Continuation: The EU Blocking Statute in light of the German Federal Court of Justice judgment XI ZR 59/23 – Protection of property rights and tortious liability in the case of frozen securities

Facts of the case

The plaintiff, a bank established under Iranian law and based in Tehran, operates a branch office in Munich and is subject to supervision by the German Federal Financial Supervisory Authority (BaFin). In June 2019, it opened a securities account with a bank (Volksbank) and acquired securities worth around €10.5 million. The securities were held in custody via a multi-tiered custody chain involving several custodian banks, at the end of which was Clearstream Banking AG, the only securities clearing and depository bank licensed in Germany.

In August 2019, Clearstream transferred the plaintiff's securities to a blocked account. The reason for this measure was the inclusion of the plaintiff on the Specially Designated Nationals and Blocked Persons List (SDN list) of the US Office of Foreign Assets Control (OFAC), which lists individuals and organisations with links to sanctioned countries such as Iran. As a result of the transfer and the associated freeze, the plaintiff was no longer able to dispose of its securities. At the beginning of January 2020, the US government decided to impose so-called secondary sanctions with effect from October 2020 on persons who maintain business relationships with persons on the SDN list. In addition to fines, these secondary sanctions also include restrictions on access to the US financial market. The plaintiff's attempt to sell the securities it held in January 2020 failed because Clearstream refused to accept instructions regarding these securities. 

The plaintiff then claimed damages from Clearstream on three grounds: (i) a breach of the custody agreement between Clearstream and a bank involved in the custody chain (which included an alleged protective effect in favour of the plaintiff); (ii) Article 6 of the EU Blocking Statute; and (iii) a violation of property rights under Section 823(1) of the German Civil Code (BGB). Clearstream argued that there was no contractual relationship between it and the plaintiff. It also maintained that the EU Blocking Statute was not applicable and that no property violation had occurred, as the loss merely of a specific possibility of use was not covered by Section 823 of the German Civil Code (BGB). 

Both the Regional Court and the Higher Regional Court (OLG) of Frankfurt had largely dismissed the action.

Decision of the BGH

The BGH overturned the judgment of the OLG and referred the case back to another senate of the OLG for a new hearing and decision. The BGH based its decision particularly on the following considerations:

No contractual claim for damages

Like the OLG, the BGH also rejects the plaintiff's contractual claims, as there is no direct contractual relationship between the plaintiff and Clearstream. The contracts along the custody chain were concluded independently of each other by the banks involved, and the contract between the plaintiff and the Volksbank is limited to their bilateral relationship. Furthermore, the contract concluded between Clearstream and its direct contractual partner within the custody chain was not a contract with protective effect in favour of third parties. The BGH justified this on the grounds that the system of third-party custody of securities was intended to simplify the securities trading system and therefore did not allow the extension of protective obligations arising from the individual custody agreements to the original depositor.

No claim under Art. 6 EU Blocking Statute

Both the OLG and the BGH deny the applicability of the EU law-based claim for damages under Article 6 of the EU Blocking Statute, albeit for different reasons: while the OLG considered the provision inapplicable due to a lack of evidence that Clearstream had blocked the sales orders for reasons of US secondary sanctions (no evidence of a so-called ‘act of compliance’ within the meaning of Article 5 of the EU Blocking Statute), the BGH rejected the claim on subjective grounds. The plaintiff was not a legal entity within the meaning of Article 11 of the EU Blocking Statute; that is, "incorporated within the Community". The branch office of an Iranian bank operated by it in Germany did not have independent legal personality and was therefore not entitled to claim. 

Protection of property under Section 823(1) BGB 

In contrast to the OLG, however, the BGH recognises Clearstream's fundamental tortious liability under Section 823(1) BGB. By freezing the plaintiff's securities in a blocked account, Clearstream violated the plaintiff's property rights – or, in the case of foreign securities, some other right within the meaning of Section 823(1) BGB – to its securities. The BGH justified this on the grounds that the freezing of the securities deprived the plaintiff of its intended use of the securities, in particular the collection of interest income. 

Justification by US sanctions – opening for proportionality review

The real controversy surrounding the judgment lies in the question of whether impending US secondary sanctions can justify a violation of property rights. The BGH does not rule out such justification in principle, but requires a proportionality review. According to the BGH, although EU entities are prohibited from complying with US sanctions under the EU Blocking Statute, a weighing of interests may show that compliance with the EU Blocking Statute is not reasonable in the specific case.

The following aspects in particular must be taken into account in the proportionality review:

• Economic risks for the acting EU entity in the event of non-compliance with US sanctions
• Impact on the objectives of the EU Blocking Statute, in particular the protection of the existing legal order, the interests of the European Union in general and the realisation of free movement of capital between Member States and third countries
• Possibility of an exemption application under Article 5(2) of the EU Blocking Statute

This assessment is based on the case law of the European Court of Justice (ECJ), which in the case of Telekom v Bank Melli Iran (judgment of 21 December 2021 – C-124/20) allowed for the possibility of a proportionality review when assessing the effectiveness of a termination based on US secondary sanctions. The BGH adopted the proportionality review permitted by the ECJ and establishes the basis for applying it in the context of assessing a possible justification for a tortious act under Section 823(1) BGB.

In the present case, however, the US secondary sanctions were not yet in force at the relevant time in January 2020. In its judgment, the BGH therefore concludes that a proportionality review could not have justified Clearstream's action. 

Unresolved issues

In the absence of determinations by the OLG in the appeal proceedings as to whether Clearstream had also acted culpably and whether the transfer and the associated freezing of the plaintiff's securities by Clearstream were the cause of the non-execution of the sale orders, the BGH was unable to make a final decision on the action. The OLG must now make up for this in the course of the new hearing. 

Irrespective of this, the BGH declared the EU Blocking Statute inapplicable in this specific case, which meant that there was no substantive discussion of the material requirements for a claim under Article 6 of the EU Blocking Statute. The issues of causality, fault and damage outlined in our first article in the context of this claim for damages under European law therefore remain unresolved.

Practical implications

• Strengthening of property protection: The recognition of a violation of property rights through the freezing of securities is of considerable significance. The BGH is thereby strengthening the protection of investor rights, even in the case of indirect custody via custody chains. 
• Increasing compliance requirements: In the future, EU companies must examine whether voluntary compliance with US secondary sanctions is proportionate in specific cases and should document this assessment comprehensively. In the course of this, it may be necessary to consider whether an exemption should be applied for under Article 5(2) of the EU Blocking Statute. 

Conclusion and outlook

With its judgment, the BGH strengthens the legal position of EU companies in dealing with the dilemma between US secondary sanctions and the EU Blocking Statute, which has long been considered irresolvable, by enabling them to invoke impending US sanctions under certain conditions. 

In practice, this means increasing complexity in the legal assessment of sanctions and their impact on civil liability. EU companies are required to familiarise themselves not only with the provisions of the EU Blocking Statute, but also with the requirements for a viable proportionality review. The judgment of the BGH is therefore unlikely to be the final word in this debate, but rather the start of a nuanced legal examination of the tension between European and US sanctions law.