If US sanctions prevent a funds transfer – you can always pay in cash

23/03/23

The Commercial Court has today handed down a significant judgment 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 companies under leases entered into before the Russia (Sanctions) (EU Exit) Regulations 2019 (“the UK Regulations”) came into force. UniCredit was the confirming bank under seven letters of credit opened in relation to those leases. In March 2022, the lessor served a demand under the letters of credit.  UniCredit refused to pay, claiming that it would be unlawful to do so on two bases: (i) the UK Regulations and (ii) US sanctions.

In today’s decision in Celestial Aviation Services v UniCredit Bank, Christopher Hancock KC (sitting as a Deputy High Court Judge) held that neither the UK Regulations nor US sanctions suspended or otherwise affected UniCredit’s payment obligations under the letters of credit.

The argument over the UK 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 letters of credit constitute the provision of funds in connection with the supply of aircraft to Russia?  No, held the Deputy Judge. The letters of credit created an autonomous payment obligation which was independent of the underlying leases and entered into before regulation 28 came into force. Discharge of that payment obligation could not be regarded as being in connection with the prospective supply of aircraft to Russia.

UniCredit also argued that US sanctions prevented it from making payment, notwithstanding that the letters of credit were governed by English law. US sanctions were said to be engaged because payment under the letters of credit was required to be made in US dollars. UniCredit argued that, under the Ralli Brothers rule, payment via a correspondent bank in New York would be illegal in the place of performance.  The Deputy Judge rejected UniCredit’s argument that US law precluded payment. Following Libyan Arab Foreign Bank v Bankers Trust [1989] 1 QB 728, the Deputy Judge held that even if a funds transfer via a correspondent bank would be unlawful as a matter of US law, it would have remained possible for UniCredit to pay by another means, including the tender of cash.

The decision will be of interest to practitioners in two main respects.  It has thus far been a rarity for claimants to seek declaratory relief as to the effect of the UK Regulations on a transaction or payment obligation. This decision paves the way to further cases of this kind. Secondly, the potential scope of US sanctions is far-reaching given that US dollar payments will typically be processed via a correspondent bank in the US.  The Deputy Judge’s decision significantly narrows the relevance of US sanctions to an English law governed payment obligation.

The judgment is here