International

Non-Iraqi party unable to complete contract for supply of goods to Iraq owing to UN sanctions against Iraq - European Commission adopting regulation prohibiting claims arising from contracts affected by UN sanctions - regulation intended to have permanent effectShanning International Ltd (in liquidation) v Lloyds TSB Bank Plc; Lloyds TSB Bank Plc v Rasheed Bank: HL (Lord Bingham of Cornhill, Lord Steyn, Lord Hope of Craighead, Lord Hobhouse of Woodborough and Lord Scott of Foscote): 28 June 2001In 1989 S Ltd agreed to sell goods to a buyer in Iraq who agreed to make an advance payment against a bank demand guarantee confirmed by an Iraqi bank.

R, an Iraqi bank, issued the guarantee in reliance on a counter-guarantee by L Plc, an English bank, in R's favour.

L Plc's counter-guarantee was issued at the request of S Ltd and was secured by a counter-indemnity in L Plc's favour from S Ltd, and the deposit by S Ltd in a deposit account at L Plc of an amount equal to the whole of the advance payment.

In August 1990, when S Ltd had almost completed the supply, Iraq invaded Kuwait, and the Security Council of the United Nations adopted resolution 661 (1990) requiring all states to prevent the supply by their nationals of any products to any person in Iraq or to make funds available to them.

Therefore, S Ltd was unable to complete the contract.

After Iraq had been expelled from Kuwait the UN Security Council adopted resolution 687 (1991) in April 1991 stating, among other things, that in accordance with resolution 661 (1990), until a further decision had been taken, the existing embargo on trade to Iraq should continue, and that Iraq should be prevented from obtaining compensation for the negative effects of the embargo.

In December 1992 the European Commission adopted regulation (EEC) 3541/92 which, by article 2, prohibited the satisfying 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 the measures decided on pursuant to ...

resolution 661 and related resolutions'.

S Ltd claimed repayment from L Plc of the principal sum of the deposit together with interest.

L Plc refused on the ground that R maintained that L Plc was under potential liability to R under the counter-guarantee.

L Plc made a part 20 claim against R.

The judge declared that by virtue of article 2 of Regulation (EEC) 3541/92, R was permanently prohibited from making any claim against L Plc under the guarantee and that L Plc was permanently prohibited from making any claim against S Ltd under the counter-indemnity.

The Court of Appeal upheld the declarations.

R and S Ltd appealed.Bernard Eder QC and John Davies (instructed by CMS Cameron McKenna) for Rasheed Bank.

Mark Hapgood QC and Alec Haydon (instructed by Teacher Stern Selby) for Lloyds Bank Plc.

Iain Milligan QC and Stephen Morris (instructed by Norton Rose) for Shanning International Ltd.Held, dismissing the appeal, that, on its true construction and in the light of its manifest purpose of protecting non-Iraqi contractors and suppliers against the risk of claims, article 2 had the effect of permanently prohibiting the satisfaction of any claim by any Iraqi entity under or in connection with any affected contract; and therefore the judge had been right to grant the declarations.

(WLR)