Celestial Aviation Services Limited v UniCredit Bank GmbH, London Branch

Payment under a letter of credit may be prohibited by sanctions against funding arrangements connected with restricted goods, even where the credit and underlying transaction pre-date the sanctions. The words “in connection with” require a broad factual connection. The autonomy of a letter of credit does not remove that connection.

Protection for acts done in the reasonable belief that they comply with sanctions applies to liabilities created by the relevant act or omission. It does not bar recovery of a pre-existing debt, statutory interest or associated costs. A party invoking foreign illegality must also make reasonable efforts to obtain any licence capable of permitting performance.

UniCredit confirmed twelve English-law standby letters of credit securing obligations under leases of aircraft to Russian airlines. Following Russia’s invasion of Ukraine, the beneficiaries made conforming demands. UniCredit withheld payment because it considered that UK and US sanctions prevented performance. The principal sums were paid after UK licences were obtained, leaving disputes about interest and costs.

In two Part 8 claims heard together, the Commercial Court held in [2023] EWHC 663 (Comm) that regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019 did not prohibit payment. In [2023] EWHC 1071 (Comm), it held that UniCredit could not rely on section 44 of the Sanctions and Anti-Money Laundering Act 2018.

The appeal concerned the application of regulation 28(3), section 44, and the Ralli Bros foreign-illegality principle to payments requiring, or alleged to require, US banking involvement.

1. Appeal allowed in part. Regulation 28(3)(c) of the Russia (Sanctions) (EU Exit) Regulations 2019 prohibited payment under the letters of credit until the relevant UK licences were granted. The provision is a deliberately broad funding prohibition designed to put pressure on Russia. It contains no grace period for pre-existing arrangements: paras [49]–[67].
2. The words “in connection with” require a factual connection, not legal dependence or causation. Payments under the letters of credit were factually connected with the aircraft leases because the credits secured lease obligations, were issued because of the leases and were triggered by asserted defaults. The continuing and later terminated status of the leases did not remove their object of making aircraft available for use in Russia or to Russian-connected persons: paras [55]–[65].
3. The autonomy principle governing documentary credits did not alter that conclusion. Autonomy makes the bank’s obligation independent of disputes under the underlying contract. It does not require the factual relationship between the credit and that contract to be ignored: paras [60]–[61].
4. UniCredit held the reasonable belief required by section 44 of the Sanctions and Anti-Money Laundering Act 2018. The reasonableness inquiry is objective once the subjective belief is established. It must be assessed without hindsight, particularly where new sanctions legislation required an immediate response: paras [70]–[74].
5. Section 44 protects against civil liability created by an act or omission undertaken in the reasonable belief that sanctions require it. It does not extinguish a pre-existing debt or prevent proceedings to recover that debt. Statutory interest under section 35A of the Senior Courts Act 1981 and associated costs are adjuncts of the debt claim and are likewise outside the immunity. Contractual default interest may raise different issues: paras [75]–[101].
6. The Ralli Bros doctrine is a limited exception applying where contractual performance necessarily requires an unlawful act in the place of performance. The letters of credit appeared to require transfer of US dollars to specified accounts. Strict compliance and freedom of contract meant that cash or another currency could not simply be substituted. However, UniCredit could not rely on US sanctions because it had not made reasonable efforts to obtain an OFAC licence permitting its own payments under the credits: paras [103]–[130].

1. Court of Appeal (Civil Division): In [2024] EWCA Civ 628, allowed UniCredit’s appeal in part. It reversed the ruling that regulation 28(3) did not prevent payment, but held that US sanctions did not assist UniCredit because reasonable efforts to obtain an OFAC licence had not been established.
2. Commercial Court: In [2023] EWHC 663 (Comm), held that regulation 28(3) did not prohibit payment under the letters of credit and that US sanctions did not excuse performance.
3. Commercial Court: In [2023] EWHC 1071 (Comm), held that UniCredit’s belief was not objectively reasonable for section 44 of the Sanctions and Anti-Money Laundering Act 2018. It awarded statutory interest and standard-basis costs.