UniCredit confirmed standby letters of credit securing aircraft leases to Russian airlines. By the time the lessors demanded payment, UK sanctions extended to funds provided in connection with arrangements to make aircraft available for use in Russia. The lessors were Irish and the leases had already ended. The Court nevertheless held that the payments were prohibited until licensed.
The letters of credit
Sberbank issued twelve irrevocable standby letters of credit, confirmed by UniCredit’s London branch, to secure the airlines’ obligations to their Irish lessors. Both the leases and the letters of credit predated the relevant sanctions.
A complying demand crystallised the bank’s duty to pay, generally within four or five business or banking days. The beneficiary had only to assert that the airline had failed to comply with the lease. No details of the failure were required.
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The sanctions amendment
Regulation 28(3)(c) originally concerned funds and financial services relating to military goods and technology. From 1 March 2022 it covered restricted goods and technology, including aircraft. A person must not directly or indirectly provide financial services or funds in pursuance of or in connection with an arrangement whose object or effect is making such goods or technology available to a person connected with Russia, or for use in Russia. The prohibition does not apply to anything done under a licence, and breach is a criminal offence.
The airlines defaulted after Russia’s further invasion of Ukraine. The lessors terminated the leases in March 2022 and demanded the aircraft back. Most remained in Russia without the lessors’ consent.
The lessors made complying demands. UniCredit refused to pay pending UK licences. The licensing process was completed on 13 October 2022 and the bank paid the principal under all twelve letters during October and November. What remained in dispute was interest and costs.
The courts below
Christopher Hancock KC, sitting as a Deputy High Court judge, held that the regulation was meant to prevent financial assistance to Russian parties in relation to the supply of aircraft. Payment fell outside that purpose because the aircraft had been supplied long before. He found that the bank believed the regulation applied, but not reasonably, so section 44 was not engaged. He awarded interest at the US Prime rate from the due dates until payment, and the lessors’ costs.
The Court of Appeal held that the regulation prohibited payment during the licensing period. It awarded interest for a period after licensing, a point which was not appealed. It also considered that section 44 would not protect the bank from a claim for a debt, or the associated interest and costs. The lessors appealed on the regulation and the bank cross-appealed on section 44.
Why the prohibition applied
Lord Stephens, with whom Lord Hodge, Lord Sales, Lord Burrows and Lady Simler agreed, rejected the argument that the funds had to cause the prohibited supply. The regulation requires a connection between the funds and an arrangement, not between the funds and the supply. The broad purpose of the Regulations, confirmed in reports laid before Parliament, is to put pressure on Russia, including by disrupting aviation. That purpose was served by a wide prohibition, with licensing available to mitigate unintended consequences. The licensing authorities, not the confirming bank, were the appropriate judges of the wider public interest.
The different statutory words were given different meanings. Funds provided “in pursuance of” an arrangement are provided under or in accordance with it. “In connection with” is wider: it covers anything which factually connects the funds to the arrangement, without causation. A practical reason for that width is that a complying demand need not explain the default, so the bank may not know whether it is being asked to pay ongoing rent or some earlier failure.
The leases remained relevant arrangements despite their date and subsequent termination. Their object had been to make aircraft available to Russian airlines for use in Russia. The airlines’ failure to return them explained their continued use. Payment under the letters of credit did not have to cause that use: the letters had secured the very leases to which the prohibition referred.
Section 44
The regulation issue meant that statutory interest was not to accrue before the licensing process was completed on 13 October 2022, and that the prohibition was relevant to costs. Lord Stephens nevertheless decided the cross-appeal on section 44 because it was likely to affect other cases and had been fully argued. The lessors had not appealed the finding that the bank’s belief was reasonable, so only construction remained.
Section 44 protects a person who acts or omits to act in the reasonable belief that this complies with sanctions regulations. It supplies a defence; it does not prohibit proceedings. A debt claim arises because of the omission to pay on a complying demand, so the liability is in respect of that omission. Interest and associated costs were covered for the same reason. The bank accepted that neither the regulation nor section 44 protected it after the licence was granted.
Verdict: The Supreme Court unanimously dismissed the lessors’ appeals and allowed the bank’s cross-appeals. Payment was prohibited until licensed. Section 44 also provided a defence to claims for the debt, interest and associated costs while the bank reasonably believed that withholding payment complied with the regulation. The Court did not decide the general effect of the prohibition on the underlying private rights.
