Law360, New York (December 12, 2014, 9:55 AM ET) -- On Nov. 25, 2014, the General Court of the European Union handed down an unprecedented judgment awarding damages in connection with sanctions against natural and legal persons (Case T‑384/11 Safa Nicu Sepahan v. Council). As more than 250 persons or entities (i.e., roughly 20 percent of affected persons or entities) have challenged their listing before the European courts, the decision may significantly impact the way the European Union  will adopt restrictive measures in the future. However, the decision leaves several legal questions related to damage claims unaddressed, as explained in detail below.

Sanctions Against Persons and Entities Under the EU´s Economic Sanctions Framework

The EU has in recent years made extensive use of autonomous economic sanctions (i.e., without relying on an UN resolution) as a foreign policy tool. Although the scope of adopted sanction regimes include different types of measures (e.g., arms embargos, export restrictions, etc.), almost all regimes target natural or/and legal persons (e.g., asset freezes and travel bans). The legal framework for listing persons and entities is complex. According to the European treaties, the council may adopt decisions providing a legal basis for economic sanctions such as asset freezes or travel bans. These measures are subsequently implemented through council implementing regulations. However, the treaties do not prescribe detailed requirements for listing natural and legal persons. Instead, the council has, over the past years, adopted extensive guidelines and recommendations, which set out the administrative conditions.

Basic Requirements for Listing Individuals

Council guidance provides that (1) there must be sufficient reason to list the natural or legal person and that (2) the listing process is compliant with fundamental European legal rights. These conditions codify the various rulings by the Court of Justice of the EU, which have addressed legal questions associated with the listing process and have led to the annulment of a number of listings in different sanction regimes. They cover, in particular, the right to due process (i.e., a fair hearing), the right to protection of personal data and, in particular, the right to an effective judicial remedy, as guaranteed by the treaties of the European Union.

Background to the Case and the Court´s Overall Findings

The case under consideration was brought by an Iranian company that was listed in 2011 under EU sanctions targeting Iran´s nuclear program. The restricted measures were imposed on the entity on the grounds that it is a “communications firm” that supplied equipment to a uranium enrichment facility which was not notified to the International Atomic Energy Agency by the Iranian government. The applicant requested removal from the targeted entities list, but instead was relisted in revised restrictive measures, adopted by the council in 2012. In the application before the General Court, the applicant sought (1) annulment of the adopted restrictive measures, in so far as they concern the applicant and (2) circa €7 million compensation for material and nonmaterial damages caused by the restrictive measures.

The General Court annulled the applicant’s listing. Its legal reasoning centered on the finding that the council had violated the applicant´s right to an effective judicial remedy in so far as it had not adduced sufficient evidence to substantiate the allegations raised against the entity. The court highlighted that the listing was based on unsubstantiated information provided by an EU member state. In addition, and more importantly, the General Court decided that the applicant’s claim for damages was partially justified under Article 340 of the Treaty of the Functioning of the European Union.

Preconditions for Damage Claims in Connection With Sanctions

Article 340 TFEU provides that the European Union is obliged to incur “noncontractual liability” for misconduct of its institutions under the following cumulative conditions:

  • The institutional conduct in question is unlawful;
  • The claimant has actually suffered damages; and
  • There is a causal link between the misconduct and the damages.

The court found that all of these conditions were met in the present case, even if the applicant´s damages were significantly lower than originally claimed.

“Unlawful Conduct” in Relation to Restrictive Measures Against Individuals

First and foremost, the General Court established that the applicant´s listing (and relisting) was “unlawful.” In that respect, it referred to established case law according to which “unlawful conduct” requires (1) that a “sufficiently serious” breach of law was committed (2) involving a law that is intended to protect rights of individuals. The General Court´s finding confirms that the council´s obligation to adduce sufficient evidence for its allegations is based on individual rights, derived from fundamental legal principles enshrined in EU law (such as the right to an effective judicial review, as noted above).

In addition, the General Court held that the council´s conduct constitutes a “sufficiently serious” breach of the law. According to existing jurisprudence concerning Article 340 TFEU, referred to by the court, this depends on whether the conduct is based on discretionary power — as in such situations, the “sufficiently serious” criterion is only met if the institution has “manifestly and gravely disregarded the limits of its discretion.” In nondiscretionary situations, any breach of law may constitute a “sufficiently serious” breach, and therefore may be considered unlawful if the application of the law concerned does not require a complex legal assessment.

The court found that (1) the council´s listing decision was not based on discretionary power, as the council must always observe EU fundamental legal rights when exercising its powers, and (2) that the breach of law was “sufficiently serious” as the council had obviously violated legal principles when (re-)imposing the sanctions on the applicant.

Given this reasoning, in principle every case in which the council fails to sufficiently substantiate its allegations against targeted individuals could expose the EU to damage claims. In this way, the judgment could have wide-ranging consequences. However, in previous cases where damage claims have been raised by affected persons or entities, the courts have repeatedly rejected those claims. For instance, in case T-341/07 Sison v. Council of Nov. 23, 2011, the General Court did not consider the breach of EU law sufficiently serious due to the complexity of the legal and factual assessments required when implementing sanctions and the lack of well-established legal precedents in this area of law.

Actual Damage and Causal Link

The court in the Safa Nicu Sepahan case further assessed whether the applicant suffered actual damage. In that respect, the court stressed that the applicant must have suffered “real and certain” losses, which arise as a “sufficiently direct consequence” from the sanctions imposed. Further, it clarified that the burden of proof falls on the applicant. However, the court did not provide detailed guidance as to when these conditions are met in terms of material and nonmaterial damages.

Nonmaterial Damages

Here, the General Court clarified that in general there may be a causal link between the disputed conduct (i.e., the listing) and nonmaterial damages, as restricted measures may result in reputational harm for affected entities. In other words, the damage caused by sanctions is not automatically limited to economic and commercial interests and, therefore, material loss. The court found that the applicant had actually suffered reputational harm and awarded a “just and fair” compensation of €50,000 (i.e., considerably less than the €2 million claimed). Unfortunately, the court neither explained the calculation method nor the specific conditions that must be fulfilled in order to bring claims. This leaves claimants in considerable legal uncertainty as to an appropriate amount to claim and how to interpret “sufficiently direct consequence” as regards nonmaterial damages.

Material Damages

In addition, the applicant claimed compensation for a variety of material damages suffered in relation to business relationships allegedly affected by the restricted measures. The General Court rejected these claims on the basis that the applicant had failed to sufficiently establish the facts and fully justify the extent of the damages. Similar to its assessment of the nonmaterial damages, the court did not provide further guidance as to when material damages are a “sufficiently direct consequence” of restricted measures.

Concluding Remarks

The Safa Nicu Sepahan judgment is remarkable for being the first in which the General Court has accepted a damage claim in connection with restrictive measures imposed by the EU. However, it does not open the floodgates, as the amount of damages awarded was relatively low, and the court raised several substantial legal hurdles that applicants would have to overcome in order to be awarded damages in future cases. Further, some of the court’s considerations remain rather opaque, thereby creating significant uncertainty for potential claimants. Finally, given the potential magnitude of the decision, it is likely that the council will appeal the judgment. This may enable the Court of Justice of the EU to clarify or alter the judgment.

The authors wish to thank Elena Mendoza Sanchez for her contribution to this article.