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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Shanning International Ltd v Lloyds TSB Bank Plc [1999] EWHC 280 (Comm) (17 December 1999)
URL: http://www.bailii.org/ew/cases/EWHC/Comm/1999/280.html
Cite as: [1999] EWHC 280 (Comm)
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Case No: 1998 Folio No 1728
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 17th December 1999
| SHANNING INTERNATIONAL LIMITED (IN LIQUIDATION) |
Claimant |
|
| - and - | ||
| LLOYDS TSB BANK PLC (formerly Lloyds Bank Plc) |
Defendant/ Part 20 Claimants |
|
| (1) RASHEED BANK (2) SBG HOLDINGS LIMITED |
Part 20 Defendants |
The Hon. Mr Justice Langley
COPIES OF THIS JUDGMENT ARE AVAILABLE IN WORD 6 for WINDOWS 3.1 ON PROVISION OF A CLEAN DISC. APPLY TO THE CLERK TO THE HONOURABLE MR JUSTICE LANGLEY Telephone 0171-936-6395
Mr Justice Langley:
In September 1989 the Claimant Company (to which I shall refer as "Shanning") contracted to supply medical equipment for a hospital in Iraq. The Iraqi buyers agreed to make an advance payment to Shanning under the contract of 20% of the total price, a sum of £907,141.32. The payment was to be made against a bank 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 first Part 20 Defendant, "Rasheed", is an Iraqi Bank. Rasheed issued a guarantee to the Iraqi buyers in the amount of the advance payment. The "Rasheed Guarantee" (as I shall call this guarantee) is dated January 27, 1990. It is governed by Iraqi law.
Rasheed issued the Rasheed Guarantee following and on the strength of a Counter-Guarantee from the Defendant and Part 20 Claimant, Lloyds Bank. The Lloyds Counter-Guarantee (as I shall call this guarantee) is dated December 22, 1989. The Lloyds Counter-Guarantee is also governed by Iraqi law.
Lloyds, in its turn, issued the Lloyds Counter-Guarantee at the request of Shanning and was secured both by a counter-indemnity dated January 5, 1990 in its favour from Shanning (the Shanning counter-indemnity) and the deposit by Shanning in a deposit account at Lloyds of the whole of the advance payment. The Shanning counter-indemnity itself is governed by English law. By its terms Shanning agreed to indemnify Lloyds "against all claims demands liabilities costs charges and expenses" which Lloyds might incur "arising out of or in connection with" the Lloyds Counter-Guarantee.
Iraq invaded Kuwait on August 2, 1990.
At that date Shanning had almost completed the supply contract. In rapid succession the United Nations, the United Kingdom and The Council of the European Communities imposed sanctions against Iraq. Although varied from time to time the sanctions are still in force. The construction and validity of some of the various instruments by which they were imposed or continued is at the heart of the issues before the court, but it is not in issue that the effect has been to prevent further or final performance of the supply contract by Shanning. Nor is it in dispute that when Rasheed was refused an extension by Lloyds of the validity of the Lloyds Counter-Guarantee the refusal was both a necessary consequence of Lloyds complying with sanctions and, in contractual terms, a demand for payment of the Lloyds Counter-Guarantee by Rasheed.
Shanning is now in insolvent liquidation. The deposit with Lloyds is Shanning's only substantial asset which remains to be distributed. But Lloyds, understandably, will not release the deposit unless assured that it will not have to pay Rasheed under the Lloyds Counter-Guarantee. It is Shanning's case that the effect, in particular of Council Regulation (EEC) No. 3541/92, is that Shanning not only has but can have in the future no liability to Lloyds under the Shanning counter-indemnity and so that the deposit should be returned to Shanning. That is the relief which Shanning seeks against Lloyds in paragraphs 2A, 3 and 4 of the Amended Originating Summons.
Lloyds denies Shanning's claim. But Lloyds has always made clear that it does so only because Rasheed maintains that Lloyds remains under at least a potential liability to Rasheed under the Lloyds Counter-Guarantee. Lloyds wants to and submits it is entitled to sit on the sidelines and follow the outcome of the match in which the real opponents are Shanning and Rasheed. However, and necessarily as neither Shanning nor Rasheed would accept Lloyds' position and there were no direct proceedings between Shanning and Rasheed, Lloyds made a Part 20 Claim against Rasheed in which Lloyds claimed declarations that Lloyds was "permanently prohibited from satisfying any and all claims" by Rasheed for payment under the Lloyds Counter-Guarantee.
Rasheed essentially raises two issues. First, ("The Construction Issue") that nothing in any of the sanctions orders, Regulations or Resolutions is or amounts to a permanent prohibition against payment by Lloyds under the Lloyds Counter-Guarantee, and, as a matter of contract, a claim by Rasheed would only be statute-barred under its Iraqi proper law after a minimum of 15 years (and at least arguably not even then if the explanation for not making or paying a claim was, as it is, sanctions). The second issue ("The Validity Issue") raised by Rasheed is that even if Regulation 3541/92 does amount to a permanent prohibition it is invalid because (and I summarise) it was not open to the Community to adopt it under article 235 of the Treaty (as it purported to do) and "in reality and substance" it was adopted for foreign or security policy objectives and not for any legitimate purpose of the EEC.
It is in effect these issues which the Court ordered to be tried on October 13, 1999. The trial took place before me on December 7 and 8 when I reserved my judgment. If Rasheed is right the deposit made by Shanning with Lloyds will be in limbo for the foreseeable future, if not for ever. Rasheed itself has been called upon to meet its guarantee by the Iraqi buyers albeit I was told Rasheed had not in fact done so to date.
Although to an extent the issues have been narrowed in the course of the trial, it is still necessary to set out the history of sanctions in addition to the particular provisions on which the parties rely.
On August 6, 1990 the UN Security Council adopted Resolution 661. Paragraph 3 of the Resolution recorded the decision that all States should prevent the supply by their nationals of any products to any person or body in Iraq and Paragraph 4 the decision that all States should not make available to any undertaking in Iraq any funds and should prevent their nationals from doing so.
The United Kingdom gave effect to Resolution 661 by the Iraq and Kuwait (United Nations Sanctions) Order 1990 S1 1651 and Amendment Order 1990 S1 1768. The Orders applied to any person within the United Kingdom and corporations constituted under the laws of the United Kingdom. S1 1651 prohibited (without a licence) any act calculated to promote the supply or delivery of any goods to any person in Iraq. S1 1768 made minor amendments to this prohibition and further prohibited (without permission) the making of any payment to or to the order of any person in Iraq and payments in respect of any right of indemnity in respect of obligations under a contract the performance of which was unlawful under the Order. The effect of these Orders was to make 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.
The Council of the European Communities gave partial effect to UN Resolution 661 by Council Regulations Nos 2340/90 and 3155/90. Neither Regulation, although directly applicable in the United Kingdom, covered guarantees or bonds or the making of payments.
Regulation 2340/90 recited UN Resolution 660, that the Community's trade as regards Iraq and Kuwait "must be prevented", that "the Community and its Member States have agreed to have recourse to a Community instrument in order to ensure uniform implementation throughout the Community of the measures concerning trade with Iraq" and that it was made with express regard to Article 113 of the Treaty of Rome. The recitals to Regulation 3155/90 also made express reference to what may be called the political situation arising from the invasion of Kuwait as an explanation of the further provisions it introduced and relied on Article 113 of the Treaty.
Following the eviction of Iraq from Kuwait, on April 3, 1991 the UN Security Council adopted Resolution 687. Primary sanctions, with some modifications, were continued, but their eventual lifting was foreseen. Paragraph 29 of Resolution 687 recorded the decision of the Security Council that:
all States, including Iraq, shall take the necessary measures to ensure that no claim shall lie at the instance of ... any person or body in Iraq ... in connection with any contract or other transaction where its performance was affected by reason of the measures taken by the Security Council in Resolution 661 ....(my emphasis).
The United Kingdom did not take any (material) further legislative steps as a result of Resolution 687. Sls 1651 and 1768 remain in force.
The Council of the European Communities did (eventually) take further steps in response to UN Resolution 687. On December 7, 1992, it adopted Regulation 3541/92. This Regulation is the basis of Shanning's case. It is necessary therefore to set out its origin and relevant provisions in some detail.
On July 12, 1991 the Commission submitted a proposal to the Council for a Regulation "prohibiting to honour Iraqi claims with regard to contracts and transactions affected by" UN Resolution 661. The proposal was in the form of a Draft Regulation. A number of the recitals in the Draft, with important additions, found their way into the Regulation when it was finally adopted. They included:
Whereas as a consequence of the embargo against Iraq economic operations 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 word "permanently" was added to the Regulation as adopted];
Whereas the Security Council adopted Resolution 687 which, in its paragraph 29, deals with claims by Iraq in relation to contracts and transactions affected by measures taken by the Security Council pursuant to Resolution 661 ... ;
Whereas the community and its member states [meeting in Political Cooperation] have agreed to establish a Community instrument in order to ensure uniform implementation throughout the Community of paragraph 29 of UN Resolution 687; [the words in square brackets were also added in the Resolution as adopted] ;
Whereas such uniform implementation is essential for achieving the aims of the Treaty establishing the European Economic Community [and in particular for avoiding distortion of competition]; [again the words in square brackets were added in the Regulation as adopted];
Whereas the Treaty does not provide, for the adoption of the Regulation, powers other than those of Article 235;
The Draft Regulation itself provided in Article 2 that :
As from 3 April 1991, it shall be prohibited to honour any claim made by ... any person or body in Iraq ... in connection with any contract or other transaction where its performance was affected by reason of the measures taken by the Security Council in Resolution 661 ....
The wording of the draft Article thus followed very closely the wording of Paragraph 29 of UN Resolution 687.
The Commission also submitted on July 12, 1991 an Explanatory Memorandum in support of its Proposal. This Memorandum quoted the terms of Paragraph 29 of Resolution 687 and commented:
Paragraph 29 thus provides for protection of economic operators against unjustified claims by Iraq ... companies .... In doing so, it prevents Iraq from obtaining compensation retroactively for the negative effects of the embargo.
Regarding exposure to claims from Iraq, the banking sector as well as European International contractors, have pointed to the fact that a lifting of the embargo could give rise to an avalanche of requests for payment of performance bonds, guarantees, stand-by credits or similar instruments under existing contracts and transactions for reasons of non-performance. The estimated amount of money involved exceeds 500 million ECU. Already now exposure of such a dimension seriously reduces the financial room for manoeuvre of contractors. If the corresponding claims would effectively have to be honoured, the consequences on companies would be dramatic.
As regards the position of Iraq, obtaining payment would mean an important financial advantage which would clearly be in contradiction with the very objective pursued by the embargo.
Under these conditions, § 29 gives a clear signal that both consequences of admitting claims (i.e. losses for non-Iraqi operators and compensation to Iraq) are unacceptable to the international community. It is important that in implementing the UN decision, the effect of this signal is not weakened. This is all the more true, as there is, for the time being, no indication that the embargo could effectively be lifted, given the apparent reluctance of Iraq to comply fully with all conditions set out in Resolution 687.
It also seems clear that the practical result intended by § 29 can only be achieved if the principles contained therein are implemented in a uniform way. In a great number of cases, contracts or transactions concerned involve companies and banks in different countries. Different national approaches as regards the modalities of protection granted are therefore bound to weaken the efficiency of such protection altogether. Furthermore, such differences would give rise to distortion of competition between operators in different countries, thus affecting common commercial policy. This calls for implementation, at Community level, by a Community instrument ….
Specific considerations
The measures proposed herewith in order to implement § 29 of UNSC Resolution 687 (1991) are based on the following specific considerations:
1) Non-enforceability of claims or prohibition to pay
§ 29 can be interpreted either as making claims by Iraq non-enforceable, or as establishing a prohibition to honour such claims. The practical consequences of each interpretation are different. A system of NON-ENFORCEABILITY would protect banks and exporters against claims mentioned in paragraph 29 of UNSC Resolution 687, by making it impossible for any Iraqi party to obtain a judgment in its favour unless it could prove that the contract or transaction was not affected by the embargo.
However, such a system would allow claims being settled by agreement between the parties concerned. This would considerably weaken the protection granted, as it would expose non-Iraqi operators, in particular contractors, to pressure which might be exerted by the Iraqi side. It would also create uncertainty as to whether the contracts concerned would still have to be treated as valid obligations. Finally, this system would not permit the achievement of the other objective of § 29, i.e. the prevention of retroactive compensation in favour of Iraq.
Therefore, the Commission proposes a system of PROHIBITION TO HONOUR CLAIMS, which would allow to meet both the objective of preventing such retroactive compensation as well as the objective of an effective protection of non-Iraqi parties, and would establish clarity as regards the treatment of the contractual obligations concerned ….
4) Relationship between contractors and banks
Finally, the issue of INDEMNITIES – i.e. the right of a party which has honoured a claim, to obtain the repayment by another party – needs to be addressed. Indemnities have normally to be paid by exporters to banks when the latter have paid out a guarantee. Indemnisation is also granted by export-credit insurers to exporters, when the conditions of the credit-insurance policy are fulfilled.
As a principle, no right to indemnisation can be recognized where the claim should not have been honoured. The question arises, however, if parties should be allowed to obtain indemnity for payments that they were forced to make, e.g. through legal execution, although the Iraqi party was not entitled to the payment under § 29 of UNSC Resolution 687 (1991).
While the Commission recognizes that in such cases it could seem inadequate not to open the possibility of recourse, this possibility is not included in the present proposal. It would considerably weaken the position of exporters whereas banks appear to be in a relatively stronger position vis-à-vis Iraqi claimants; in fact, so far no cases of legal execution or similar measures against banks seem to have occurred. The question may, however, have to be reconsidered in the light of further experience.
(The emphases in the text are all mine).
The Committee on Foreign Affairs and Security issued a Report on the Commission’s proposal dated November 6, 1992. It did so on a reference from the President of the European Parliament made on October 27 following the consultation of the Parliament by the Council on October 5 as required by Article 235 of the Treaty. The Committee approved the proposal. The Explanatory Statement accompanying this approval is in very similar terms to the Explanatory Memorandum of the Commission. It too referred to “the objective of removing the possibility of retroactive compensation,” to the “problem” as one “which is extremely political” and in its two concluding paragraphs stated:
Failure to take action on Resolution 687 would be tantamount to declaring that the embargo imposed following the invasion of Kuwait was illegal, and in effect recognizing the right of the Iraqi regime to compensation which would help it economically and politically at a time when, on the contrary, it is necessary to send fresh signals of firmness, in the light of the revelations made by the observers from the United Nations and the International Atomic Energy Agency of Iraq’s nuclear capability. For this reason, it appears vital to deliver a favourable opinion on the Commission proposal.
It should be said that, with the entry into force of the Treaty on European Union, Article 228a (new) of the EEC Treaty, which makes no provision for consultation of Parliament, could be used as the legal basis for adoption of such measures. Parliament is opposed to the provisions of this article and calls on the Council not to abandon the current procedure under which parliamentary control may be exercised, albeit inadequately.
The Committee on External Economic Relations also prepared an Opinion for the Committee on Foreign Affairs and Security. The Opinion is dated November 16,1992. It also refers to preventing Iraq from obtaining compensation retroactively for the negative effects of the embargo; to the possible avalanche of requests for payment following a lifting of sanctions with "dramatic" consequences on companies; to payment involving an important financial advantage for Iraq which would "clearly be in contradiction with the very objective pursued by the embargo" and to "the problem" as "essentially a political one".
Finally, the European Parliament itself approved the Commission's proposal on November 19, 1992. It did so in unamended form.
Various provisions of the Treaty of Rome have been considered in argument and, as emerges from the final paragraph of the Explanatory Statement of the Committee on Foreign Affairs and Security quoted above, certain amendments to the Treaty which were agreed by the Treaty of European Union concluded at Maastricht but not in fact in force (despite the wording of that paragraph) at the time Regulation 3541/92 was adopted (December 7, 1992).
Two of "the activities of the Community" stated in article 3 are material:
Article 3(b) the establishment of a common customs tariff and of a common commercial policy towards third countries.
Article 3(f) the institution of a system ensuring that competition in the common market is not distorted.
"Commercial Policy" is also the subject of Chapter 4 of the Treaty. It addresses customs duties (Article 110), a common policy in the field of external trade (Article 111) aid for exports to third countries (Article 112) and provides by Article 113 that:
... the common commercial policy shall be based on uniform principles, particularly in regard to changes in tariff rates, the conclusion of tariff and trade agreements, the achievement of uniformity in measures of liberalisation, export policy and measures to protect trade such as those to be taken in case of dumping and subsidies.
The powers conferred by article 113 on the Council to implement the common commercial policy are exercisable without consultation with the European Parliament and by a qualified majority of the Council.
Competition policy is also the subject of Chapter 1 of the Treaty and, in particular, Articles 85 (agreements preventing, restricting or distorting competition within the common market) 86 (abuse of dominant position) and 92 (State aids which distort competition).
The Article of the Treaty under which regulation 3541/92 was or purported to be made was Article 235 which 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 Assembly, take the appropriate measures.
The "new" Articles 228 a and 73g.1 incorporated in the Treaty following Maastricht, but not in force at the time of or relied upon in adopting Regulation 3541/92, are as follows:
Article 228a. Where it is provided, in a common position or in a joint action adopted according to the provisions of the Treaty on European Union relating to the common foreign and security policy, for an action by the Community to interrupt or reduce, in part or completely, economic relations with one or more third countries, the Council shall take the necessary urgent measures. The Council shall act by a qualified majority on a proposal from the Commission.
Article 73g.1. If, in the case envisaged in Article 228a, action by the Community is deemed necessary, the Council may, in accordance with the procedure provided for in Article 228a take the necessary urgent measures on the movement of capital and on payments as regards the third countries concerned.
Finally Article 177 (now 234) of the Treaty provides for the jurisdiction of the European Court of Justice (ECJ) to give preliminary rulings concerning the interpretation of the Treaty and the validity and interpretation of acts of the institutions of the Community. In the event that this court considers that a decision on such a question is necessary to enable a judgment to be given then the ECJ may be requested to give a ruling upon it.
There is no dispute as to the principles to be applied. A national court has no power to declare a Community act, such as Regulation 3541/92, invalid. Only the ECJ has that power. But a national court does have power to rule that a Community act is valid. Thus only if I conclude that Rasheed's case that Regulation 3541/92 is invalid is itself unfounded should I not refer that question to the ECJ : see Case 314/85 Foto-Frost v. Hauptzollant Lubeck [1987] ECR 4199 at 4230-1, paras 14 and 15. The test is, as Mr Davies submitted and is agreed, whether Rasheed has raised any real doubts about the validity of the Regulation or its construction: see Regina v. Stock Exchange Ex parte Else [1993] 2 WLR 70 per Sir Thomas Bingham M.R. at page 76.
In addition to the recitals which I have already set out in the context of the Commission's proposal to the Council, the Regulation refers to the Community and its Member States "meeting in Political Cooperation" and agreeing that Iraq must comply in full with paragraph 29 of UN Resolution 687.
Unlike the draft regulation contained in the Commission proposal, the terms of the Regulation as adopted are much more detailed. Article 1 contains definitions. It makes clear that the Regulation applies to contracts and transactions "whatever the applicable law" and that "claim" is very widely defined.
Article 2 (so far as material) provides:
1. It shall be prohibited to satisfy or to take any step to satisfy a claim made by:
(a) a person or body in Iraq ....
....
(e) any person or body making a claim arising from or in connection with the payment of a bond or financial guarantee or indemnity to [a person or body in Iraq]
under or in connection with a contract or transaction the performance of which was affected directly or indirectly ... by the measures decided pursuant to UN Resolution 661 and related resolutions.
2. This prohibition shall apply within the Community and to any ... body which is incorporated or constituted under the law of a Member State.
There is no dispute that Article 2.1(a) prohibits satisfaction by Lloyds of the Lloyds Counter-Guarantee, nor that Article 2.1(e) prohibits satisfaction by Shanning of the Shanning counter-indemnity .
Article 3 excepted from the prohibition in Article 2 what may loosely be called established claims arising from events which ante-dated sanctions.
The Regulation also expressly provides that it "shall be binding in its entirety and directly applicable in all Member States."
Shanning submits that on its true construction Regulation 3541/92 establishes a permanent prohibition on Rasheed claiming from Lloyds under the Lloyds Counter-Guarantee and on Lloyds claiming from Shanning under the Shanning counter-indemnity. Rasheed submits that it does not. Lloyds is concerned only to ensure that there is no "mismatch" between any obligations it may have to Rasheed and Shanning.
The question is not one of whether or not the Council could at some point in the future repeal or revoke the Regulation. Mr Davies has not relied upon that possibility. Rightly so, in my judgment, because if the Regulation, properly construed, does impose a permanent prohibition I think Shanning (and Lloyds) would be entitled to the declarations they seek in any event. It is also the case that on other occasions when sanctions have been imposed and then lifted by the Community the claims prohibition regulation has not been repealed. The prospect of repeal can therefore be ignored.
Plainly at the forefront of Shanning's submissions is the recital which says in terms that "it is necessary to protect operators permanently against such claims and to prevent Iraq from obtaining compensation for the negative effects of the embargo". Indeed the political considerations underlying sanctions would, as I think the documents I have quoted demonstrate, and as a matter of commonsense, dictate that no claims should ever be made for the effects of the sanctions themselves. In my judgment that also derives support from the references in the travaux preparatoires to the need to avoid "an avalanche " of claims, the necessity to avoid "retroactive compensation" after primary sanctions were lifted (if they were) and the expressed need to achieve clarity as to contractual obligations (as opposed to continuing uncertainty as to their validity).
Mr Davies' submissions for Rasheed pointed to the late (and unexplained) addition of the word "permanently" to the recital; to the fact that the Regulation is not directly applicable to Rasheed but only to persons or bodies in Member States; to the use of the language of "no claims shall lie" (Paragraph 29 of UN Resolution 687) "prohibited to satisfy a claim" (Regulation 3541/92 itself) in respect of contracts "the performance of which" was "affected" by sanctions which he submitted indicated that the relevant contract remains in force and has not been discharged particularly so as "prohibitions are essentially temporal".
Community law principles of interpretation are to be applied by this court by virtue of Section 3(1) of the European Communities Act 1972 and Article 189 of the Treaty. Community law applies a purposive approach. The recitals and travaux preparatoires are central to the ascertainment of the purpose of a Regulation. In my judgment, applying this approach, Shanning is right in its submissions on this Issue. The recitals are clear. The purpose (political or not) requires or at the very least is likely to require permanence. A prohibition may or may not be intended to have a permanent or temporal effect or meaning. In the case of Article 2 of the Regulation the choice is stated in the recital and explained by the purpose. The Regulation indeed is directed only to persons or bodies in Member States. That may explain why it does not use the language of "discharge" of a contract, but in any event it is the chosen method of achieving the stated purpose and I think effective as such.
Mr Davies for Rasheed makes two basic submissions:
(i) that it is apparent from the references I have quoted and generally that the object of the Regulation and the problem it addressed was political and not economic and such references as can be found to economic factors are wholly unconvincing and unsupported.
(ii) Article 235 itself cannot be used as a foundation for a Regulation going beyond the objectives of the Treaty.
Mr Morris for Shanning submitted that the Regulation was and clearly was validly made and adopted under Article 235 for the attainment of the stated Community objective of avoiding distortions of competition within Article 2 and 3(f) of the Treaty.
There are a number of factors which are material to this issue which are not or not substantially in issue:
(1) Prior to Regulation 3541/92, sanctions adopted by the Community had been adopted (as were the first Iraqi sanctions) under Article 113, and so with reference to common commercial policy under Article 3(b) and not distortion of competition under Article 3(f).
(2) Article 113 was not available for use to impose sanctions in respect of financial services but only for trade in goods. The scope of Article 113 has been a matter of debate but this was the general conclusion (and one said by both Rasheed and Shanning to mean that Regulation 3541/92 could not properly have been adopted under Article 113). At the very least it was a matter of serious doubt and, where there is doubt, the ECJ has decided that reliance on article 235 may be "justified in the interest of legal certainty": Case 8/73 Hauptzollant Bremerhaven v. Massey-Ferguson GmbH [1973] ECR 897 at 908.
(3) Article 235 does not permit the adoption of measures which would constitute an amendment to the Treaty: Opinion 2/94 [1996] ECR 1-1759. It "is designed to fill the gap where no specific provisions of the treaty confer on the Community express or implied powers to act, if such powers appear nonetheless to be necessary to enable the Community to carry out its functions with a view to obtaining one of the objectives laid down by the Treaty": at paragraph 29.
(4) Avoiding distortions of competition in the Common market is one of the fundamental aims and objectives of the Community: Articles 2, 3(f) and the specific provisions of articles 85 to 94 of the Treaty.
(5) Article 235 has been relied upon to adopt measures to control mergers where the Council concluded that the provisions of Articles 85 and 86 were insufficient "to control all operations which may prove to be incompatible with the system of undistorted competition envisaged in the Treaty": see Recital (6) to and Regulation (EEC) 4064/89.
(6) Foreign or security policy is not and has never been covered by the Treaty or the Community legal order. Common action in these spheres is governed by international law. Sanctions Regulations adopted by the Community have always been preceded by agreement on common action often for the purpose of implementing UN sanctions resolutions binding on Member States individually.
(7) The fact that sanctions Regulations are preceded by an agreement to take common action as a matter of foreign or security policy or that the imposition or lifting of sanctions is highly political does not of itself mean that in adopting sanctions the Community is pursuing an objective outside the boundaries of the Treaty. Indeed there is no reason why political events should not give rise to a legitimate need for common action in the economic field. Otherwise the sanctions previously adopted under Article 113 would also be invalid and Mr Davies (albeit on the ground that in this case he did not need to go so far) shrunk from making such a submission. Concurrent objectives are not objectionable as such.
(8) In R. v. Searle [1995] 3 C.M.L.R. 196 the Court of Appeal, Criminal Division held that (A) a Regulation imposing sanctions on trade with Serbia and Montenegro could properly be based on Article 113 notwithstanding that the motive underlying the sanctions was political not commercial and (B) that the adoption at Maastricht of Articles 228a and 73g did not imply that prior to Maastricht the Community had no power to legislate to impose sanctions. As to (1) Lord Taylor, L.C.J. said, at page 206, "it does not seem to us that the imposition of restrictions, plainly within the ambit of Article 113 (restricting exports from and imports to Serbia and Montenegro) is properly to be regarded as falling outside its ambit simply because the reason for their adoption was to implement UN sanctions". As to (2), at page 208, Lord Taylor agreed with the submission on behalf of the Crown that the "recent change in legal base and its subsequent use by the Community was no more than an application of the principle that where a lex specialis is created, it should apply instead of a more general provision".
Despite Mr Davies' at least tentative submission that R v Searle might be wrongly decided in the light of the ECJ's decision in Case C 124/95 R v H.M. Treasury ex parte Centro-Com Sri [1997] ECR 1-81 I see nothing in the latter decision to justify such a conclusion. As I understand it, Centro-Com decided that the fact that Member States retained individual competence in the field of foreign and security policy did not justify taking measures with foreign policy objectives which were inconsistent with Community law in the field (in that case) of common commercial policy. That is in a sense the reverse of the position in this case. Just as a foreign policy objective does not of itself preclude the adoption of measures within the ambit of Community competence, so also such an objective does not enable a State to ignore measures properly adopted within Community competence.
It is in the light of the foregoing factors that the submissions on invalidity must be considered. The five substantive requirements for validity of the power to act under Article 235 are stated in The Foundations of European Community Law, 4th Ed., by Professor Hartley at page 104. They are:
1. The power must be used in order to attain one of the objectives of the Community.
2. Action by the Community must be necessary for this purpose.
3. The attainment of the objective must take place in the course of the operation of the Common market.
4. The Treaty must not have provided the necessary powers.
5. The measure must be appropriate for the attaining of the objective.
I will consider these in turn.
The stated objective was to ensure uniform implementation throughout the Community of paragraph 29 of UN Resolution 687 to avoid distortion of competition. The Commission's Explanatory Memorandum, from which I have quoted at length, addresses the expressed need to ensure that all Member States implemented the Resolution in the same manner. The memorandum also addressed two possible methods of implementation (non-enforceability of claims or prohibition to pay) with potential different consequences. Whilst it is true that previous sanctions regimes had been justified in terms of common commercial policy, and the Memorandum itself refers to that policy, I see no reason to doubt the genuineness of the expressed objective. The two objectives are not mutually exclusive. Sanctions themselves may well create distortions but that may be a good reason to limit the distortions rather than compound them when sanctions are lifted and for doing so in a uniform manner throughout the Community so that those who are affected by sanctions are treated equally.
Mr Davies' submission came close to arguing that the expressed objective was an invention born of the need to find some apparently legitimate basis for a Regulation which was exclusively political in its purpose. I do not accept that. It is not what the Regulation itself says. It is not what the travaux preparatoires say, albeit they do not shrink from stating the obviously political context. There is nothing illogical or absurd in the statements of commercial or economic purpose which might suggest an improper motive. In my judgment, supported by R v Searle, there is no necessary dichotomy between the political and economic objectives, and Mr Davies' submission is really founded on the contrary proposition.
As Professor Hartley points out (also at page 104) the determination that a Community act is "necessary" in fact involves a large measure of discretion and it is unlikely that the ECJ will substitute its own judgment for that of the institutions to which the power to act is given by the Treaty. Mr Davies' submission was that the Regulation was not "necessary" to avoid distortion because the only real reason given to justify it was a political one. That submission fails for the reasons I have already given.
Mr Davies' submission was that the application of economic sanctions against Iraq has nothing to do with the operation of the common market. The submission is in effect the same as the "political objective" submission and fails for the same reason.
There is agreement that Article 113 did not provide a basis for the Regulation. Even if it was arguable that it did the use of Article 235 is still lawful and valid: Case 8/73 Massey-Ferguson. I also think that Case and the passage I have quoted above from Opinion 2/94 establish the legitimacy of the use of Article 235 in circumstances such as this where the objective is to fill a gap in the pursuit of a legitimate Community objective. Nor, for the reasons stated in R v Searle, do I think the fact that the "gap" may subsequently have been filled by incorporation in the Treaty of Articles 228a and 73g affects that conclusion.
Granted that I have held that the objective was a legitimate one as expressed, namely to ensure uniform implementation of paragraph 29 of UN Resolution 687 to avoid distortion of competition in the Community and the apparent generality of the terms of paragraph 29 itself I see nothing in the terms of the Regulation which is out of proportion to the terms of its aims. Mr Davies referred in particular to the express application of the Regulations to contracts whatever their governing law and, if it was so decided, to the permanent effect of the Regulation. Both, he submitted, went beyond the terms of paragraph 29 and so were out of proportion to the aims of the Regulation. I do not agree. In my judgment both are at the least contemplated by and consistent with paragraph 29 and whether they are or not I think they provide good examples on which the need for uniform implementation of paragraph 29 to avoid distortions of competition in the Community could be justified.
Finally, Mr Davies also submitted that there was an infringement of an essential procedural requirement because no reason is given as to why the Regulation is needed to avoid distortions of competition or how it would achieve that objective.
To quote again from Professor Hartley (at page 124):
An important rule laid down by the European Court is that the degree of specificity required depends on the nature of the act in question: in the case of an act of a truly legislative nature, affecting general categories of persons (the normal type of regulation ) it is sufficient if the reasoning is limited to broad outlines ....
An indication of what is required in the case of a legislative act was given by the judgment of the European Court in the Beus case (Case 5/67 [1968] ECR 83 at 95):
"The extent of the requirement laid down by ... the Treaty to state the reasons on which measures are based depends on the nature of the measure in question. It is a question in the present case of a regulation, that is to say a measure intended to have general application, the preamble to which may be confined to indicating the general situation which led to its adoption, on the one hand, and the general objectives which it is intended to achieve on the other.
Consequently, it is not possible to require that it should set out the various facts, which are often very numerous and complex, on the basis of which the regulation was adopted ....
In my judgment the Regulation fully complies with the requirement to state reasons so expressed.
Although I have expressed my views on all the validity issues, I must also ask myself whether it is right or possible to conclude that I should decide to resolve the issue myself rather than refer it to the ECJ and I must do so conscious of Mr Davies' submission that I should be wary of reaching such a conclusion. Nonetheless and despite the attractive and reasoned way in which Mr Davies put his submissions I have reached the overall conclusion that I am not left in any real doubt in rejecting them. It follows that in my judgment not only is Regulation 3541/92 valid but it is also to be construed so as to prohibit permanently the satisfaction by Lloyds of any claim by Rasheed under the Lloyds Counter-Guarantee and the satisfaction by Shanning of any claim by Lloyds under the Shanning counter-indemnity.
I will hear the parties on the precise terms of the relief to which they claim to be entitled and any ancillary matters arising out of this judgment.