House of Lords
|Session 2001- 02
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|Judgments - Shanning International Ltd (In Liquidation) and Others v. Rasheed Bank and Others
HOUSE OF LORDS
Lord Bingham of Cornhill Lord Steyn Lord Hope of Craighead Lord Hobhouse of Wood-borough Lord Scott of Foscote
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
SHANNING INTERNATIONAL LTD (IN LIQUIDATION)
SHANNING INTERNATIONAL LTD (IN LIQUIDATION)
AND OTHERSCONJOINED APPEALS
ON 28 JUNE 2001
 UKHL 31
LORD BINGHAM OF CORNHILL
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:
The judge based these declarations on a construction of Council Regulation (EEC) 3541/92 which was later upheld by the Court of Appeal:  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:
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:
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
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:
Under the heading "Specific considerations" the memorandum continued:
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:
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:
12. Article 2, which lies at the heart of these appeals, provides (so far as relevant):
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
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:  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.