UniCredit Bank GmbH, London Branch v Constitution Aircraft Leasing (Ireland) 3 Ltd and another

Factual and Procedural Background

The opinion concerns two appeals and cross-appeals arising from materially identical actions about whether a confirming bank’s payment obligations under 12 irrevocable standby letters of credit were prohibited (and therefore suspended) by UK Russia-related sanctions until UK licences were obtained.

Company A (a German bank acting through its The City branch) confirmed 12 US-dollar standby letters of credit (governed by English law and incorporating UCP 600) that had been issued by Company B (a Russian bank). The beneficiaries were three Irish-incorporated aircraft lessors and related entities, collectively Plaintiffs. The letters of credit secured obligations under civilian aircraft leases between the lessors and two Russian airlines (Company C and Company D).

Following the invasion of Country B by Country A, UK sanctions were significantly expanded. With effect from 1 March 2022, regulation 28(3)(c) of the Russia (Sanctions) (EU Exit) Regulations 2019 (as amended) extended restrictions to “critical-industry goods,” including aircraft. In March 2022, after lessee defaults, Plaintiffs made compliant demands under the letters of credit, crystallising Company A’s payment obligations (due no later than mid-to-late March 2022 depending on the instrument). The lessors terminated the leases shortly after 1 March 2022 and demanded return of the aircraft; most aircraft were not returned and remained in Country A, used there without lessor consent and in breach of the leases.

Company A refused payment pending licences, asserting regulation 28(3)(c) prohibited payment. It applied for UK licences through Government Agency A (financial sanctions licensing) and Government Agency B (trade sanctions licensing). Licences were granted in late September and on 13 October 2022 (financial licence), after which payments were made, with some paid immediately and the remainder approximately six weeks later.

At first instance, Judge Hancock held that regulation 28(3)(c) did not prohibit payment under the letters of credit. In a later judgment, he held section 44 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) was not engaged because Company A’s belief in prohibition was not reasonable; he awarded interest (under section 35A of the Senior Courts Act 1981) and costs to Plaintiffs.

The Court of Appeal reversed on regulation 28(3)(c), holding payment was prohibited until licences were obtained and the payment obligation was suspended in the interim. It awarded interest only for the post-licence, pre-payment delay (about six weeks), and addressed section 44 SAMLA only obiter.

In this court, Plaintiffs appealed the Court of Appeal’s interpretation of regulation 28(3)(c). Company A cross-appealed on the construction of section 44 SAMLA (a point treated as one of general importance), noting that the reasonableness of its belief was not challenged in this court.

Legal Issues Presented

1. On the true interpretation of regulation 28(3)(c) (as amended with effect from 1 March 2022), was Company A prohibited from paying Plaintiffs under the letters of credit (and thus was its payment obligation suspended) until UK licences were obtained?
2. On the true construction of section 44(2) SAMLA, does the statutory “protection for acts done for purposes of compliance” extend to protection against (i) an action to recover a debt, (ii) an award of interest on that debt, and (iii) associated costs, where the debtor omitted to pay in the reasonable belief that payment was prohibited by sanctions regulations?

Arguments of the Parties

Plaintiffs’ Arguments

• Regulation 28(3)(c) should be construed purposively as requiring a causal link between the provision of “financial services or funds” and the prohibited making-available of aircraft; on the facts, aircraft remained in Country A because the lessees wrongfully retained them, not because of any bank payment.
• The aircraft leases were not “arrangements” for regulation 28(3)(c), variously because: (i) they were lawful when made/performed; (ii) they pre-dated 1 March 2022; and/or (iii) once terminated, they ceased to be relevant “arrangements” (relying on the present tense “is” in “whose object or effect is”).
• On section 44 SAMLA, Company A lacked the requisite reasonable belief, and/or section 44(2) (properly construed) did not immunise against debt claims, interest, or costs.

Company A’s Arguments

• The aircraft leases were arrangements whose object or effect was making aircraft available to persons connected with Country A or for use in Country A, and the letters of credit were issued in connection with those leases; therefore payment was prohibited by regulation 28(3)(c) until licences were obtained.
• The amended sanctions were structured to cast a “wide net,” with the licensing regime as the mechanism to mitigate unintended impacts; regulation 28(3)(c) does not require a causal link between payment and the supply/making-available of aircraft.
• Even if payment had not been prohibited, section 44 SAMLA would protect Company A (given its reasonable belief) against liability for the debt, interest, and costs until a licence was obtained.

Table of Precedents Cited

Court's Reasoning and Analysis

Issue 1 (regulation 28(3)(c)): Judge Stephens (with whom the other members of the court agreed) rejected the contention that regulation 28(3)(c) requires a causative link between the bank’s payment and the prohibited making-available of aircraft. The text, the court held, requires that the provision of “financial services or funds” be “in pursuance of or in connection with” an arrangement whose object or effect is making restricted goods (including aircraft) available to a person connected with Country A or for use in Country A. The court emphasised that the required “connection” is to the arrangement, not to a separate causal contribution to the prohibited supply.

The court accepted that the sanctions regime’s broad public purpose is to put pressure on Country A, including by disrupting strategic industries such as aviation. It held that the legislative design achieves that purpose by “casting a wide net” (a “blunt instrument”), tempered by a licensing system to mitigate unintended effects. The court considered that private actors (including banks) may lack information to determine whether a particular demand relates to prohibited activity, especially since compliant demands under these letters of credit could be made without disclosing detailed default facts. The licensing authority was treated as the appropriate arbiter of the broader public-interest judgment.

On the meaning of “in pursuance of” versus “in connection with,” the court applied the interpretive presumption that different words carry different meanings. It agreed with the Court of Appeal that “in connection with,” used alongside “in pursuance of,” signals broader reach. “In connection with” was construed as requiring a factual connection to the arrangement, not causation.

The court also rejected arguments that the aircraft leases were not “arrangements” within regulation 28(3)(c) because they were lawful when made, pre-dated 1 March 2022, or had been terminated before payment. The regulation contains no temporal limitation to post-amendment arrangements. Further, termination did not change the leases’ “object” (making aircraft available for use in Country A), and the descriptor “is” was read as directed to characterising the arrangement when entered into. The court additionally noted that treating terminated leases as outside the regulation would enable avoidance by drafting payment to occur after termination.

Applying that construction, the court held there was an evident factual connection between the letters of credit and the aircraft leases (the letters were issued in connection with the leases). Accordingly, payment under the letters of credit was prohibited by regulation 28(3)(c) until licences were obtained. The court proceeded (without deciding) on the parties’ shared assumption that the effect was to suspend enforceability of the payment obligation during the prohibited period; and it noted it was common ground that statutory interest should not accrue during any period of prohibition.

Issue 2 (section 44 SAMLA): Although not necessary to dispose of the case given the conclusion on regulation 28(3)(c), the court addressed section 44 because of its broader significance and because full argument had been heard. It identified section 44’s purpose as protecting persons who act or omit to act in the reasonable belief they are complying with sanctions, thereby furthering the public purpose of the sanctions regime.

The court held section 44 does not bar proceedings (absent clear words, consistently with access-to-justice principles), but provides protection from civil liability “in respect of” the protected act/omission. In the court’s view, a debt claim arises only because of non-payment; therefore, where a defendant’s omission to pay is the relevant protected omission, liability in debt is “in respect of” that omission and falls within section 44(2). The court reasoned similarly for interest and costs, treating them as flowing from the omission to pay and therefore also covered by the statutory language.

Holding and Implications

Holding: DISMISSED the Plaintiffs’ appeals on regulation 28(3)(c), and ALLOWED Company A’s cross-appeals on the construction of section 44 SAMLA.

Implications: The court held that regulation 28(3)(c) prohibited payments under these letters of credit until licences were obtained, with the result (on the parties’ common ground) that the payment obligation was suspended during that period and statutory interest did not accrue while the prohibition applied. The court further held, as a matter of statutory construction, that section 44(2) SAMLA can protect a person (who has the requisite reasonable belief) against civil liability for debt, interest, and associated costs during the period of non-payment in purported compliance with sanctions. The opinion indicates that the sanctions framework is intended to operate broadly, with the licensing regime functioning as the mechanism to address unintended negative consequences rather than narrowing the prohibitions through a causation-based judicial construction.