On 7 August 2018, an updated version of EU Regulation 2271/96/EC (known as the EU Blocking Statute) came into force. The update was a response to the US withdrawal from the 2015 Joint Comprehensive Plan of Action relating to Iran, and the re-imposition of certain US sanctions on Iran. This note explains how and why this has changed the forms of sanctions-related representations and undertakings (sanctions confirmations) many European lenders are requesting from their borrowers.

Background

Over the last five years, it has become increasingly common in the European loan market:

  • for lenders to demand sanctions confirmations on most deals, regardless of currency, facility type or location of the parties; and
  • (except in the case of German lenders, who are subject to their own domestic anti-blocking legislation) for those sanctions confirmations to extend to US sanctions, as well as EU and domestic sanctions which directly apply to European lenders and borrowers. For background on how sanctions confirmations have developed in the loan markets, and their typical scope, see our earlier article Sanctions confirmations in facility agreements - is there a market standard?.

However, all EU-incorporated companies are subject to the EU Blocking Statute. Since it was introduced in the 1990s, the EU Blocking Statute has prohibited those bound by it from complying with:

  • specified US sanctions, in particular specified US sanctions on Cuba and Iran (the Blocked US Sanctions); or
  • "any requirement or prohibition based on or resulting from" them. 

Conflict between sanctions confirmations and the EU Blocking Statute

Assume an EU-incorporated lender requires its borrowers, as a policy point, to:

  • represent that they are not the target of any US, EU or UN sanctions (the Relevant Sanctions); and
  • undertake not to use loan proceeds in any country, or for the benefit of any person, targeted by the Relevant Sanctions.

Arguably the primary purpose of that policy is to ensure that the lender itself does not breach the Relevant Sanctions – including the Blocked US Sanctions – by providing the loan. This could constitute a breach by the lender of the EU Blocking Statute. As a result, there is a risk for the lender both of liability for that breach, and that the relevant contractual protection is unenforceable. An EU-incorporated borrower could also breach the EU Blocking Statute by giving sanctions confirmations which include the Blocked US Sanctions within their scope.

A change in market approach

Until August 2018, these conflicts had limited impact on the form of sanctions confirmations in finance documents. Lenders rarely excluded the Blocked US Sanctions from the scope of the sanctions confirmations they requested, and borrowers rarely successfully negotiated their exclusion. Most lenders and borrowers considered the EU Blocking Statute a dormant piece of legislation (there has been almost no enforcement of it). Lenders in particular took the view that it was more important to comply with a sanctions regime that was enforced, even if it was one to which they might be only indirectly subject.

The update to the EU Blocking Statute on 7 August 2018 expanded the Blocked US Sanctions to include the re-imposed US sanctions on Iran. Since then, it has become much more common for EU lenders to carve out the Blocked US Sanctions from the scope of the sanctions confirmations they request.

This is not a solution to the unavoidable, and indeed intentional, conflict between the scope of US sanctions and the EU Blocking Statute, and some lenders are adopting different approaches. However, to the extent any sanctions confirmations in an English law agreement would cause either the party giving them or relying on them to breach the EU Blocking Statute, they are likely to be unenforceable anyway.

Drafting considerations

  • Any carve-out to a sanctions confirmation should only apply to the extent necessary to ensure no party breaches the EU Blocking Statute (or other anti-blocking legislation) by giving or relying on it. The most appropriate way to frame the carve-out will depend on the parties involved. Is the borrower, or other party giving the sanctions confirmation, incorporated in the EU? Are any present or likely future finance parties incorporated outside the EU? Are any present or likely future parties subject to any other anti-blocking legislation?
  • If a lender is applying an EU Blocking Statute carve-out to the sanctions-related undertakings in its documents, it should generally apply that carve-out to any sanctions-related representations and warranties in those documents too.
  • With Brexit seemingly imminent, UK lenders should check that any reference to the EU Blocking Statute is broad enough to include any legislation incorporating the EU Blocking Statute's terms into UK domestic law on the UK's withdrawal from the European Union.

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