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

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    19. The present case provides a good example. Shanning had performed a very substantial part of its contract. It had almost earned its contractual reward. It was prevented by the embargo from completing the contract and earning its reward. But for the embargo it seems fair to assume that it would have done so. It may be regarded as an innocent victim of the international community's response to Iraqi lawlessness. It would be extraordinary if, even when the embargo is lifted and normal commercial relations are restored, it were to be exposed even to the risk of claims (and it is "the risk of claims" to which the fourth recital refers) by the Iraqi side.

    20. Any claim which Rasheed or Lloyds might make under the counter-guarantee and counter-indemnity would plainly be "under or in connection with a contract or transaction the performance of which was affected, directly or indirectly, wholly or in part" by the embargo. As such it would fall squarely within the prohibition in article 2(1), whatever the nature of the claim. It is not suggested that article 3 would apply.

    21. It is plain from the Community travaux préparatoires that careful thought was given to the best legislative means of protecting non-Iraqi contractors and suppliers against the risk of claims. It would no doubt have been possible to provide that affected contracts should be treated as discharged, or that rights and obligations arising thereunder should be extinguished. But this would have enabled an Iraqi party which had made an advance payment or deposit to seek a restitutionary remedy, and it was instead thought preferable to prohibit the satisfaction of any claim by any Iraqi entity under or in connection with any affected contract. This may very well have been a wise approach. It was certainly, in my opinion, an effective one.

    22. The judge was right to make the declarations he did. If I entertained any real doubt about the construction of Regulation (EEC) 3541/92 I should see force in Rasheed's submission that a ruling should be sought from the European Court of Justice, but I do not. For these reasons, and also those given by my noble and learned friends Lord Steyn and Lord Hope of Craighead, I would dismiss these appeals. Rasheed must pay the costs of both Shanning and Lloyds in this House.


My Lords,

    23. In the dispute between Shanning and Rasheed the only matter before the House is the correct construction of article 2 of Council Regulation (EEC) 3541/92 of 7 December 1992 which prohibited the satisfying of Iraqi claims with regard to contracts and transactions the performance of which was affected by the trade embargo imposed on Iraq by United National Council Resolution 661 (1990) and related resolutions.

    24. There is an illuminating discussion in Cross, Statutory Interpretation, 3rd ed. pp 105-112 of the correct approach to the construction of instruments of the European community such as the regulation in question. The following general guide provided by Judge Kutscher, a former member of the European Court of Justice, is cited by Cross (at p 107):

    "You have to start with the wording (ordinary or special meaning). The Court can take into account the subjective intention of the legislature and the function of a rule at the time it was adopted. The provision has to be interpreted in its context and having regard to its schematic relationship with other provisions in such a way that it has a reasonable and effective meaning. The rule must be understood in connexion with the economic and social situation in which it is to take effect. Its purpose, either considered separately or within the system of rules of which it is a part, may be taken into consideration."

Cross points out that of the four methods of interpretation - literal, historical, schematic and teleological - the first is the least important and the last the most important. Cross makes two important comments on the doctrine of teleological or purposive construction. First, in agreement with Bennion, Statutory Interpretation, 2nd ed, s.311, Cross states that the British doctrine of purposive construction is more literalist than the European variety, and permits a strained construction only in comparatively rare cases. Judges need to take account of this difference. Secondly, Cross points out that a purposive construction may yield either an expansive or restrictive interpretation. It follows that Regulation No 354/92 ought to be interpreted in the light of the purpose of its provisions, read as a coherent whole, and viewed against the economic and commercial context in which the regulation was adopted.

    25. In flagrant breach of international law Iraq invaded Kuwait in August 1990. Kuwait was liberated in February 1991. In the meantime the international community, acting pursuant to United National resolutions, imposed a trade embargo on Iraq. These primary sanctions affected the implementation of a large number of contracts between Iraqi and EEC contracting parties. The legal consequences of the trade embargo are not in issue. The fact is, however, that the primary sanctions were always intended to be a means of persuading Iraq to comply with international norms. It was contemplated that in due course the primary sanctions would have to be lifted. That left the problem of the large number of contracts between EEC and Iraqi parties affected by the trade embargo.

    26. Unless drastic and affective action was taken there was the spectre attested to by the contemporary EEC memorandum of an avalanche of claims by Iraqi parties, including claims by the Iraqi state, Iraqi state agencies and Iraqi corporations, against EEC parties. The prospect of Iraqi parties through successful law suits retrospectively transferring to EEC nationals and entities losses resulting from the trade embargo, which Iraq had entirely brought upon itself, was self evidently unacceptable. The obvious means of eliminating this risk to EEC parties was by an EEC Council Regulation. The only real question was what legislative technique to adopt. There were two possibilities. The EEC could have chosen the route either of discharging the affected contracts or of prohibiting the satisfying of Iraqi claims on such contracts. Both methods would be directed at the same obvious end, namely the elimination of the risk of Iraqi contracting parties successfully pursuing claims against wholly innocent EEC parties. The first route involved conflict of law problems. It would not have been effective, or not necessarily effective, in respect of a system of law other than that of a member state of the EEC. The chosen method was therefore the second. And it is important to note that Council Regulation (EEC) 3541/92 was put in place more than two years after the initial imposition of the trade embargo. It was plainly directed at claims already affected by primary sanctions.

    27. Against this crystal clear contextual scene Rasheed advances two implausible arguments. The first is that the prohibition contained in the Regulation is not stated to be permanent in the operative part of the Regulation and is therefore not permanent in character. The recital quoted by Lord Bingham of Cornhill plainly impresses the stamp of permanence on the entire Regulation. Even without this recital the intrinsic nature of the Regulation, in order to be effective, would have to be permanent. Unless the prohibition is permanent it cannot achieve its obvious aim. As Tuckey LJ observed in the Court of Appeal [2000] CMLR 450, 481: "to leave open the possibility that claims could be made at some unspecified time in the future would make no sense and cause great uncertainty." The language of the regulation interpreted against the contextual scene rules out Rasheed's argument that the prohibition contained in the Regulation is not permanent in character. Counsel for Rasheed suggested that it is curious, if the prohibition is permanent in character, that the underlying rights and obligations under the affected contracts are still in force. There is, however, no issue before the House as to whether or not the underlying contractual rights and obligations remain in being. And I express no view on the matter. In any event, Tuckey LJ gave the answer to this point. He observed, at p 481:

    ". . . the chosen method of prohibition is effective and the quest for some juridical basis to explain how claims can be permanently prohibited under contracts which remain in force, is entirely academic. If it is juridically acceptable to prohibit such claims temporarily it must be legislatively possible to prohibit them permanently. That is what the Regulation has done in my judgment."

The position is therefore that the Regulation validly, effectively and permanently bars Iraqi claims under affected contracts. Rasheed's argument to the contrary is misconceived.

    28. The second argument of Rasheed is directed to the subject matter of the prohibition. Counsel for Rasheed argued that the Regulation says nothing about prohibiting permanently the satisfaction of claims which are not the consequence of the embargo. He emphasised that the words in the recital aim to prevent Iraqi parties "from obtaining compensation for the negative effects of the embargo." This statement is substantially correct but establishes nothing that assists Rasheed. The prohibition in the operative part of the Regulation extends to the satisfaction of any claim "under or in connection with a contract or transaction the performance of which was affected, directly or indirectly, wholly or in part, by [primary sanctions]" It is moreover an agreed fact that the trade embargo made it unlawful "for Lloyds to pay Rasheed under the Lloyds counter-guarantee, and unlawful for Shanning both to complete the supply contract itself and to make payment to Lloyds under the Shanning counter-indemnity." In these circumstances the contractual instruments which Lord Bingham has described were plainly affected by primary sanctions. The argument under this heading must be rejected.

    29. In my view the judge rightly made the declarations which have been challenged on this appeal. And the reasons of the Court of Appeal for dismissing the appeal were entirely convincing.

    30. For these reasons, as well as the fuller reasons given by Lord Bingham, I would dismiss Rasheed's appeal and make the order which Lord Bingham proposes.


My Lords,

    31. I have had the advantage of reading in draft the speech which has been prepared by my noble and learned friend Lord Bingham of Cornhill. I agree with it, and for the reasons which he gives I too would dismiss the appeal. But our attention was drawn to the importance of this case to the appellants, and to the wider significance throughout the European Union of the issue which they have raised. So I should like to add these brief observations.

    32. The critical question is whether the prohibition in article 2 of Council Regulation (EEC) 3541/92 against 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 is or is not permanent. If the prohibition is permanent, Lloyds will have a complete answer to any and all claims which may be made by Rasheed for payment under the Lloyds Counter-Guarantee. In that event there will be no obstacle to the recovery by Shanning of the sum which Lloyds holds on deposit on its behalf. Rasheed accepts that the prohibition is in force for the time being. But its contention is that it is not a permanent prohibition, as the underlying obligations were not discharged by the Regulation nor are they declared by it to be void. According to its argument, as there is nothing in the Regulation to the contrary, the permanence of the prohibition cannot be assumed so it is possible that these claims may become enforceable again when the embargo is lifted.

    33. The answer to the question whether or not the prohibition is permanent depends on the meaning of the words used in the Regulation. It is a question of construction. In terms of article 189 of the EC Treaty (now article 249 EC) a regulation is binding in its entirety and directly applicable in all member states. The effect of Regulation (EEC) 3541/92 is to be determined according to the rules of construction which are firmly established in Community law. As Lord Templeman said in Lister v Forth Dry Dock Co Ltd [1990] 1 AC 546, 558E, the courts of the United Kingdom are under a duty to follow the practice of the European Court of Justice when construing Community instruments. A purposive approach is to be adopted, and the travaux préparatoires may be referred to for guidance as to what was intended. Community legislation is to be interpreted, so far as possible, in such a way that it is in conformity with general principles of Community Law: Dowling v Ireland, the Attorney General and Minister for Agriculture and Food (Case C-85/90) [1992] ECR I-5305, 5319, para 10 per AG Jacobs.

    34. The starting point is to examine the words used in the recitals and articles of the regulation itself. Mr Eder for Rasheed devoted much of his argument to an examination of the wording of the Commission's proposal at the stage when the regulation was still in draft and it was being considered by the European Parliament. I agree that the proposal is available as an aid to construction. Article 190 of the EC Treaty (now article 253 EC) provides that regulations, directives and decisions adopted by the Council shall state the reasons on which they are based and shall refer to any proposals or opinions which were required to be obtained pursuant to the Treaty. But I think that it is necessary to bear in mind that the instrument which is binding in its entirety in terms of the Treaty is the regulation which was adopted by the Council of the European Communities at the end of the legislative process which the Treaty has identified. Moreover, in Garcia v Mutuelle de Prévoyance Sociale D'Aquitaine (Case C-238/94) [1996] ECR I-1673, the court held that in view of the clear and precise terms of the article it was not necessary to look even at the preamble to the directive in order to determine the purpose or the scope of the provision.

    35. The Treaty base for Regulation 3541/92 is to be found in article 235 of the EC Treaty (now article 308 EC), as the eighth and ninth recitals of the regulation indicate. This article provides:

    "If action by the Community should prove necessary to attain, in the course of the operation of the common market, one of the objectives of the Community and this Treaty has not provided the necessary powers, the Council shall, acting unanimously on a proposal from the Commission and after consulting the European Parliament, take the appropriate measures."

The Regulation which the Council made on 7 December 1992 was based on a proposal presented by the Commission on 12 July 1991 on which an opinion was delivered by the European Parliament on 19 November 1992. But, as I have said, I think that the proper starting point is to examine the wording of the regulation which was adopted by the Council at the end of this process.

    36. The fourth and fifth recitals of the Regulation are in these terms:

    "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."

The phrase "to protect operators permanently" in the fifth recital is an important indication as to the intended effect of the Regulation. Mr Eder did not suggest that these words were in themselves ambiguous. According to their plain meaning, the intention was to put in place a protection against the risk of claims by the Iraqi side which would indeed be permanent. Mr Eder submitted that the words "such claims" in the fifth recital indicated that the protection was to be limited to claims of the kind described in the fourth recital and that a narrow interpretation ought to be placed on those words. For a proper understanding of the extent of the protection however it is necessary to turn to the articles.

    37. The Regulation contains six articles, of which the first and the last three are ancillary to its leading provisions. The leading provisions are set out in articles 2 and 3. Article 2 describes the prohibitions. Article 3 contains a list of claims to which the article 2 prohibitions do not apply. But it is subject to an important proviso which excludes from this exception any amount, by way of interest, charge or otherwise, to compensate for the fact that performance was, as a result of the embargo, not made in accordance with the terms of the relevant contract or transaction. The wording and structure of these two articles, when read together with the definition of the word "claim" in article 1 of the regulation, leave no room for doubt that the prohibition in article 2 extends to any and all claims for performance of any obligation arising under or in connection with a contract or transaction and for extension of payment of a bond, financial guarantee or indemnity of whatever form. The articles are carefully structured to leave open the possibility of the making of claims by the operators against the Iraqi side, as it is only the satisfying of claims by the Iraqi side that is prohibited.

    38. As for the permanence of the prohibition, it is plain that anything less than a permanent prohibition would not relieve economic operators in the Community from the damaging effects of the embargo. The proviso to article 3 shows that the Council was well aware of the risk of claims for failures in performance due to the embargo to which economic operators had been exposed by it, to which in any event attention had been drawn by paragraph 29 of the so-called "cease-fire" resolution by the United Nations Security Council (Resolution 687(1991)) which foresaw the lifting of the embargo after the fulfilment of the necessary conditions by Iraq. Unless they were protected against such claims the operators would have to make provision against them for a prolonged and indefinite period. This would be bound to impose a substantial financial burden upon them, to the detriment of their businesses. Nothing less than a permanent prohibition would give them the protection which they needed once the embargo was brought to an end and the sanctions against Iraq were lifted. The significance of the use of the word "permanently" in the fifth recital is that it serves to confirm what a purposive reading of the articles in their whole context would in any event indicate.

    39. I see no need in these circumstances to refer back to the travaux préparatoires for further guidance. Mr Eder's argument that we should do so was largely based upon the absence from the recital in the proposal by the Commission which corresponds to the fifth recital in the regulation of the word "permanently", the fact that the word does not appear in article 2 and the lack of any mention in the explanatory memorandum which accompanied it and in the draft resolution embodying the opinion on the proposal of the European Parliament that the prohibition was intended to be permanent. But the legislative history of the regulation simply shows that, as not infrequently happens, the wording of the regulation as adopted by the Council differs in various respects from that of the Commission's proposal. It is settled law that the requirement to consult the European Parliament in the legislative procedure in cases provided for in the Treaty means that it must be freshly consulted whenever the text finally adopted, taken as a whole, differs in essence from the text on which the Parliament has already been consulted: European Parliament v Council of the European Union (Case C-392/95) [1997] ECR I-3213, p 3246, para 15. The information which is before your Lordships indicates that the Parliament was not consulted about the changes in the wording of the preamble.

    40. The inference which I would draw from the inclusion of the word "permanently" in the fifth recital is that it was introduced in order to explain more fully the purpose of the Regulation, but to not change the essence of what had been proposed. It was intended to remove a possible but unintended ambiguity in the words used by the proposal. There was no need to include the word in article 2, as the intention of the Regulation as a whole was made plain by the terms of the recital. I do not think that the plain meaning of the Regulation can be contradicted by reference to the absence of this word from the proposal and the travaux préparatoires. Once this conclusion is reached the basis for Mr Eder's argument on this point disappears.


My Lords,

    41. I agree that the appeal should be dismissed with costs as proposed by my noble and learned friend Lord Bingham of Cornhill and for the reasons which he has given. I would also like to express my agreement with the speech of my noble and learned friend Lord Hope of Craighead and, in particular, what he has said concerning the approach to be adopted in construing a Council Regulation.


My Lords,

    42. I have had the advantage of reading in draft the opinions of my noble and learned friends, Lord Bingham of Cornhill, Lord Steyn and Lord Hope of Craighead. For the reasons they give, I too would dismiss this appeal.


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