Celestial Aviation Services Ltd v Unicredit Bank GmbH, London Branch

Factual and Procedural Background

This appeal concerns UniCredit Bank GmbH ("UniCredit"), a German bank operating through its London branch, challenging decisions made by a Deputy High Court judge regarding its obligations as confirming bank under standby letters of credit ("LCs") issued by a Russian bank, Sberbank. These LCs were connected to civilian aircraft leasing transactions involving Irish entities Celestial Aviation Services Ltd ("Celestial") and Constitution Aircraft Leasing (Ireland) 3 Ltd and 5 Ltd ("Constitution"), which acted as beneficiaries. The leases were with Russian airlines and entered into between 2005 and 2014.

The leases were terminated for default in March 2022, though most aircraft were not recovered. Celestial and Constitution made conforming payment demands on the LCs, but UniCredit refused payment citing sanctions imposed by the UK and US following Russia's invasion of Ukraine in February 2022. Legal proceedings were initiated by Celestial and Constitution in March and April 2022 respectively, seeking the amounts owed, interest, declarations regarding sanctions, and costs.

UniCredit subsequently obtained licences from EU and UK authorities and settled the principal sums under the LCs in October and November 2022, with payments made in US dollars or sterling by agreement. The US sanctions licence application remained outstanding. The judge heard the Part 8 claims in September 2022 before principal payments were made, and by the March 2023 judgment, the dispute was confined to interest and costs. The appeal concerns the legal effect of sanctions on UniCredit's payment obligations under the LCs.

Legal Issues Presented

1. Whether payment under the LCs by UniCredit was "in connection with" an arrangement whose object or effect was the supply of aircraft to or for use in Russia or to a Russian person, thus prohibited by regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019 (the "UK Regulations").
2. If the prohibition did not apply, whether UniCredit had a defence under section 44 of the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA") based on a reasonable belief that it was complying with the UK Regulations.
3. Whether the question of illegality under the US sanctions regime was engaged under the Ralli Bros principle, given that payment in US dollars required a correspondent bank in the United States.
4. If US sanctions applied, whether payment in accordance with the demands would have been illegal under that regime.

Arguments of the Parties

Appellant's Arguments (UniCredit)

• The judge erred by not giving effect to the ordinary and literal meaning of the words in reg. 28(3)(c); payment under the LCs was plainly "in connection with" the leases.
• The judge unduly narrowed the purpose of reg. 28 and improperly introduced a judicial carveout for pre-existing obligations.
• The autonomy principle was wrongly applied to assist the Claimants.
• UniCredit had a reasonable belief under s.44 SAMLA that payment under the LCs complied with sanctions and thus was protected.
• Payment in US dollars was contractually required and could be made in cash or sterling, so US sanctions were not engaged.
• UniCredit made reasonable efforts to obtain a US licence from OFAC.

Respondents' Arguments (Celestial and Constitution)

• There was no relevant "arrangement" under reg. 28(3) as the supply of aircraft was lawful when made and thus not prohibited.
• The judge should not have accepted that UniCredit had the necessary subjective belief under s.44 SAMLA.
• Even if s.44 applied, it did not extend to statutory interest and costs.
• US sanctions were irrelevant because no act of performance was required in the US, payment could have been made in sterling or euros, and payment obligations accrued before prohibitions applied.
• UniCredit failed to take reasonable steps to obtain a US licence and thus cannot rely on US law sanctions as a defence.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by emphasizing the importance of statutory interpretation grounded primarily in the ordinary meaning of the words within their statutory context, guided by the legislative purpose as set out in the UK Regulations and SAMLA. It rejected the judge's narrower purposive interpretation and reliance on the autonomy principle to exclude the application of reg. 28(3)(c).

The court held that reg. 28(3)(c) applies broadly to financial services or funds provided "in pursuance of or in connection with" arrangements whose object or effect is making restricted goods, including aircraft, available for use in Russia or to persons connected with Russia. The phrase "in connection with" was interpreted widely to include factual connections without requiring legal dependence or causation.

The court rejected the argument that the regulation only applies prospectively to arrangements made after 1 March 2022, holding that the absence of a legislative grace period and the broad wording meant that payments under pre-existing arrangements were caught if the arrangements' object or effect was to make aircraft available for use in Russia. The court also dismissed the contention that termination of leases prior to payment negated the existence of the relevant arrangement, reasoning that the object of the leases remained unchanged.

Regarding s.44 SAMLA, the court found that UniCredit had the requisite subjective and reasonable belief that payment under the LCs complied with sanctions. However, the court distinguished between immunity from claims for damages caused by compliance and claims to recover pre-existing debts, concluding that s.44 does not protect against claims for recovery of debts, interest, or costs, as these arise from pre-existing liabilities rather than new liabilities created by compliance.

On the US sanctions issue, the court considered the Ralli Bros principle, which limits the relevance of foreign illegality to contract enforcement when performance requires unlawful acts in another jurisdiction. The court found no sufficient factual findings on whether payment necessarily required a US correspondent bank and noted contractual terms precluded payment in cash or currencies other than US dollars, undermining the judge's reliance on Libyan Bank.

Critically, the court held that UniCredit could not rely on US sanctions as a defence because it failed to make reasonable efforts to obtain a US licence from OFAC. The application made by UniCredit focused on processing receipts from Sberbank rather than obtaining a licence to perform the payment obligations under the LCs, which was insufficient.

Holding and Implications

The court's final decision was to allow the appeal in part. It reversed the judge's conclusion that reg. 28(3) of the UK Regulations did not prevent payment under the LCs, holding that the regulation did apply and thus UniCredit's payment obligation was suspended until the UK licence process was completed.

Furthermore, the court decided that US sanctions do not assist UniCredit because it failed to make reasonable efforts to obtain a US licence, precluding reliance on US sanctions as a defence.

The direct consequence is that UniCredit was obliged to pay under the LCs subject to the UK sanctions regime, and the defence based on US sanctions was unavailable due to procedural failure. The court clarified the scope of s.44 SAMLA, limiting its protection to acts done in reasonable belief of compliance but not extending to recovery of debts, interest, or costs. No new precedent beyond the application of existing principles was established, but the decision provides significant guidance on the interpretation of sanctions regulations and the requirements for reliance on foreign sanctions defences.