Court of Appeal rules in case involving payment obligations under US-UK sanctions

The UK’s Court of Appeal handed down its judgment in closely watched Celestial Aviation Services Limited v UniCredit, holding for the bank on one point but dissenting with the lower court’s decision on another, in what is considered a landmark case related to payment obligations under sanctions.

UniCredit had argued it is not obligated to pay for letters of credit opened in relation to the agreement for the lease of aircraft to Russian companies because payment would mean violation of Russia-related US and UK sanctions. It had based its case on Regulation 28 of the Russia (Sanctions) (EU Exit) Regulations 2019 No. 855 (as amended), which makes it illegal for a person to provide funds meant for supplying aircraft to Russia.

In March last year, the UK Commercial Court had held that neither the Regulations nor US sanctions affected UniCredit’s payment obligations under the LCs.

But in its 11 June judgment the Appeal Court allowed UniCredit’s appeal in relation to the Regulations, but upheld the Commercial Court’s decision in relation to US sanctions.

In his judgment Mr. Christopher Hancock KC wrote: ‘In conclusion I would allow the appeal in part. I would reverse the judge’s conclusion that reg. 28(3) of the UK Regulations did not prevent payment under the LCs. To the extent that US sanctions remain relevant in the light of that decision, I would decide that they do not assist UniCredit for a different reason to that given by the judge, namely that UniCredit has not established that it made reasonable efforts to obtain a licence from OFAC.’

The lower court had ruled the payment would not breach Regulation 28 because the funds were not directly for the supply of aircraft to Russia and that they constituted a separate obligation that predated the regulation.

But Hancock explained: ‘The purpose of the amended reg. 28 is not simply to prevent further aircraft going to Russia by preventing financing arrangements that facilitate that, albeit it undoubtedly does achieve that. Rather, it is a relatively blunt instrument that is intended to cast the net sufficiently wide to ensure that all objectionable arrangements are caught, such that the overall purpose of putting pressure on Russia is achieved.’