Sanctions Do Not Excuse Non-Payment to a Non-Sanctioned Party If Obligation Accrues Prior to Sanctions Coming into Force
- Sanctions operate prospectively and do not affect payment obligations to a non-sanctioned party accruing before sanctions became effective.
- Payment obligations under standby letters of credit at issue were autonomous and unconnected with the underlying transaction.
- The fulfilment of an independent obligation owed by a German bank to Irish-incorporated aircraft lessors was found not to have intended to benefit the Russian entities involved in other elements of the transaction.
The English Court recently confirmed that sanctions do not excuse non-payment to a non-sanctioned party where the aircraft lease arrangements and related letters of credit were created before sanctions came into effect: Celestial Aviation Services Limited, Constitution Aircraft Leasing (Ireland) 3 Limited and another v UniCredit Bank AG (London Branch)  EWHC 663 (Comm).
In 2005 – 2014, the claimants, two Irish aircraft lessors, entered into aircraft leases with Russian lessees. The leases were supported by standby letters of credit issued by Sberbank of Russia. Between 2017 and 2021, the London branch of UniCredit confirmed the Sberbank letters of credit, of which the claimant lessors were beneficiaries. The UniCredit letters of credit were governed by English law and were payable in U.S. dollars.
Following the imposition of sanctions in the wake of the Russia/Ukraine conflict, events of default arose under the leases. The claimant lessors terminated the leasing of the aircraft and made demands for payment on UniCredit. UniCredit did not dispute that it was liable to pay under the letters of credit, but considered itself to be precluded from doing so by UK, EU and U.S. sanctions imposed from February 2022. Sberbank became subject to UK asset freeze measures on April 6, 2022.
The Court was asked to determine whether certain Regulations under the Russia (Sanctions) (EU Exit) Regulations 2019 no. 855 (as amended) (UK Regulations) prohibited payment in the absence of a UK sanctions license.
Having considered Regulations 11, 13 and 28, the Court concluded that UniCredit was not relieved of its payment obligations by the sanctions, for the following reasons:
- The purpose of the Regulation 28 was to prevent the provision of financial assistance to Russian parties in relation to the supply of aircraft. Regulation 28 operated prospectively, not retrospectively. The aircraft under the leases had been supplied and the LCs issued long before the sanctions came into effect when it was lawful to supply the aircraft and provide the LCs.
- Regulation 11 (which prohibits dealing with funds or economic resources owned, held or controlled by sanctioned persons) and Regulation 13 (which prohibits making funds available for the benefit of sanctioned persons) did not prohibit payment by UniCredit under the LCs because it would not involve dealing or interfering with Sberbank’s property nor lead to the discharge, in whole or in part, of Sberbank’s obligations.
- The fact that the fulfilment of the payment obligation under the LCs had the collateral result of discharging the independent obligations of the Russian lessees and Sberbank (by that point, a sanctioned entity) to the claimants was a “wholly collateral matter.”
- The payment obligations under the LCs were autonomous and unconnected with the underlying supply of aircraft or any other element of the transaction. The fulfilment of an independent obligation owed by a German bank to Irish lessors could not be said to have intended to benefit the Russian entities involved in other elements of the overall transaction.
The Court also rejected UniCredit’s contention that it would be committing an offence under U.S. law by making a payment in U.S. dollars. Firstly, it found that no relevant U.S. law prohibition existed at the time payment became due. Secondly, the beneficiaries could demand payment in cash rather than through a US correspondent bank which would block any payment.