Published on July 2, 2024
UK sanctions ground payment obligations under letters of credit in aircraft leasing case

In Celestial Aviation Services Limited v UniCredit Bank GmbH, London Branch [2024] EWCA Civ 628, the Court of Appeal held that UK sanctions prohibited payments under letters of credit issued in relation to aircraft leasing transactions with Russian airlines. In doing so, it also provided helpful guidance on the limitations of the Ralli Bros principle.

Background facts

Between 2017 and 2020, twelve standby letters of credit (“LCs”) were issued by the Russian bank Sberbank in connection with various aircraft leasing transactions between three Irish companies (“Lessors”) and two Russian airlines. UniCredit acted as the confirming bank. The LCs were US dollar denominated, governed by English law and incorporated the UCP 600.

In March 2022, the leases were terminated for default and the Lessors made conforming demands for payment on the LCs. However, UniCredit refused to pay on the basis of sanctions. Relevantly, under the Russia (Sanctions) (EU Exit) Regulations 2019 (“UK Regulations”), Regulation 28(3) provides that:

“(3) A person must not directly or indirectly provide financial services or funds in pursuance of or in connection with an arrangement whose object or effect is-

(a) the export of restricted goods to, or for use in, Russia;

(b) the direct or indirect supply or delivery of restricted goods to a place in Russia;

(c) directly or indirectly making restricted goods or restricted technology available-

(i) to a person connected with Russia, or(ii) for use in Russia…”

On 1 March 2022, the UK Regulations were amended in light of the events in Ukraine, with the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2022 (“Amendment”), which broadened the definition of “restricted goods” to include aircraft.

Proceedings were issued in March and April 2022 under the LCs, at which time UniCredit also applied for licenses from the relevant authorities. It received licenses in respect of EU and UK sanctions, though its application in respect of US sanctions remained outstanding.

The principal amounts under the LCs were thereafter paid in either US dollars or sterling, by agreement. As such, by the time the trial judgment was handed down in March 2023, the principal amounts had been paid and the dispute was confined to interest and costs.

First instance

The High Court held that Regulation 28(3) was not engaged. Although it could operate to prohibit financial services in the present circumstances, it would do so prospectively, not retrospectively; here, the aircraft were supplied, and the LCs issued, prior to the Amendment. Additionally, all the Lessors required was for the obligations under the LCs to be fulfilled. Although a consequence may be discharge of the independent obligations of the Russian airlines, and Sberbank, to the Claimants, that was a collateral matter; the Court, relying on the autonomy principle, concluded that fulfilment of that independent obligation cannot be said to be intended to benefit the Russian entities simply because they are involved in other elements of the overall transaction. In any event, Regulation 28(3) should not be read more broadly simply because of the existence of a licensing regime provided to circumvent it.

The Court further held that s.44 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”), which provides a defence to liability should a reasonable belief be held that sanctions prevented payment, did not apply as UniCredit’s subjective belief that Regulation 28(3) applied was unreasonable.

Finally, in relation to the relevance of US sanctions, the Court concluded they were not engaged because payment could have been made lawfully in cash, or alternate currency to US dollars, rather than through a correspondent bank.

The Court thereafter awarded interest under s.35A Senior Courts Act 1981 up to the date of payment of the LCs and costs on the standard basis.

The Appeal

The Court of Appeal, rejecting the High Court’s conclusions, held that Regulation 28(3) was engaged and allowed the appeal on this point.

The Court of Appeal held that the purpose of the UK Regulations is to put pressure on Russia and Regulation 28(3) should be read broadly. It is not limited only to persons connected with Russia and the language: “in pursuance of or in connection with” is “as wide a connecting link as one can commonly come across.” Additionally, “funds”, which includes letters of credit, and “arrangement” which includes “any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable” clearly indicates a broad scope. Further, it was held to have retrospective effect on the basis that there was no explicit limit in the Amendment, nor was a grace period, as in the EU sanctions, provided for.

As such, whilst the LCs were issued before the Amendment, payments, even to the Lessors who were unconnected with Russia, would be caught.

Further, the autonomy principle was misapplied by the Court as the reality was that the LCs were in connection with the leases to the Russian companies and were triggered by default under them. The fact that the leases had been terminated prior to the demands under the LCs being made was irrelevant; their object remained the provision of aircraft for use in Russia or to a person connected with Russia.

In light of the above, it was arguably not necessary to consider whether s.44 SAMLA applied. However, the Court of Appeal noted that it disagreed with the Court’s conclusions as to whether UniCredit held the reasonable belief that sanctions prevented performance. In doing so, it observed that the courts must remain wary of viewing this issue with the benefit of hindsight. It also considered that, should Regulation 28(3) not apply, UniCredit would not have been entitled to rely on s.44 to protect it against an award of interest and costs, in particular as an entitlement to statutory interest on a debt “is not within the mischief sought to be addressed by s.44”.

The application of the Ralli Bros principle, a limited exception to the general principle that the enforceability of a contract governed by English law is determined without reference to illegality under any other law, applicable where contractual performance necessarily takes place where it would be unlawful, was also considered. The Court of Appeal concluded that “even if the Ralli Bros principle is engaged so that US sanctions are potentially relevant, UniCredit is precluded from relying on them because it did not make reasonable efforts to obtain a license from the US authorities.”

The Court of Appeal further disagreed with the High Court’s conclusions on circumventing US sanctions. Referring to the doctrine of “strict compliance”, it observed that the LCs clearly stated that any demand would be for the transfer of US dollars to a specified bank account. This specific wording precluded a demand in cash or non-US dollar currency from being a conforming demand.


The case brings clarity to the application of Regulation 28(3) stating “it is a relatively blunt instrument that is intended to cast the net sufficiently wide to ensure that all objectionable arrangements are caught, such that the overall purpose of putting pressure on Russia is achieved. That approach obviously risks catching arrangements that may not be seen to be within the overall mischief”, though the existence of the licensing regime is deemed a suitable mitigation tool.

It is also worth noting that the recent Supreme Court decision in RTI Limited v MUR Shipping [2024] UKSC 18 was referenced in support of the importance of allowing contracting parties to agree terms of their choice, including the manner of performance, such as the right to be paid in US dollars.

Finally, the Court of Appeal’s observations on the application of the Ralli Bros principle are particularly notable, demonstrating that, whether or not performance may be prohibited by a sanctions regime such that the principle would ordinarily apply, it will not in circumstances where there exists a lawful means to circumvent those prohibitions, in particular, a licensing regime. Parties are, therefore, minded to ensure they have taken reasonable steps to apply for a license to avoid this issue.

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