Introduction

The judgment in Celestial Aviation Services Ltd v UniCredit Bank GmbH, London Branch ([2024] EWCA Civ 628) represents a significant development in the enforcement of sanctions within the UK's legal framework. This case involves an appeal by UniCredit Bank GmbH against decisions that determined its obligations under certain standby letters of credit ("LCs") issued by the Russian bank Sberbank Povolzhsky Head Office. These LCs were connected to civilian aircraft leasing transactions involving Russian airlines, AirBridge Cargo Airlines LLC ("AAL") and JSC Aurora Airlines ("Aurora"), amidst the backdrop of stringent sanctions imposed by the United Kingdom (UK) and the United States (US) following Russia's invasion of Ukraine in February 2022.

The central legal issues revolve around whether the payments under the LCs are prohibited under UK and US sanctions regulations, whether UniCredit can rely on a reasonable belief defense under the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA"), and the applicability of the Ralli Bros principle concerning US sanctions.

Summary of the Judgment

The initial decision by Deputy High Court Judge Christopher Hancock KC ruled that UniCredit's obligations under the LCs were not impeded by existing sanctions. However, upon appeal, the Court of Appeal overturned this judgment in part. The appellate court concluded that Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019 did indeed apply to UniCredit's payments under the LCs. Furthermore, while the judge had ruled that UniCredit could not rely on s.44 SAMLA due to an unreasonably held belief of compliance, the appellate court found that UniCredit did possess a reasonable belief and thus could rely on s.44 SAMLA. However, the protection under s.44 SAMLA does not extend to interest and costs associated with the dispute.

Additionally, the appellate court addressed the relevance of US sanctions and the Ralli Bros principle, ultimately determining that UniCredit did not make reasonable efforts to obtain the necessary US licenses to comply with sanctions, thereby precluding reliance on US sanctions as a defense.

Analysis

Precedents Cited

The judgment extensively referenced several key precedents to shape the court's reasoning:

• Ralli Bros v Compañia Naviera Sota y Aznar [1920] 2 KB 287: Established that contractual performance requiring acts in jurisdictions where such acts are illegal might invoke the Ralli Bros principle.
• Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728: Addressed the enforceability of contracts under US sanctions and the requirement of making payments in alternative forms like cash.
• Rossendale Borough Council v Hurstwood Properties [2021] UKSC 16: Emphasized the importance of purposive interpretation in statutory construction.
• Donoghue v Stevenson [1932] AC 562: Though not directly cited, the case's principles of duty of care underpin the reasoning around reasonable belief.
• MUR Shipping [2024] UKSC 18: Although decided during the appeal, it reinforced the importance of contractual terms regarding performance and currency of payment.

These precedents collectively underscored the necessity of interpreting statutory language not just by its literal meaning but within the intended purpose, particularly in contexts involving international sanctions.

Legal Reasoning

The appellate court's reasoning hinged on a detailed statutory interpretation of Regulation 28(3) of the UK sanctions regime. The court held that the phrase "in connection with" in the regulation is broad and encompasses any factual connection between the provision of funds and the prohibited arrangements (i.e., the supply or use of restricted goods like aircraft in Russia). The court rejected the lower judge's narrow interpretation, emphasizing that the autonomy principle of letters of credit does not sever the factual connections to the underlying lease agreements.

Moreover, the court analyzed the scope of s.44 SAMLA, concluding that while UniCredit held a reasonable belief about compliance, this protection does not extend to associated interest and costs. The Ralli Bros principle was also scrutinized, with the court determining that UniCredit failed to make reasonable efforts to secure US licenses, thereby negating any defense based on US sanctions.

The court also clarified that contractual terms, especially regarding the strict compliance and specified currency in LCs, limit the avenues through which payment could be diverted to comply with sanctions, rendering arguments for alternative payment forms (like cash or euros) invalid under the contract terms.

Impact

This judgment sets a pivotal precedent in the realm of sanctions enforcement, particularly in how financial institutions manage obligations under international sanctions. Key impacts include:

• Broad Interpretation of Sanctions: Regulators and banks must now recognize that even pre-existing contracts can fall within the scope of sanctions if the execution of obligations is connected to sanctioned activities.
• Reasonable Belief Defense: While s.44 SAMLA provides a shield, its application is nuanced. Financial institutions must ensure that their beliefs about compliance are not only subjective but also objectively reasonable.
• Licensing Obligations: The necessity for timely and appropriately framed license applications is reinforced. Delays or inadequacies in such applications can dismantle potential defenses.
• Contractual Compliance: Strict adherence to the terms of LCs is paramount, as deviations can preclude defenses based on the autonomy principle.
• US Sanctions Intersection: The interplay between UK and US sanctions regimes requires comprehensive compliance strategies, especially considering the burdens of obtaining multiple licenses.

Future cases involving sanctions will likely cite this judgment to delineate the boundaries of prohibited financial transactions and the extent of defenses available to financial institutions.

Complex Concepts Simplified

Regulation 28(3) Explained

Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019 prohibits providing financial services or funds in connection with arrangements that involve the supply or use of restricted goods in Russia. The phrase "in connection with" is interpreted broadly to include any factual relationship, not just legally dependent ones.

Sanctions and Letters of Credit

Letters of credit are financial instruments that guarantee payment to a seller upon fulfilling specified conditions. The autonomy principle ensures that these instruments operate independently from the underlying contract. However, this judgment clarifies that while the financial commitment is separate, the factual connection to sanctioned activities cannot be ignored.

s.44 SAMLA - Reasonable Belief

Section 44 of SAMLA protects individuals or entities from civil liability for actions taken under a reasonable belief that they are complying with sanctions. This defense requires both a subjective belief of compliance and an objective reasonableness in that belief.

Ralli Bros Principle

The Ralli Bros principle allows the enforcement of a contract even if fulfilling it requires illegal acts in another jurisdiction, provided that the party did not have prior awareness of the illegality or failed to make reasonable efforts to overcome it (e.g., obtaining necessary licenses).

Conclusion

The Court of Appeal's decision in Celestial Aviation Services Ltd v UniCredit Bank GmbH marks a critical reinforcement of the UK's commitment to sanctions enforcement. By broadening the interpretation of "in connection with" within Regulation 28(3) and delineating the boundaries of defenses under s.44 SAMLA, the judgment underscores the imperative for financial institutions to rigorously assess and ensure compliance with international sanctions. Moreover, the interplay with US sanctions and the stringent application of the Ralli Bros principle necessitate a more integrated and proactive approach to sanctions compliance. This ruling not only impacts the parties involved but also sets a precedent that will influence the handling of similar cases in the future, reinforcing the legal robustness of sanctions regimes.