Since 2015 the international community has endeavoured to ease the sanctions imposed on Iran in 2006 provided that the country scales down its nuclear programme. However, for the first time US President Donald Trump now wants to withhold America’s political endorsement of the agreement. From a legal standpoint, this gives rise to new uncertainties with respect to existing export agreements with Iran: How should a so-called “snap back”, i.e. the possible re-imposition of tighter sanctions, be handled in relations with Iranian business partners?
Background: The Iran embargo
Since 2006 the UN Security Council has passed various resolutions imposing economic sanctions on Iran, due to the international community suspecting the country of working on a nuclear bomb programme under the guise of the peaceful use of nuclear power to produce energy. The intention was to force Iran to suspend uranium enrichment and reprocessing activities.
The resolutions are implemented at European level via EU decisions within the framework of the Common Foreign and Security Policy (CFSP). Generally speaking, these decisions are in turn binding by virtue of EU Regulations that are directly applicable in the Member States. The key regulation restricting foreign trade with Iran is EU Regulation No. 267/2012 of 23 March 2012 (Iran Embargo Regulation), which has since been updated several times. Under this Regulation, a sliding scale of bans and approval requirements, linked to certain goods, services and persons, is in force.
Easing of sanctions, and the snap-back mechanism
Over the last two years, however, these sanctions have been eased. The E3+3 States (France, Great Britain, Germany, Russia, China and the US) reached a Nuclear Agreement with Iran that took legal effect on 18 October 2015. Under the Agreement, Iran was to begin dismantling its nuclear programme on this Adoption Day. After confirmation that the corresponding steps to dismantle the programme had been taken, rules easing the Iran Embargo Regulation’s sanctions took effect within the EU on 16 January 2016, Implementation Day. Bans relating to goods, for example, were converted to approval requirements or cancelled altogether; sanctions on specific persons were also reduced. It is intended to further reduce sanctions step by step by 2025. Until that date, however, trade with Iran will continue to be legally restricted.
But at the same time, the easing of UN sanctions set out above continues to be subject to a snap-back mechanism. The sanctions can be reimposed if Iran violates its obligations and cooperation with the international community fails to function as envisaged. A formal dispute resolution mechanism, regulated in detail, is then triggered, which may result in the sanctions being (again) tightened up. The fundamental advantages and disadvantages of such a mechanism are fairly evident. The mechanism provides maximum flexibility when it comes to effectively monitoring and penalizing violations of international agreements. But it also means considerable legal risks and uncertainties for exporters regarding whether existing contractual arrangements – established while sanctions were eased – will continue.
Trump administration’s current Iran policy
US President Trump’s policy increases these uncertainties. During the election campaign, he was already criticizing the easing of sanctions against Iran, culminating in late 2017 in his no longer confirming that Iran was complying with the provisions of the Nuclear Agreement. Under US law (the Iran Nuclear Agreement Review Act), every 90 days the President must confirm to Congress that Iran is complying with the terms of the Nuclear Agreement and that the Agreement continues to serve US national security interests. On 15 October 2017, Trump refused to provide this confirmation. As a consequence of this, Congress could have reimposed the eased US sanctions within 60 days, i.e. by 14 December 2017. Although these US sanctions primarily concern “US persons”, they may also affect non-US persons and undertakings (“secondary sanctions”). Congress could also have resolved upon further or even more extensive sanctions. Instead, it chose the third option and did not take action. On 12 January 2018 Trumpo again refused to provide confirmation. But at the same time he extended the easing of the national regulations on sanctions.
So legally, although Trump’s refusal does not directly trigger the snap-back mechanism, it could be the first step towards doing so. On the international level, a consultation procedure would first need to be carried out if one of the parties to the Agreement takes the view that the obligations agreed on have not been met. If the matter is not resolved by the end of the procedure, and there is still a view that the matter constitutes a major failure to comply with the obligations under the Nuclear Agreement, the state that is party to the Agreement may inform the UN Security Council. The UN Security Council will then vote on a resolution to retain the easing of sanctions. If this resolution is not then accepted within 30 days of the notification, the provisions of the UN Security Council’s relevant resolutions will then apply once again (snap back), unless otherwise resolved upon by the Council. So UN sanctions will automatically come into force again unless the Security Council decides to continue suspending them. This can be prevented by a veto from one of the Council’s permanent members (such as the US), however.
On the EU level, it would then be necessary to implement the tighter international requirements by amending the EU regulations again. Although EU regulations to date have provided that old agreements concluded while sanctions were eased should not be affected by any snap back, the details of this remain completely open. There is also a risk that, in substantive terms, EU sanctions and US secondary sanctions will drift apart. Things that are legal under EU law might then be subject to US secondary sanctions.
Recommendations for companies: Factor in uncertainties in contractual clauses
At least politically, it no longer seems wholly unlikely that sanctions against Iran will be tightened up. For this reason, companies should consider taking the risk of snap back into account in export contracts with Iranian business partners. One option here is to include force majeure clauses. Such clauses apply in unforeseeable, extraordinary situations beyond the control of the contractual parties. This could include the tightening of sanctions, not only through the snap-back mechanism but also in the scenario of the US unilaterally imposing secondary sanctions. Despite the current discussions on tightening up sanctions, it remains impossible to predict exactly what the consequences of US export control policy vis-à-vis Iran will be. The legal consequence of such a clause would be that the contract would be adjusted to the new developments. The contractual parties would have various options here. One might be to release the obligor from its duties to deliver and from secondary claims such as for damages. A further option would be termination or automatic dissolution of the contract. In the interest of legal certainty, however, the contract should not end automatically but only as a consequence of a legal declaration by one of the parties. German law (which should, where possible, always form the basis of contracts between German companies and Iranian business partners) offers considerable structuring leeway. In specific cases, it will be necessary to ensure compatibility with a boycott declaration banned under section 7 of Germany’s Foreign Trade and Payments Ordinance (Außenwirtschaftsverordnung).
Conclusion
The political development initiated by US President Trump means that a snap back – the tightening up of sanctions that had been eased – against Iran can no longer be ruled out. When drafting contracts with Iranian business partners, the resulting uncertainty should be taken into account by structuring contracts accordingly, as a form of “contractual compliance management.”
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