The dispute resulted from a number of LCs issued in relation to leases of aircraft by Celestial and other entities to Russian airlines. When sanctions were imposed in March 2022 following the termination of these leases, UniCredit, the confirming bank, claimed it could not process payments due to sanctions restrictions; which in effect meant that the sanctions had retrospective effect. Although licences were later granted by UK and EU authorities for the principal amounts, other issues, including interest and costs, remained unresolved.

1. Broad application of Regulation 28 of the UK sanctions

The Court of Appeal held that Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019 prohibits payments under LCs where they are "in connection with" prohibited arrangements, regardless of whether the leases had been terminated. It emphasised the broad language of the regulation, which aims to cast a wide net over objectionable arrangements. This overturned the High Court's interpretation, which limited the scope to prospective arrangements only.

The Court of Appeal clarified that the licensing regime exists to address unintended consequences of sanctions and that parties should proactively obtain licences to mitigate risks.

2. Objective assessment of reasonable belief (SAMLA Section 44)

Citing section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), UniCredit argued it acted reasonably in believing that making payment would breach UK sanctions. The Court of Appeal upheld that while UniCredit’s belief was subjectively held, whether it was a "reasonable" required objective assessment. The Court of Appeal acknowledged that UniCredit’s interpretation of new legislation was reasonable, but this did not exempt UniCredit from interest claims.

3. Limits on alternative payment methods

The High Court suggested UniCredit could have made payment in cash or other currencies to bypass US sanctions, but the Court of Appeal rejected this reasoning in obiter. It reinforced the freedom to contract and strict compliance with LC terms, which required payment by US$ bank transfer. The Court of Appeal noted that cash payments were neither contemplated by the contracts nor demanded by the beneficiaries.

This finding aligns with recent decisions, reinforcing that parties cannot unilaterally alter performance terms to address sanctions issues.

4. Efforts to obtain licences

The Court of Appeal criticised UniCredit for failing to take “reasonable efforts” to secure a US licence, citing errors in how the application was framed. Instead of seeking permission to fulfil LC payment obligations, UniCredit focussed on receiving funds from Sberbank, undermining its ability to rely on the Ralli Bros principle (which protects parties from performing contracts illegal at the place of performance).

This judgment provides critical guidance for financial institutions and corporates navigating the intersection of sanctions and contractual obligations:

• Broad scope of sanctions: Sanctions regulations may apply retrospectively, capturing arrangements even after their termination. Proactive licensing is crucial to mitigate risks.
• Strict compliance with contracts: Parties cannot deviate from agreed terms (eg, currency or payment method) under the guise of avoiding sanctions.
• Objective reasonableness standard: Beliefs about compliance with sanctions will be assessed objectively, even if held in good faith.
• Reasonable efforts in licensing: Applications to sanctions authorities must be clear and correctly framed to demonstrate compliance with local laws.

This case reinforces the need for meticulous drafting of contracts, vigilant compliance with sanctions regimes, and careful navigation of payment obligations under complex international laws.

The Court of Appeal judgment can be found here.