Shanning International Ltd and Others v. Rasheed Bank and Others

The House of Lords held that Council Regulation (EEC) No. 3541/92 must be read purposively and in its whole context to give effect to paragraph 29 of United Nations Security Council Resolution 687(1991). Article 2 of the Regulation imposes a permanent prohibition on satisfying claims made by Iraqi persons or bodies, or claims arising in connection with payment of bonds, guarantees or indemnities, where the performance of the contract or transaction was affected, directly or indirectly, wholly or in part, by measures taken pursuant to UNSC Resolution 661(1990) and related resolutions. The prohibition therefore prevents payment under the Lloyds counter-guarantee to Rasheed and reimbursement by Lloyds under Shanning's counter-indemnity out of funds held on Shanning's behalf. The Court rejected arguments that the prohibition was temporary because the operative article did not use the word "permanently" or that it was limited to claims solely consequential to the embargo; the recitals, the definition of "claim" in article 1 and the regulatory scheme supported a permanent and wide prohibition.

Background and parties:

• Shanning (a supplier) contracted to supply medical equipment to an Iraqi purchaser and received an advance payment secured by an Iraqi bank guarantee issued by Rasheed, which in turn relied on a counter-guarantee issued by Lloyds. Lloyds was secured by an English-law counter-indemnity from Shanning and by funds deposited with Lloyds.
• After Iraq's invasion of Kuwait in August 1990, the UN, the European Community and the United Kingdom imposed an embargo and financial restrictions. Paragraph 29 of UNSC Resolution 687(1991) provided that no claim should lie for contracts affected by the embargo.

Procedural posture:

• Langley J (17 December 1999) made declarations that article 2(1)(e) of Regulation 3541/92 permanently prohibited Shanning satisfying claims under the counter-indemnity and that article 2(1)(a) permanently prohibited Lloyds satisfying claims under the counter-guarantee. The Court of Appeal (Tuckey LJ) upheld that construction ([2000] 3 CMLR 450). Rasheed appealed to the House of Lords.

Relief sought and issues:

• Shanning sought declarations as to the legal effect of Regulation (EEC) 3541/92 so that Lloyds could pay out funds held for Shanning without risk of later liability to Rasheed. The principal issues were (i) whether the prohibition in article 2 was permanent and (ii) whether its scope extended to any claim "under or in connection with" affected contracts, including claims not characterised as arising directly from the embargo.

Court's reasoning and decision:

• The House applied a purposive approach to construction of Community instruments, having regard to the recitals, the definition of "claim" in article 1, the Commission's explanatory memorandum and the travaux préparatoires. The regulatory scheme was designed to implement paragraph 29 of Resolution 687 and to avoid an "avalanche" of claims by Iraqi parties against Community operators when the embargo was lifted.
• The recitals, notably the phrase "to protect operators permanently", and the article definitions showed an intention to create a permanent prohibition on satisfying claims by Iraqi parties in respect of contracts the performance of which was affected by the embargo. The Council chose prohibition of satisfaction rather than extinguishment of underlying obligations to avoid restitutionary consequences and cross-border conflict-of-law problems.
• Accordingly the House dismissed Rasheed's appeal and upheld the declarations below: article 2 prohibits permanent satisfaction of the sorts of claims in issue and therefore prevents Lloyds from paying Rasheed or from reimbursing itself under Shanning's counter-indemnity out of Shanning's deposited funds.

Wider context:

• The court noted the policy justification and the need for uniform Community implementation to avoid competitive distortion and to give effective protection to non-Iraqi operators; it emphasised that a purposive construction of Community regulation was required and that recitals and preparatory materials may be used to resolve ambiguity.

The appeal was dismissed. The House held that Council Regulation (EEC) No. 3541/92, read purposively in light of its recitals and travaux préparatoires and the definition of "claim" in article 1, imposes a permanent prohibition in article 2 on satisfying any claim by or on behalf of persons or bodies in Iraq "under or in connection with" contracts or transactions the performance of which was affected by measures taken pursuant to UNSC Resolution 661(1990). That permanent prohibition therefore barred payment under the Lloyds counter-guarantee and reimbursement under Shanning's counter-indemnity.

First instance: Order of Langley J (17 December 1999) granting declarations that article 2 prohibited payment under the counter-indemnity and counter-guarantee. Court of Appeal (Tuckey LJ) upheld that construction: [2000] 3 CMLR 450. Appeal to the House of Lords: dismissed, [2001] UKHL 31; [2001] 1 WLR 1462.