorities according a procedure set out in the Regulation.

There is no recorded case implementing the Regulation or the imposition of fines on EU companies on the basis of the Regulation. This is mainly because the Blocking Regulation is enforced by means of penalties on the EU companies which have complied, including by the payment of fines, with US sanctions.

The Regulation creates a double jeopardy for EU enterprises. Non-compliance with US sanctions results in exposure to possible sanctions under US law. Compliance with US sanctions results in exposure to possible EU sanctions. There is no indication that the EU is taking steps to address this simple but dramatic problem.

Article 6 of the Regulation does provide that an EU enterprise which suffers loss due to the application of the amended sanctions can recover damages in an EU court. Theoretically this could balance out fines imposed by the US but this would require being able to bring the US before a national court, a very difficult task due to the doctrine of sovereign immunity.

Possible damages actions could also be taken against private parties refusing, for example, to finance an export operation from the EU to Iran, or to provide parts for the goods to be exported. However, the level of proofs required for the action to be successful is high and the requirement to mitigate damages, in other words, to use the same resources to export elsewhere, mean that damages, even if available, would be very low to non-existent.

The net practical effect is that EU enterprises are forced to choose between the Iranian and the US market and, more problematically, if the choice is Iran, it will have to ensure that none of its suppliers or financing institutions are themselves active in the US market. Achieving this level of isolation in today’s global market is difficult indeed. And because of this stark reality, EU enterprises are likely to choose not to do business with Iran.

Given the severe limitations of the Blocking Regulation, it can be asked why the EU is taking the trouble to include the re-imposed sanctions within its ambit. If the Blocking Regulation does not provide an effective legal remedy, the reason must be political. The EU needs to be seen to be doing something to support the JCPOA in these difficult times. But is that enough? And does the EU have the obligation to take more effective action?

The EU’s obligations in International law

The EU has always been a staunch defender of a rules-based system not only in international trade but in international affairs more generally. This is reflected, for example, in the EU’s support for the WTO, the Paris Agreement on Climate Change, agreements on biodiversity and the Aarhus Convention. In recent months it is seen clearly in the EU’s promotion of the importance of the maintenance of the JCPOA.

This political engagement is reflected in law. Article 3(5) of the Treaty of the European Union provides that in its relations with the wider world the EU shall contribute to the strict observance and development of international law. This same Article makes reference to the EU contributing to free and fair trade. In many cases the EU Court of Justice has affirmed the obligation of the Union to comply with international law.

Does the obligation to comply with and promote the development of international law have consequences for the Union? It can be argued that the EU must take more effective steps to ensure that EU enterprises can benefit from the terms of the JCPOA so that the EU keeps its side of the agreement in the lifting of sanctions. In other words, in addition to lifting the sanctions the EU must create an environment in which EU enterprises are likely to engage with Iran. The failure to do so is not a full implementation of the EU’s obligations under the agreement.

Against this can be argued that the EU is faced with a situation of force majeure, something outside its control and for which it cannot be held responsible. In that sense the EU has done all that it can: it has reaffirmed its commitment to the agreement and it has taken steps, even if they are very likely to be ineffective, to create the environment in the EU to allow EU enterprises to trade with Iran in the absence of sanctions.

The sanctions to be lifted under the nuclear deal are the UN Security Council sanctions which have in turn been suspended by UN Security Council resolution 2231(2015). Thus, it can be argued that the US, in re-imposing the sanctions, is itself acting in breach of international law and the de facto application of those sanctions to EU enterprises is both a breach of the JCPOA itself and out of line with the resolutions of the UN Security Council. It can also be argued that the EU has an ongoing obligation to ensure the application of resolution 2231(2015) in its territory meaning that it must do something effective against secondary US sanctions.

Enforcing international law by EU enterprises

It can also be argued that the EU’s political commitment to the development of international law and the legal obligation to comply with it have consequences in the internal market. In its 2015 judgement in Vereniging Mileudefensie the Court of Justice examined when the terms of international law can be relied on to review an act of secondary legislation. While it is well known that the Court is reluctant to recognise the direct effect of international law in the same way as EU law has direct effect in Member State law it found that there could be reliance on international law where ‘the nature and broad logic’ of that agreement did not preclude it and, secondly, the provisions at issue were, ‘as regards their content, […] unconditional and sufficiently precise’ (paragraph 54 of the judgement).

Are the terms of the JCPOA unconditional and sufficiently precise. It seems clear that the terms of the agreement are precise in that sanctions are lifted. Precision comes from the fact that sanctions are in place or they are not. Can it also be said that the terms of the agreement are unconditional. The content of the agreement is not conditional. Sanctions are lifted if Iran complies with its obligations to restrain nuclear development. It is clear that if Iran does not comply there are mechanisms, after the exhaustion of dispute settlement procedures, for the sanctions to snap back into place but that is a different type of conditionality which is outside the hands of the EU and enterprises doing business with Iran. The agreement is not conditional in that if both sides comply with its terms EU enterprises can rely on its terms to safely do business in Iran.

If an EU enterprise damaged by the application of US sanctions imposed in breach of the Blocking Regulation were to challenge the legality of that Regulation, what outcome could be expected. Depending on the application to it, he Court of Justice has competence either to annul the Regulation or grant damages against the EU institutions. Annulling the Regulation does not get the EU enterprise very far. To get damages the applicant would have to show that the EU erred grievously in not adopting sufficiently effective public law. This is a high test to be met particularly in the light of Article 6 of the Regulation.

What should the EU do?

The JCPOA requires the EU to remove sanctions so as to allow EU enterprises to do business with Iran. The combination of the re-imposition of sanctions by the US and the effects of the secondary nature of those sanctions means that any EU enterprise with business relations with the US is still subject to sanctions. It can be argued that the Blocking Regulation is not effective and therefore does not ensure that the EU has done all that it can to lift the UN sanctions in compliance with the agreement.

The question raised in this note whether the EU can take better steps to protect the interests of EU enterprises and better comply with the obligations under the JCPOA.

The exposure of individual EU enterprises to US sanctions are likely to arise in a number different ways:

  1. a US enterprise refuses to do business with an EU enterprise doing business with Iran;
  2. an EU enterprise refuses to do business with an EU enterprise doing business with Iran as that enterprise might be exposed to US sanctions as it also does business with the US;
  3. an EU enterprise doing business in Iran is sanctioned in the US.

It is not clear how the EU can address the first situation. If the EU were to introduce measures to address it, the US enterprise would simply find other justifications for not doing business with the EU enterprise in question. Nor is it clear how to address the second situation. Again, were measures introduced, the EU enterprise would find ways to avoid doing business other than the Iran issue. In relation to both the first and the second situation it could also be argued that Article 6 already provides a remedy.

In theory, the EU could adopt measure to compensate EU enterprises sanctioned in the US but the many difficulties with such an idea make it unrealistic. Any compensatory measure would ultimately be a US fine on the EU which is neither politically or legally acceptable.

There do not appear to be new practical solutions for individual EU enterprises to the problem of the chilling effect of US secondary sanctions in domestic EU law. If there are no new measures available could the EU improve the Blocking Regulation to make it more effective? It is not clear how this could be done. Consideration could be given to lessening the burden of proof and the making available of punitive damages but these solutions would be complex to agree and implement.

The absence of effective means to protect individual EU enterprises trading with Iran from secondary US sanctions at the domestic level does not address possible remedies in international law. At first sight the US sanctions cannot be based on the UN sanctions as these are now subject to UN Security Council resolution 2231(2015) which has not been abrogated or changed.

Thus the EU could take action to show that the re-imposed US sanctions are not in compliance resolution 2231(2015). However this takes time and the procedures to be followed are not clear. And even if the EU was to be successful there do not appear to be the means to enforce any ruling against the US. And there is possibly a worse result. The inability to enforce a possible ruling might be to weaken the very international law that the EU is bound to uphold and develop.

What has Iran done?

On 17 July 2018 Iran instituted proceedings against the United States before the International Court of Justice in the Hague in relation to the re-imposition of the sanctions. Iran argues that the re-impositions of sanctions breaches six articles of the Treaty of Amity, Economic Relations and Consular Rights between Iran and the US signed in Teheran on 15 August 1955 and which entered into force on 16 June 1957.

Iran not only asks the Court to rule that the US is in breach of international law but seeks provisional measures to stop the US re-imposing sanctions on its own citizens and enterprises but in relation to the secondary application of the sanctions to non-US persons.

At first sight Iran seems to have strong arguments in its favour on the substance of its case. The application of provisional measures is more problematic. Enforcement of any ruling in Iran’s favour even more so.


There do not appear to be readily available actions that the EU or EU enterprises can take to address the chilling effect of US secondary sanctions. Iran’s action before the International Court of Justice may unlock the situation but it is unlikely to take effect in the short term.




The content of this article is only for information and does not constitute professional advice.
For further information contact Bernard O’Connor.

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