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Win for the bank in aviation letter of credit claims – Supreme Court holds sanctions bar payments

The linked appeals in UniCredit Bank v Celestial Aviation Services,[1] involved three Irish incorporated aviation lessors (the “Claimants”) which entered into civilian aircraft leasing agreements with Russian airlines between 2005 and 2014. As security for the lessors’ obligations under the leases, a Russian bank issued a total of 12 letters of credit between 2017 and 2020, of which the Claimants were the beneficiaries. UniCredit Bank GmbH (“UniCredit”), a German bank acting through its London branch, acted as the confirming bank for each letter of credit.

Following the Russian invasion of Ukraine in February 2022, the UK amended the Russia (Sanctions) (EU Exit) Regulations 2019/855 (the “Regulations”) to expand the scope of the sanctions it imposed on Russia. The leases all terminated for default in March 2022 and the Claimants made demands to UniCredit for payment under the letters of credit. Despite the termination, most aircraft were not returned and continue to be used in Russia, without the Claimants’ consent and in breach of the lease terms.

UniCredit considered that the amended Regulations, in particular Regulation 28(3), prohibited it from making the payments until it obtained a licence from the UK authorities, which it applied for the same month. This was because the effect of the amendment was to extend a prohibition regarding military goods and military technology to encompass certain civilian goods, including critical-industry goods such as aircraft. Regulation (28(3)(c)) reads as follows:

“(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 - …

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

(i) to a person connect with Russia, or

(ii) for use in Russia”.

Additionally, UniCredit contended that even if Regulation 28(3)(c) did not prohibit it from making payments under the letters of credit, section 44 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) protected it until a licence was obtained.

The first instance and appeal proceedings

The Claimants each brought claims against UniCredit. After the first instance hearing but before judgment, UniCredit obtained a licence and paid the principal amounts due under the letters of credit. The dispute was thereafter confined to interest and costs for the period between the licences being granted and the date of payment. 

The High Court found in favour of the Claimants. However, the Court of Appeal reversed this and allowed UniCredit’s appeal as a matter of statutory interpretation of Regulation 28(3)(c). 

Supreme Court decision

The Supreme Court unanimously dismissed the appeal finding that Regulation 28(3)(c) of the Regulations prohibited UniCredit from discharging payment obligations owed to the Claimants under letters of credit issued as security for arrangements to lease aircraft to Russian airlines, where those lease agreements were lawful when entered into and terminated before the payment obligations fell due.

It also allowed the cross-appeal that section 44 of the SAMLA would have provided protection to UniCredit against an action to recover a debt, an award of interest on the amount of the debt and an award of associated costs. Further details of the Supreme Court’s decision are set out below.

Issue 1: Interpretation of Regulation 28(3)(c)

The Supreme Court rejected the Claimants’ interpretation that Regulation 28(3)(c) requires a causal connection between the provision of financial services and the prohibited supply (i.e., that prohibiting a German bank from paying Irish entities funds which do not relate to making aircraft available from 1 March 2022 to persons connected with Russia or for use in Russia is not within the mischief of the Regulations because payment by UniCredit does not disrupt Russia’s strategic industries).[2] This was for several reasons:

  • The language of Regulation 28(3)(c) does not require a connection between the provision of financial services or funds and the prohibited supply of aircraft.  Rather, it requires a connection between the provision of financial services or funds and an arrangement. [3]
  • There is no doubt as to the purpose of the Regulations. The very broad purpose is to put pressure on Russia by disrupting strategic industries such as aviation, but that purpose can be achieved in different ways. The Supreme Court accepted UniCredit’s submissions that the structure of casting the net wide with a licensing system available to mitigate any unintended consequences serves the purpose of Regulation 28(3)(c): “[t]he net is cast wide because vital public interests are involved and the arbiter of those interests should be public authorities involved in the licensing process.” [4]
  • Regulation 28(3) uses different words (“in pursuance of” and “in connection with” the arrangement) thereby indicating that they have different meanings. The Supreme Court approved of the Court of Appeal’s interpretation of the use of the phrase “in connection with” in conjunction with “in pursuance of” indicating that there was a clear intention to cast the net more broadly than financial services or funds provided under or in accordance with the terms of the relevant arrangements. Accordingly, the conjunction of the two phrases meant anything which factually connects the provision of the funds to the arrangement. [5]

On the point as to whether the aircraft leases were arrangements within Regulation 28(3)(c), the Supreme Court found that there was no support in the wording of the Regulation for the submission that they were not relevant arrangements because there was no prohibition in respect of making aircraft available at the time the leases were entered into and the aircraft were made available.[6] The words “object or effect” of the leases were unchanged by their termination. As it was put by the Court of Appeal, and as concurred with by the Supreme Court: “[i]t is and always has been the making available of aircraft for use in Russian or to a person connected with Russia”.[7]

On that basis, the Court concluded that there was no requirement for a causative connection between the provision of financial services or funds and the prohibited supply. There has only to be a connection with an arrangement the object or effect of which is making available aircraft to persons connected with Russia or for use in Russia. Therefore, UniCredit was prohibited under the Regulations from making payments under the letters of credit until licences to do so were obtained.

Issue 2: Section 44 of the SAMLA

Whilst UniCredit succeeded on its arguments in respect of Regulation 28(3)(c), meaning that it was not necessary for the Court to resolve the issue as to whether the protections under s 44(3) of the SAMLA applied, it nevertheless considered it appropriate to deal with its interpretation. The Supreme Court held that:

  • The purpose of section 44 is to provide protection for a person who acts or omits to act in the reasonable belief that the act or omission is in compliance with, for instance, Regulation 28(3)(c). The protection provided to the person furthers the public purpose of the sanctions provision. A person with the requisite belief should have that protection because making payments might undermine the sanction regime. [8]
  • The protection provided is that a person is not liable to any civil proceedings to which they would, in the absence of the provision, have been liable in respect of the act. However, the Supreme Court confirmed that Section 44 does not prohibit civil proceedings, as it would prevent access to justice and that would require clear words. In this case, as UniCredit’s liability is in respect of its omission to pay upon receipt of a compliant demand under the letters of credit, the protection afforded falls within the language used in section 44(2). Accordingly, the Supreme Court confirmed that section 44 would have provided protection to UniCredit against an action to recover a debt, and associated interest and costs.
Comment

The Supreme Court’s judgment is clear that UK Russia-related sanctions are to be interpreted widely.  The effect of this is that parties cannot assume that the end of an underlying transaction (such as the termination of an aircraft lease) severs the sanctions risk. Payments under financial instruments such as letters of credit can still be caught if they are factually connected to arrangements whose object or effect is making restricted goods (such as aircraft) available to Russia or for use in Russia. However, if a bank is acting in the reasonable belief that they are complying with sanctions regulations, they will be protected from civil proceedings for non-payment under Section 44 of the SAMLA.

This gives latitude to banks not to pay out under financial instruments on the basis that they are prohibited from doing so or first need permission to do so under a licence.  Lessors’ requesting payment will have limited recourse in these scenarios and may consider this allocation of risk where new arrangements are made with lessees in regions where there is a risk that the UK government may impose sanctions in the future.

Footnotes

[1] UniCredit Bank GmbH, London Branch (Respondent) v Constitution Aircraft Leasing (Ireland) 3 Ltd and another (Appellants); UniCredit Bank GmbH, London Branch (Respondent) v Celestial Aviation Services Ltd (Appellant) [2026] UKSC 10.
[2] Paragraph 72.
[3] Paragraph 75.
[4] Paragraphs 76 – 77.
[5] Paragraph 80.
[6] Paragraph 83.
[7] Paragraph 86.
[8] Paragraph 91.