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Judgments - Shanning International Ltd (In Liquidation) and Others v. Rasheed Bank and Others


Lord Bingham of Cornhill Lord Steyn Lord Hope of Craighead Lord Hobhouse of Wood-borough Lord Scott of Foscote



















ON 28 JUNE 2001

[2001] UKHL 31


My Lords,

    1. There are effectively three parties to these appeals, to whom it is convenient to refer as Shanning, Lloyds and Rasheed. By an order of 17 December 1999 Langley J made two declarations:

    "(1)  . . . that by virtue of article 2(1)(e) of Regulation (EEC) No. 3541/92 [Shanning] is permanently prohibited from satisfying any and all claims made or to be made by [Lloyds] for payment under a counter-indemnity in writing dated 5 January 1990 given by [Shanning] to [Lloyds].

    "(2)  . . . that by virtue of article 2(1)(a) of Regulation (EEC) No. 3541/92 [Lloyds] is permanently prohibited from satisfying any and all claims made or to be made by [Rasheed] for payment under Guarantee No. G89/60047T dated on or around 22 December 1989 issued by [Lloyds] to [Rasheed]."

The judge based these declarations on a construction of Council Regulation (EEC) 3541/92 which was later upheld by the Court of Appeal: [2000] 3 CMLR 450. In these appeals to the House Rasheed challenges the correctness of that construction.

    2. The relevant facts may be briefly summarised. By a contract in writing dated 16 September 1989 Shanning agreed with Al-Mansour Contracting Co of Baghdad to supply 10 operating theatres and medical equipment related to those theatres according to technical specifications and bills of quantities identified in the contract. Under the contract Al-Mansour agreed to make an advance payment to Shanning of 20% of the total price, a sum of £907,141.32. The payment was to be made against a bank demand guarantee, confirmed by an Iraqi bank, which was to be released after presentation of the shipping documents for the last shipment of equipment under the contract. The contract was governed by the law of Iraq. Rasheed is an Iraqi bank, and issued a guarantee dated 27 January 1990 to Al-Mansour, in the amount of the advance payment. Rasheed issued its guarantee in reliance on a counter-guarantee (No G89/60047T) dated 22 December 1989 issued by Lloyds in favour of Rasheed. Both these guarantees are governed by Iraqi law. Lloyds in its turn issued its counter-guarantee at the request of Shanning, secured by a counter-indemnity in its favour dated 5 January 1990 issued by Shanning and the deposit by Shanning with Lloyds of an amount equal to the advance payment, £907,141.32. The counter-indemnity issued by Shanning is governed by English law and is expressed to indemnify Lloyds "against all claims demands liabilities costs charges and expenses" which Lloyds might incur "arising out of or in connection with" the counter-guarantee issued by Lloyds in favour of Rasheed. On 2 August 1990 Shanning had almost completed the supply contract. Of the total contract value (in excess of £4.5 m), one shipment only (valued at £270,000) remained to be made.

    3. On 2 August 1990 Iraq invaded Kuwait. The international response of the Security Council of the United Nations, the European Community and the United Kingdom was very prompt. On the same date the Security Council adopted Resolution 660 (1990) condemning the invasion and demanding an immediate withdrawal by Iraq. The United Kingdom, on 2 and 4 August, made statutory instruments restricting the making of payments or the parting with gold or securities on the orders of any party in Kuwait or Iraq (the Control of Gold, Securities, Payments and Credits (Kuwait) Directions 1990 (SI 1990/1591), the Control of Gold, Securities, Payments and Credits (Republic of Iraq) Directions 1990 (SI 1990/1616)). By Resolution 661(1990) adopted on 6 August the Security Council decided that all states should (subject to some limited exceptions) prevent the supply of goods or the remission of funds to Iraq or Kuwait. Over the following months the Security Council adopted 11 further resolutions directed to this subject.

    4. On 8 August 1990, having regard to Resolutions 660 and 661, and in order that trade between member states of the Community and Iraq and Kuwait should be prevented, the Council of the European Communities adopted Regulation (EEC) 2340/90, which provided in article 2:

    "As from the date referred to in article 1 [7 August 1990], the following shall be prohibited in the territory of the Community or by means of aircraft and vessels flying the flag of a member state, and when carried out by any Council national:

    . . .

    2. the sale or supply of any commodity or product, wherever it originates or comes from:

      - to any natural or legal person in Iraq or Kuwait,

      - to any other natural or legal person for the purposes of any commercial activity carried out in or from the territory of Iraq or Kuwait;

    3.  any activity the object or effect of which is to promote such sales or supplies."

    5. On the same date, 8 August 1990, and also with reference to Resolution 661, the United Kingdom made the Iraq and Kuwait (United Nations Sanctions) (Amendment) Order 1990 (SI 1990/1651) which provided in article 3:

    "Except under the authority of a licence granted by the Secretary of State under this Order or under the Export of Goods (Control) (Iraq and Kuwait Sanctions) Order 1990 no person shall -

      (a) supply or deliver or agree to supply or deliver to or to the order of any person in either Iraq or Kuwait any goods that are not in either country;

      (b) supply or deliver or agree to supply or deliver any such goods to any person, knowing or having reasonable cause to believe that they will be supplied or delivered to or to the order of a person in either Iraq or Kuwait or that they will be used for the purposes of any business carried on in or operated from Iraq or Kuwait; or

      (c) do any act calculated to promote the supply or delivery of any goods to any person in Iraq or Kuwait or for the purpose of any business carried on in Iraq or Kuwait in contravention of the foregoing provisions of this paragraph."

    6. By the Iraq and Kuwait (United Nations Sanctions) (Amendment) Order 1990 (SI 1990/1768), made on 29 August 1990, article 3 of this Statutory Instrument was slightly amended and a new article was inserted which had the effect of prohibiting payment to any person in Iraq or Kuwait under any agreement by which a party ("the obligor") agreed that, if called upon or if a third party failed to fulfil a contractual obligation owed to another, the obligor would make payment to or to the order of the other party to the agreement. On 29 October 1990 the Council, by Regulation (EEC) 3155/90, extended the effect of the embargo imposed by the Community.

    7. The liberation of Kuwait from Iraqi occupation led to the adoption by the Security Council on 3 April 1991 of Resolution 687(1991), a wide-ranging instrument directed to the new international situation. The resolution set out a detailed list of conditions to be met by Iraq. It was decided (in paragraph 24) that in accordance with Resolution 661 and until a further decision had been taken the existing embargo on trade to Iraq should continue. The Secretary-General was requested by paragraph 26 to develop guidelines to facilitate full international implementation of the embargo, and by paragraph 27 international organisations and states were called upon to take such steps as might be necessary to ensure full compliance with the guidelines. Then, in paragraph 29, the Security Council decided that

    "all states, including Iraq, shall take the necessary measures to ensure that no claim shall lie at the instance of the Government of Iraq, or of any person or body in Iraq, or of any person claiming through or for the benefit of any such person or body, in connection with any contract or other transaction where its performance was affected by reason of the measures taken by the Security Council in resolution 661(1990) and related resolutions;".

The Community adopted a regulation on 7 May 1991 to give immediate effect to Resolution 687, but then embarked on consideration of a further measure.

    8. On 12 July 1991 the Commission promulgated the draft of a proposed Council Regulation which in due course was (subject to some changes) adopted as Regulation (EEC) 3541/92, the regulation which the House is asked to construe in these appeals. In accordance with the admirable practice of the Commission this proposed regulation was accompanied by an explanatory memorandum, setting out in broad and untechnical terms the object of the proposed instrument. In this memorandum reference was made to Resolution 687, which was said to foresee the lifting of the embargo after the fulfilment of the necessary conditions by Iraq. Paragraph 29 of Resolution 687 was quoted in full and the memorandum then continued:

    "2.  Paragraph 29 thus provides for protection of economic operators against unjustified claims by Iraqi individuals, companies or organisations. In doing so, it prevents Iraq from obtaining compensation retroactively for the negative effects of the embargo.

    Regarding exposure to claims from Iraq, the banking sector as well as European international contractors, have pointed to the fact that a lifting of the embargo could give rise to an avalanche of requests for payment of performance bonds, guarantees, stand-by credits or similar instruments under existing contracts and transactions for reasons of non-performance. The estimated amount of money involved exceeds 500 million ECU. Already now exposure of such a dimension seriously reduces the financial room for manoeuvre of contractors. If the corresponding claims would effectively have to be honoured, the consequences on companies would be dramatic.

    As regards the position of Iraq, obtaining payment would mean an important financial advantage which would clearly be in contradiction with the very objective pursued by the embargo.

    3.  Under these conditions, paragraph 29 gives a clear signal that both consequences of admitting claims (ie losses for non-Iraqi operators and compensation to Iraq) are unacceptable to the international community. It is important that in implementing the UN decision, the effect of this signal is not weakened. This is all the more true, as there is, for the time being, no indication that the embargo could effectively be lifted, given the apparent reluctance of Iraq to comply fully with all conditions set out in Resolution 687.

    It also seems clear that the practical result intended by paragraph 29 can only be achieved if the principles contained therein are implemented in a uniform way. In a great number of cases, contracts or transactions concerned involve companies and banks in different countries. Different national approaches as regards the modalities of protection granted are therefore bound to weaken the efficiency of such protection altogether. Furthermore, such differences would give rise to distortion of competition between operators in different countries, thus affecting common commercial policy. This calls for implementation, at Community level, by a Community instrument. It also requires close consultation between the Community and third countries, in particular OECD members."

Under the heading "Specific considerations" the memorandum continued:

    "The measures proposed herewith in order to implement paragraph 29 of UNSC Resolution 687 (1991) are based on the following specific considerations:

    (1) Non-enforceability of claims or prohibition to pay

    Paragraph 29 can be interpreted either as making claims by Iraq non-enforceable, or as establishing a prohibition to honour such claims. The practical consequences of each interpretation are different. A system of NON-ENFORCEABILITY would protect banks and exporters against claims mentioned in paragraph 29 of UNSC Resolution 687, by making it impossible for any Iraqi party to obtain a judgment in its favour unless it could prove that the contract or transaction was not affected by the embargo.

    However, such a system would allow claims being settled by agreement between the parties concerned. This would considerably weaken the protection granted, as it would expose non-Iraqi operators, in particular contractors, to pressure which might be exerted by the Iraqi side. It would also create uncertainty as to whether the contracts concerned would still have to be treated as valid obligations. Finally, this system would not permit the achievement of the other objective of paragraph 29, ie the prevention of retroactive compensation in favour of Iraq.

    Therefore, the Commission proposes a system of PROHIBITION TO HONOUR CLAIMS, which would allow to meet both the objective of preventing such retroactive compensation as well as the objective of an effective protection of non-Iraqi parties, and would establish clarity as regards the treatment of the contractual obligations concerned.

    Furthermore, member states should take all steps required in order to ensure effectiveness of the prohibition, including the establishment of sanctions in case of non-respect.

    (2) Burden of proof

    The protection granted to non-Iraqi parties would be imperfect if contractors or banks, when defending themselves against Iraqi claims, would have to prove that the conditions of paragraph 29 are met. Therefore, the burden of proof should be reversed. Consequently, contracts or transactions with regard to which claims are made are regarded as having been affected by the embargo, unless the claimant provides proof to the contrary.

    (3) Possible exceptions

    Although the Commission recognizes that an unrestricted application might in some cases lead to hardship, it appears impossible to define in a general way, situations in which the performance of a contract has not been affected by the embargo. The Commission is therefore of the opinion that exceptions from the general rule should be limited to the case where payment has been ordered by a court or a comparable authority provided the legislation applied provides for an effective implementation of the principles contained in paragraph 29 of UNSC Resolution 687."

    9. The Commission's proposed regulation was first considered by the Committee on Foreign Affairs and Security which on 6 November 1992 approved it. On 16 November 1992 the Committee on External Economic Relations also approved it. In a letter expressing its opinion, the Committee, having referred to paragraph 29 of Resolution 687, expressly adopted passages in the Commission's explanatory memorandum. On 19 November 1992 the European Parliament approved the Commission's proposal, although calling for further consultation if the Council intended to make substantial modifications to the Commission's proposal.

    10. On 7 December 1992 the Council adopted Regulation (EEC) 3541/92 "prohibiting the satisfying of Iraqi claims with regard to contracts and transactions the performance of which was affected by United Nations Security Council Resolution 661(1990) and related resolutions". In the European manner the text of the regulation was preceded by a series of important recitals explaining its genesis and rationale:

    "Whereas, under Regulations (EEC) No 2340/90 and (EEC) No 3155/90, the Community has taken measures to prevent trade between the Community and Iraq;

    Whereas the United Nations Security Council has adopted Resolution 687 (1991) of 3 April 1991 which, in its paragraph 29, deals with claims by Iraq in relation to contracts and transactions the performance of which was affected by measures taken by the Security Council pursuant to Resolution 661 (1990) and related resolutions;

    Whereas the Community and its member states meeting in political cooperation have agreed that Iraq must comply in full with the provisions of paragraph 29 of United Nations Security Council Resolution 687 (1991) and consider that, in deciding whether to reduce or lift measures taken against Iraq, pursuant to paragraph 21 of Security Council Resolution 687, particular account must be taken of any failure by Iraq to comply with paragraph 29 of the same Resolution;

    Whereas, as a consequence of the embargo against Iraq, economic operators in the Community and third countries are exposed to the risk of claims by the Iraqi side;

    Whereas it is necessary to protect operators permanently against such claims and to prevent Iraq from obtaining compensation for the negative effects of the embargo;

    Whereas the Community and its member states meeting in political cooperation have agreed to resort to a Community instrument in order to ensure uniform implementation, throughout the Community, of paragraph 29 of United Nations Security Council Resolution 687 (1991);

    Whereas such uniform implementation is essential for achieving the aims of the Treaty establishing the European Economic Community and in particular for avoiding distortion of competition;

    Whereas the Treaty does not provide, for the adoption of this Regulation, powers other than those of article 235,

    Having regard to the Treaty establishing the European Economic Community, and in particular article 235 thereof,

    Having regard to the proposal from the Commission,

    Having regard to the opinion of the European Parliament".

In the Commission's proposed regulation there was no equivalent of the third of these recitals, and the recitals common to both versions were in a different order. There were some differences of language: the word "permanently" in the fifth of the recitals quoted did not appear in the proposed draft.

    11. Article 1 of the regulation contains a series of comprehensive definitions:

    "For the purposes of this Regulation:

    1. 'contract or transaction' means any transaction of whatever form and whatever the applicable law, whether comprising one or more contracts or similar obligations made between the same or different parties; for this purpose 'contract' includes a bond, financial guarantee and indemnity or credit whether legally independent or not and any related provision arising under or in connection with the transaction;

    2. 'claim' means any claim, whether asserted by legal proceedings or not, made before or after the date of entry into force of this Regulation, under or in connection with a contract or transaction, and in particular includes:

      (a) a claim for performance of any obligation arising under or in connection with a contract or transaction;


      a claim for extension or payment of a bond, financial guarantee or indemnity of whatever form; . . .

    3. 'measures decided on pursuant to United Nations Security Council Resolution 661 (1990) and related resolutions' means measures of the United Nations Security Council or measures introduced by the European Communities or any state, country or international organisation in conformity with, as required by, or in connection with the implementation of relevant decisions of the United Nations Security Council, or any action, including any military action, authorised by the United Nations Security Council, in respect of the invasion or occupation of Kuwait by Iraq;

    4. 'person or body in Iraq' means: . . .

      (b) any person in, or resident in, Iraq;

      (c) any body having its registered office or headquarters in Iraq;


      any body controlled, directly or indirectly, by one or more of the abovementioned persons or bodies.

    Without prejudice to article 2, performance of a contract or transaction shall also be regarded as having been affected by the measures decided on pursuant to United Nations Security Council Resolution 661 (1990) and related resolutions where the existence or content of the claim results directly or indirectly from those measures."

    12. Article 2, which lies at the heart of these appeals, provides (so far as relevant):

    "1.  It shall be prohibited to satisfy or to take any step to satisfy a claim made by:

      (a) a person or body in Iraq or acting through a person or body in Iraq; . . .

      (e) any person or body making a claim arising from or in connection with the payment of a bond or financial guarantee or indemnity to one or more of the abovementioned persons or bodies,

    under or in connection with a contract or transaction the performance of which was affected, directly or indirectly, wholly or in part, by the measures decided on pursuant to United Nations Security Council Resolution 661 (1990) and related resolutions.

    2.  This prohibition shall apply within the Community and to any national of a member state and any body which is incorporated or constituted under the law of a member state."

    It is common ground that article 2 and, for that matter, the United Kingdom statutory instruments already referred to, which remain in force, are effective to prevent Lloyds paying Rasheed and also to prevent Lloyds reimbursing itself out of funds which it holds on behalf of Shanning.

    13. Article 3 provides that, without prejudice to the embargo on trade with Iraq introduced pursuant to United Nations Security Council Resolution 661, article 2 should not apply to certain transactions, for example to claims which had been accepted before the adoption of measures in response to Resolution 661, claims for payment under insurance contracts in respect of events occurring before the adoption of such measures and

      "(f) . . . . claims for sums which the persons or bodies referred to in article 2 prove to a court in a member state are due under any loan made prior to the adoption of the measures decided on pursuant to United Nations Security Council Resolution 661 (1990) and related resolutions and that those measures have had no effect on the existence or content of the claim,

    provided that the claim includes no amount, by way of interest, charge or otherwise, to compensate for the fact that performance was, as a result of those measures, not made in accordance with the terms of the relevant contract or transaction."

    14. This issue of construction now arises because Shanning is in liquidation and the liquidators seek payment by Lloyds of the sum which Lloyds holds on deposit on behalf of Shanning. Lloyds for its part adopts a Janus-like position: it is content to pay to Shanning the sum which it holds on behalf of Shanning if on a proper construction of Regulation (EEC) 3541/92 it can be assured that it cannot hereafter become liable to Rasheed; but if on such a construction any risk exists that it may hereafter be liable to Rasheed, it resists making payment to Shanning. Thus, quite understandably, it aligns itself with whichever of Shanning or Rasheed is to succeed in these appeals.

    15. Before the judge the construction issue was whether Regulation (EEC) 3541/92 imposed a permanent prohibition on Lloyds making any payment to Rasheed under its counter-guarantee against any claim Rasheed might at any time make in connection with this contract and a permanent prohibition on Lloyds reimbursing itself under Shanning's counter-indemnity out of funds held by Lloyds on behalf of Shanning. He rightly held that in construing the regulation a broad purposive approach was to be followed, giving due weight to the travaux préparatoires and recitals to which reference has already been made. Since Shanning sought a declaration on the legal effect of the regulation as it stood, he did not think it right to speculate on the possibility of future revocation or repeal, although he gave reasons for concluding that such possibility could be discounted. Basing himself on the travaux préparatoires, the recitals, the political considerations underlying the sanctions policy and common sense, he concluded that Shanning's submission was correct and that the effect of article 2 was to prohibit satisfaction by Shanning and Lloyds respectively of claims which might at any time be made against them by Lloyds or Rasheed respectively.

    16. Giving the leading judgment in the Court of Appeal, Tuckey LJ was of the same opinion: [2000] 3 CMLR 450. The prohibition in article 2 was to continue in effect even when the embargo was lifted. He did not attach significance to the fact relied on by Rasheed that article 2 did not provide for the discharge of affected contracts. There was no juridical objection to a permanent prohibition on satisfying claims, and that was the legislative technique which had been adopted.

    17. Before the House Rasheed challenged the construction put on the regulation by the courts below on two main grounds. First, it was argued, there is nothing in article 2 of the regulation to suggest that the prohibition it imposed was intended to be permanent. Such terms as "permanently" or "for all time" were not to be found. Had the prohibition been intended to be permanent, the article would have provided for the obligations of non-Iraqi parties to be extinguished or discharged, but instead performance was subjected only to a prohibition, which could be temporary. Significance should not be attached to the term "permanently" in the fifth recital, which had not appeared in the Commission's original draft and could not therefore have been regarded as a substantial addition. But if, secondly, the expression "permanently" in the fifth recital was of significance, its effect was only to protect operators against "such claims", which meant claims referred to in the fourth recital, namely, claims which were a consequence of the embargo. That would not cover claims relating, for example, to the quality of goods supplied. So long as there was a possibility of such claims being validly made, Lloyds and Shanning could not be released from their counter-guarantee and counter-indemnity, and the judge was accordingly wrong to make the declarations he did.

    18. In my opinion these submissions are at variance with the obvious intent and effect of the regulation. The embargo on trade and financial dealings with Iraq was imposed in the immediate aftermath of the Iraqi invasion of Kuwait in the hope that it would coerce Iraq to withdraw its forces within its own borders. This embargo had the inevitable and intended effect of halting the performance of current contracts. This prevented non-Iraqi contractors and suppliers from fulfilling their contractual obligations and so put them in breach of contract, subject to any defence of frustration or force majeure which might (or might not) be available to them under any relevant law or in any relevant court. The hope that imposition of an embargo would lead to peaceful withdrawal was not realised. Armed intervention was necessary to liberate Kuwait. But it was decided that the embargo on trade and financial dealings with Iraq should continue until Iraq met a series of clearly specified conditions, which it showed little willingness to do. The potential exposure of non-Iraqi contractors and suppliers therefore continued. Resolution 687 plainly looked forward to the end of the embargo, but it also expressed a very clear intention that no claim should lie at the instance of any Iraqi entity in connection with any transaction where performance had been affected by the embargo. The Community travaux préparatoires and Regulation (EEC) 3541/92 expressed the same clear intention. Were the ending of the embargo to be accompanied by removal of the prohibition on satisfaction of claims against non-Iraqi contractors and suppliers, it is obvious that those who had been involuntarily prevented from performing their contracts would or might become liable to their Iraqi opposite numbers, with the result that the ultimate losers as a result of Iraq's gross violation of international law would be the non-Iraqi contractors and suppliers and not the Iraqi entities (including the government) which the embargo was intended to injure.