Court of Appeal gives guidance on interpretation on sanctions legislation

11/06/24

The Court of Appeal has today handed down judgment in Celestial Aviation Services v UniCredit Bank, addressing the application of Russian sanctions and the relevance of US sanctions to English law governed payment obligations.

A lessor of aircraft supplied aircraft to Russian airlines under leases entered into before the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Regulations”) came into force. UniCredit was the confirming bank under seven letters of credit (“LCs”) opened in relation to those leases. In March 2022, the lessor served a demand under the LCs.  UniCredit refused to pay, claiming that it would be unlawful to do so on two bases: (i) the Regulations and (ii) US sanctions. Following an OFSI licence, the principal amounts under the LCs were then paid, leaving costs and interest in issue.

The Commercial Court had held that neither the Regulations nor US sanctions affected UniCredit’s payment obligations under the LCs. The Court of Appeal allowed UniCredit’s appeal in relation to the Regulations, but upheld the Commercial Court’s decision in relation to US sanctions.

The argument over the Regulations focused on regulation 28, which (in summary) provides that a person must not provide funds in connection with an arrangement whose object or effect is the supply of aircraft to Russia. Did payment under the LCs constitute the provision of funds in connection with the supply of aircraft to Russia?  The Commercial Court had held that it did not, in particular since the LCs were opened and aircraft supplied before regulation 28 came into force. The Court of Appeal disagreed with that analysis, holding that payment of the LCs was “in connection with” the leases, and it mattered not that aircraft were subject to a prohibition only from March 2022 onwards. At [66] the Court held that regulation 28 was a “relatively blunt instrument” which “risks catching arrangements that may not be seen to be within the overall mischief”, and that the licensing regime operated to mitigate any unintended negative consequences.

As to the remaining issues, the Court of Appeal accepted Celestial’s arguments that:

1. Section 44 of Sanctions and Anti-Money Laundering Act 2018, which gives a defence to a person who holds a reasonable but mistaken belief that sanctions apply, would not have given UniCredit a defence to paying interest and costs, in the event that Regulation 28 had not applied.  The claim to interest was an adjunct to the debt claim, which was not within the mischief sought to be addressed by s.44.
2. UniCredit could not rely upon illegality under US law. The Ralli Bros rule was not engaged because UniCredit had not taken reasonable steps to obtain a licence from the US authorities. In the light of that conclusion, the Court did not need to resolve the issue whether payment through a correspondent bank in New York was such as to make the US a relevant place of performance for the purposes of the rule in Ralli Bros.

The judgment is here.