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

A prohibition under article 2 of Regulation (EEC) 3541/92 against satisfying Iraqi claims relating to contracts or transactions affected by the sanctions imposed following Iraq’s invasion of Kuwait is permanent. It continues after the underlying embargo ends, even though the regulation does not extinguish the underlying contractual rights.

The prohibition covers every claim under or connected with an affected contract, whatever the claim’s particular basis. Community legislation must be read purposively, as a coherent whole and in its economic and commercial context. Its recitals and, where appropriate, travaux préparatoires may assist in identifying that purpose.

Shanning agreed to supply medical equipment to an Iraqi contractor. The advance payment was supported by guarantees involving Rasheed Bank and Lloyds, together with Shanning’s counter-indemnity and cash deposit. The embargo imposed following Iraq’s invasion of Kuwait prevented completion of the supply contract and payment under the associated instruments.

After Shanning entered liquidation, its liquidators sought the deposited money from Lloyds. Lloyds required certainty that it could never become liable to Rasheed under the counter-guarantee. Langley J declared that article 2(1) of Regulation (EEC) 3541/92 permanently prohibited the relevant payments. The Court of Appeal upheld that construction: [2000] 3 CMLR 450.

The conjoined appeals concerned whether the prohibition was permanent and whether it covered all claims under or connected with the affected instruments, rather than only claims whose particular subject matter resulted from the embargo.

1. The appeals were dismissed unanimously. Lord Bingham delivered the leading speech. Lord Steyn and Lord Hope gave concurring reasons. Lord Hobhouse and Lord Scott agreed that the appeals should be dismissed for the reasons given in the other speeches.

2. Per Lord Bingham, the regulation had to be construed broadly and purposively, with due weight given to its recitals, travaux préparatoires, sanctions context and practical purpose. Resolution 687 and the Community materials showed a clear intention to prevent Iraqi entities from transferring embargo-related losses to non-Iraqi economic operators once the embargo ended. Removing the prohibition when the embargo ended would defeat that purpose.

3. Per Lord Steyn, Community instruments are interpreted by reference to their wording, context, structure, purpose and economic and social setting. The regulation’s purpose required a permanent prohibition. A temporary prohibition would leave operators indefinitely exposed to the very claims which the measure was designed to eliminate.

4. Per Lord Hope, the fifth recital’s reference to protecting operators “permanently” confirmed the meaning produced by a purposive reading of the regulation as a whole. The omission of that word from article 2 did not make the prohibition temporary. Nor could the earlier Commission proposal or travaux préparatoires contradict the plain meaning of the regulation ultimately adopted by the Council.

5. Per Lord Bingham, any claim under the counter-guarantee or counter-indemnity was under or connected with a transaction whose performance had been affected, directly or indirectly, wholly or partly, by the embargo. It therefore fell within article 2(1), whatever the particular nature of the claim. Article 3 did not apply.

6. Per Lord Bingham and Lord Steyn, permanent prohibition was an effective legislative technique even if the underlying contractual rights and obligations remained in existence. Extinguishing affected contracts could have enabled Iraqi parties to pursue restitutionary remedies. The regulation instead prohibited satisfaction of their claims.

7. The declarations made by Langley J were upheld. Rasheed was ordered to pay the costs of Shanning and Lloyds in the House.

1. House of Lords: The conjoined appeals were dismissed unanimously. The declarations that the relevant claims were permanently prohibited were upheld.

2. Court of Appeal: The court upheld Langley J’s construction of Regulation (EEC) 3541/92, holding that the article 2 prohibition continued after the embargo ended: [2000] 3 CMLR 450.

3. High Court: By an order dated 17 December 1999, Langley J declared that article 2(1)(a) and (e) permanently prohibited payment of the relevant claims under the counter-guarantee and counter-indemnity.