The Court of Appeal today handed down its judgment in Celestial Aviation Services Limited v UniCredit [2024] EWCA Civ 628. The appeal, featured in The Lawyer’s “Top 10 Appeals of 2024”, considered whether Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019 prohibited payment under letters of credit (“LCs”) issued by Sberbank in respect of aircraft leases to Russian airlines entered into before the imposition of sanctions, between 2005 and 2014. 

Overturning the first instance judgment, the Court of Appeal held that Regulation 28 did prohibit payment under the LCs, because such a payment would be “in pursuance of or in connection with” an arrangement prohibited by the Regulations (i.e. the supply of aircraft). Underscoring the breadth of the language of Regulation 28, it emphasised that the provision is “a relatively blunt instrument that is intended to cast the net sufficiently widely to ensure that all objectionable arrangements are caught”. The solution, the Court said, where arrangements are caught that are not seen to be within the overall mischief, is supplied by the licensing regime. 

However, the Court also held that UniCredit was precluded from relying on US sanctions because it had not exercised reasonable efforts to obtain a license from OFAC (applying Banco San Juan Internacional Inc v Petroleos De Venezuela SA [2021] 2 All ER (Comm) 590). It followed that the rule in Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287, was inapplicable. UniCredit had erred in framing its application for a licence from OFAC as one for receipt of funds from Sberbank rather than for permission to perform its separate (and autonomous) payment obligation under the LCs.  

The Court also rejected UniCredit’s reliance on section 44 of the Sanctions and Anti-Money Laundering Act 2018, which it held did not protect a party with the reasonable (but mistaken) belief that sanctions applied from being pursued in respect of, and paying interest on, an underlying debt, or the costs of litigation to recover it.

The decision is likely to be commercially consequential given the reliance placed on letters of credit in international markets.

Akhil Shah KC and Leonora Sagan acted for the Respondents, Constitution Aircraft Leasing, instructed by Yasseen Gailani, Marina Boterashvili, and Jasdeep Gill of Quinn Emanuel Urquhart & Sullivan UK LLP.

The judgment can be found here.