On 11 June 2024, the UK Court of Appeal handed down its judgment in the case of Celestial Aviation Services Limited v UniCredit Bank GmbH (London Branch) [2024] EWCA Civ 628. In summary, the Court of Appeal determined that, in the context of payment obligations under standby letters of credit (“LCs”), sanctions measures relating to financing the supply of restricted items can apply retrospectively as well as prospectively, significantly widening the scope of application of such measures and creating uncertainty around the permissibility of payments where they have a degree of connection with restricted items, including where those items were lawfully supplied prior to the sanctions being introduced. The Court of Appeal overturned the 2023 High Court judgment that found UniCredit was not justified in refusing to make payment to aircraft lessors under LCs issued in connection with aircraft leases to Russian companies that were entered into prior to the relevant sanctions being introduced.
The Court of Appeal considered:
- the scope of Regulation 28 of the Russia (Sanctions) (EU Exit) Regulations 2019 (“UK Russia Regulations”), which prohibits the provision of financial services or funds in relation to the supply of certain restricted goods;
- the scope of Section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), which provides that a party shall have a defence in civil proceedings in respect of acts done in reasonable belief that the acts are in compliance with UK sanctions; and
- the relevance of US sanctions where a payment obligation is denominated in US dollars.
The Court of Appeal concluded that UniCredit was entitled to withhold payment on the basis the arrangement fell within the applicable sanctions regime. Furthermore, the Court found that even if the relevant sanctions restrictions did not apply, UniCredit would have been able to avail itself of a “reasonable belief” defence in support of withholding payment.
The Court of Appeal’s decision has far-reaching implications for any parties involved in trade finance transactions (either banks or beneficiaries), or other financing activities connected to trade in goods that are (or have become) subject to sanctions. The case is also significant in highlighting the extent to which UK courts may take differing views of key elements of the UK sanctions framework. Read our full alert here.
