No retrospective relief: Sanctions are no bar to making payments due under pre-existing letters of credit in aircraft leasing dispute

In Celestial Aviation Services Limited and Constitution Aircraft Leasing (Ireland) 3 Limited and another v UniCredit Bank AG (London Branch) [2023] EWHC 663 (Comm), the English High Court considered two concurrent claims in relation to payment under standby letters of credit which were provided before the Russian sanctions. The judgment is clear that sanctions will not ‘bite’ where the leases and agreements associated with the letters of credit were put in place prior to the relevant sanctions regime coming into effect.

Background

The claims were brought by Celestial (regarding numerous aircraft leases between various subsidiaries of its parent company (AerCap Holdings N.V.) and two Russian lessees) and Constitution, (relating to an aircraft leasing agreement with the Russian cargo airline AAL) and whose letters of credit were confirmed by UniCredit between 2017 and 2021, it in turn confirming the letters of credit issued by the Russian bank, Sberbank, in respect of the aircraft leases entered into between 2005 and 2014. The monies were payable in US dollars.

Celestial and Constitution were the respective beneficiaries and it was common ground between parties that, subject to the question of sanctions, UniCredit was liable to pay under the letters of credit.

Both claimants made valid demands for payment in March 2022 due to the lessees’ failure to comply with obligations under these leases, which were ultimately terminated by Celestial and Constitution. UniCredit however refused to pay under the claimants’ letters of credit, stating that it was prohibited from making any payments due to the Russian sanctions imposed by the UK, US and EU in response to the conflict in Ukraine in February 2022.

The Court was required to consider whether the UK Regulations, being the Russia (Sanctions) (EU Exit) Regulations 2019, prohibited payment under the letters of credit in the period prior to demand and if compliance with a contractual obligation would involve the commission of a criminal offence, compliance could be excused.

The Court’s decision

The Court expressed its “clear conclusion that UniCredit was not relieved of the obligation to make payment” nor prohibited from doing so for a number of reasons:

1. Payment by UniCredit did not discharge Sberbank’s obligations as they were still liable to UniCredit, nor did it benefit the Russian entities involved in other elements of the overall transaction. - The intention of the legislation was to ensure that financial assistance was not provided to Russian parties.
2. The aircraft supply and confirmation of the letters and UniCredit’s obligation took place before the sanctions’ prohibitions came into effect - the regulations are to be applied prospectively and not retrospectively.
3. Whilst the payments being fulfilled may also have the collateral result of discharging the independent obligations of the lessees and Sberbank to the Claimants, the Court held this was “a wholly collateral matter”.
4. Lastly, the Court reiterated that the autonomy principle remains important; whilst the letters of credit involve interconnected parties and relationships, the various strands will all involve independent contractual obligations. In this case, UniCredit were not dealing directly with the sanctioned entity in making the payments, therefore a clear distinction could be made.

Key takeaways

The Court’s overarching conclusion in this case is that sanctions will not relieve a party of its payment obligations on the basis of a prohibition taking effect after the obligation was created. It is good for commercial parties to remember that they are unable to shirk their liabilities retrospectively, even if fulfilment takes place after a relevant sanctions regime has been enforced.

The Court also agreed with the Claimants that it was critical to take a step back and “ask whether the fulfilment of an independent obligation owed by a German bank to Irish companies can be said to be intended to benefit the Russian entities who happen to be involved in other elements of the overall transaction.” The Court’s answer to this question was a firm “no” and sets a clear approach for future cases relating to similar multi-party transactions and how they interact with sanctions regimes.

As practical advice for commercial parties and their representatives alike, the Court also emphasised the need to approach statutory wording in light of its purpose, rather than the more literal approach adopted by UniCredit. Parties must remain focused on the legislature’s intent when applying the law, particularly where legislation is new, complex or yet untested.

Authored by Sophie Eyre, with thanks to Vruksha Patel for her help with this article.