Celestial Aviation Services Limited v Unicredit Bank AG (London Branch)

Sanctions legislation must be construed purposively, by reference to its statutory context and legislative purpose. A prohibition on providing funds or financial services in connection with the supply of restricted goods does not ordinarily prevent payment under an autonomous letter of credit issued and confirmed before the prohibition came into force, where the goods were supplied earlier and payment benefits the beneficiary rather than the Russian parties. Asset-freeze provisions likewise do not prevent a confirming bank from satisfying its independent obligation where that does not deal with the issuing bank’s property or confer a significant financial benefit on it. The place of performance governs the application of the Ralli Bros principle. A bank may be required to pay in cash where the stipulated payment route would necessarily involve unlawful foreign conduct.

Two Part 8 claims were heard together. Celestial Aviation Services Limited and Constitution Aircraft Leasing (Ireland) 3 Limited and 5 Limited were beneficiaries of standby letters of credit confirmed by UniCredit Bank AG’s London branch. The letters secured obligations under aircraft leases to Russian companies. Following Russia’s invasion of Ukraine, UniCredit refused payment, relying on UK, EU and US sanctions.

The principal sums were later paid under licences or settlement arrangements. The court was asked to determine issues relevant to interest and costs, including whether UK Regulations 28, 11 and 13 prohibited payment, whether US law excused performance, and the application of the Ralli Bros principle.

1. UK Regulation 28. The court adopted a purposive approach to statutory interpretation. Regulation 28 operated prospectively. The relevant aircraft had been supplied, and the letters of credit had been issued and confirmed, before the prohibition came into force. Payment thereafter discharged UniCredit’s pre-existing, autonomous contractual obligation to the beneficiaries. It was not financial assistance provided to Russian parties in relation to a future supply of aircraft. Regulation 28 therefore did not relieve UniCredit of its payment obligations.
2. The autonomy principle was material. Although the letter-of-credit arrangements contained interconnected obligations, UniCredit’s obligation to the beneficiaries was independent of the issuing bank’s obligation to reimburse it. Payment benefited the beneficiaries. Any effect on the Russian lessees or Sberbank was collateral and did not determine the construction of Regulation 28.
3. Regulations 11 and 13. These provisions came into force after the relevant payment obligations had matured. In any event, UniCredit was not dealing with funds or economic resources owned, held or controlled by Sberbank when satisfying its own obligation. Nor did payment make funds available for Sberbank’s benefit. Sberbank’s separate liability was replaced by an equivalent reimbursement obligation to UniCredit, so there was no significant financial benefit.
4. US law and payment mechanics. The place of performance was England for the relevant Celestial payments and Ireland for the Constitution payments. The Ralli Bros exception applies only where performance itself requires an unlawful act in the place of performance. On the authority of Libyan Arab Foreign Bank, a dollar obligation could be discharged by tendering cash where payment through the usual correspondent-bank route was unlawful. UniCredit could not insist on that route merely because the demands contemplated it.
5. UniCredit had not established, on the expert evidence, that the CAPTA sanctions prohibited payment under the Constitution letters of credit. The US enforcement material relied upon was distinguishable because it concerned direct dealings with sanctioned entities. The court left the reasonable-efforts issue and EU-law issues undetermined.