Recently Decided Cases
DCW maintains a list of recently-decided court cases involving commercial letters of credit, standby LCs, demand guarantees, and other trade
English Court of Appeal (Civil Division) reversed trial judgments in favour of standby beneficiaries.
To support leases of civilian aircrafts, AirBridge Cargo Airlines LLC and JSC Aurora Airlines (collectively, “Applicants”), Russian companies, applied for and caused Sberbank Povolzhsky Head Office (Issuer) to issue seven standby letters of credit[[1]] in favour of Celestial Aviation Services Ltd. (Celestial-Beneficiary), an Irish aircraft lessor.[[2]] The standbys were later confirmed by UniCredit Bank GmbH, London Branch (Confirming Bank),[[3]] subject to English law and UCP600, and were payable in US dollars. Provided standby text from Issuer and Confirming Bank is reprinted below.
To support separate aircraft lease obligations, the AirBridge-Applicant again applied for and caused Issuer to issue five standby LCs[[4]] in favour of Constitution Aircraft Leasing (Ireland) 3 & 5 Ltd. (Constitution-Beneficiaries). These standbys were also subject to English law and UCP600. Confirming Bank added confirmations.
Following Russia’s invasion of Ukraine, new and broad sanctions were imposed against Russia by the EU, UK, and US. Beneficiaries[[5]] terminated the leases for default in March 2022, although several aircraft apparently remain in Russia. At or around the terminations, Beneficiaries made complying demands to Confirming Bank for payment on all twelve standbys. Confirming Bank dishonoured, claiming “it was unable to make payment because of the effect of sanctions.” (para.5).
Beneficiaries sued Confirming Bank alleging practically identical claims for wrongful dishonour and declarations regarding the sanctions position and costs.[[6]] In the interim, Confirming Bank sought licences from the relevant EU and UK authorities. A licence from US OFAC remained outstanding. The claims were joined and hearings were held in September 2022.[[7]] The trial court ruled in favour of Beneficiaries, finding Confirming Bank could not rely on UK or US sanctions to dishonour. In a subsequent judgment, the trial court awarded Beneficiaries interest and costs. Confirming Bank appealed both judgments. The English Court of Appeal (Civil Division), Males, Snowden and Falk, JJ., reversed in part and affirmed in part.
Confirming Bank raised four core issues on appeal: (1) that the “UK Regulations” reg.28(3) prohibited honouring the standby demands;[[8]] (2) even if reg.28(3) did not apply, whether the UK Sanctions and Anti-Money Laundering Act 2018 (SAMLA) s.44 gave Confirming Bank a defence as it reasonably believed the standby demands were covered by sanctions; (3) whether effecting payment through a US correspondent bank in USD raised an illegality issue under the Ralli Bros principle;[[9]] and (4) whether US sanctions prohibited payment.
Beneficiaries maintained that UK sanctions did not apply because the lease arrangements were entered into well before the March 2022 regulations. Under UK SAMLA s.44, the trial Judge erred in finding that Confirming Bank had the requisite subjective belief and, in any event, the statute did not “extend to statutory interest and costs”. Finally, Beneficiaries argued that US law could not support Confirming Bank’s decision to dishonour because: (1) no performance was required in the US; (2) payment could occur in pounds sterling or euros; and (3) the undertaking to honour arose before the new sanctions were effective and would not have prohibited payment in any event; Confirming Bank also failed to make reasonable efforts to obtain a US licence.
SAMLA is the principal legislation governing UK sanctions and the UK Regulations directed at Russia are promulgated thereunder. Breach of these regulations may result in serious consequences, including criminal charges. Confirming Bank principally rested its appeal on Chapter 2 “Restricted Goods”, Part 5 “Trade”, Reg.28 “Financial services and funds relating to restricted goods and restricted technology”. “Funds” are broadly defined and include letters of credit. Much of Reg.28’s text is reprinted in Judgment para.24. Pursuant to the new Russian sanctions enacted 1 March 2022, restricted goods and technology came to include civilian aircraft. Essentially, Confirming Bank argued that the trial court erred in ruling that Reg.28(3)(c)(ii) did not prohibit payment at the time Beneficiaries made their demands.[[10]]
For ease in discussing Confirming Bank’s appeal, the appellate court reviewed the text of a single standby that had been issued and confirmed in favour of Celestial-Beneficiary (para.28).[[11]] Against the twelve standbys, each identified a US dollar account and “[f]our of the accounts were in London and eight were in Dublin. The demands which specified a Dublin account also identified a correspondent account in the US through which payment was to be made.” (para.33). The appellate court then reviewed the decisions of the trial court and its “purposive” statutory interpretation (paras.34-43). The trial court concluded that Reg.28 did not prohibit payment due to the autonomous (independent) nature of standbys and that honouring the demands would not “be ‘in pursuance of or in connection with’ the supply of aircraft under the leases.” This so because the leases were entered into well before the new sanctions were promulgated (a “prospective” interpretation of the Regulations).
The appellate court, however, was not persuaded with this analysis. Instead of a “purposive” approach to interpretation, the court considered “that statutory construction remains an exercise of identifying the meaning of the words used in their statutory context.” (para.50). Put differently, construing the plain and ordinary meaning of terms within the concerned law. The appellate court viewed the trial decision as having “erred in assessment of the purpose.” (para.52). While subsections (1) and (2) of Reg.28 target “financial services or funds” provided to a “person connected with Russia” regarding or in pursuance of restricted goods, Reg.28(3) is broader.
As the appellate court noted, the provision of services or funds need not have such a Russian connection: “That is obviously an intentional extension.” Reg.28(3)(c)(ii) covers direct or indirect financial services or funds provided “in connection with” an arrangement or whose effect concerns restricted goods “for use in Russia.” (See Judgment para.55). The plain text of the law casts a broad net that does not require any alleged “casual connection” but merely a factual one; the appellate court accepted Confirming Bank’s argument that “restricted goods” as defined under reg.28 cannot alone apply “only to arrangements concerning goods which are ‘restricted’ when the arrangement was made.” In its interpretation, the appellate court expressed:
[I]t does not matter that the payee is unconnected with Russia. It is enough that the funds are provided in connection with a relevant arrangement. … it is also not in dispute that the object or effect of the arrangements comprising the leases was to make aircraft available either to persons connected with Russia or for use in Russia. Further, with an ongoing arrangement such as a lease there is a continued ‘making available’ during the currency of the lease. [para.58].
Moreover, the appellate court did not ignore the autonomous (independent) nature of LCs; quoting UCP600 Article 4(a), the court noted that the “scope” of autonomy concerns the undertaking of banks against documents presented by a beneficiary. Standby payment would undoubtedly be “in connection with” the leases, but demands for payment and honour would be against an allegation of default, not necessarily a default in fact.[[12]] In conclusion, the appellate court addressed a “fallback” argument advanced by Beneficiaries that a “temporal” connection was missing with the provision of funds as the leases had been terminated by the time LC payment was due. The court was unpersuaded.
The plain text of the law was merely descriptive; the provision of financing or funds would nevertheless be related to the aircraft: “The object of the leases is unchanged by their termination: it is and always has been the making available of aircraft for use in Russia or to a person connected with Russia.” This more so because payment was supported by LCs; banking personnel would merely be checking the documents and statements of default for compliance with LC terms and conditions, not looking beyond to actual underlying realties. Accordingly, the appellate court allowed Confirming Bank’s appeal on this matter and reversed the trial court decision.
While a decision was unnecessary on whether SAMLA s.44[[13]] provided a defence to Confirming Bank as it was determined that UK Regulation 28(3) prohibited payment (until an appropriate licence was obtained), the matter was one of first impression. As the parties had fully briefed the matter, the appellate court reviewed certain “points of significance”. The court did not disturb the finding that Confirming Bank then had a subjective belief that UK Regulations prohibited payment. The appellate court, however, did not agree that that belief was unreasonable. The trial court rested its decision on LC autonomy, that reg.28 could not be read retroactively and concern payment by a German bank (London branch) to Irish entities, and that Confirming Bank appeared to be more concerned with reimbursement from Issuer, i.e. its “cash flow”.[[14]]
The appellate court considered that even were it to have reached a different conclusion on reg.28, it still would have found that Confirming Bank had a reasonable belief that the payments were sanctioned: “[Confirming Bank] was required to form a view about new legislation at short notice. There is no doubt that the literal words appear to catch payments under the LCs.” (para.73). Thus, even were the decision regarding applicability of sanctions different, Confirming Bank could have relied on s.44 until it obtained appropriate licences. What the appellate court considered more pertinent, however, was whether s.44 (which protects against civil liability) also extended to interest and costs.
In reviewing the text of s.44 and Explanatory Notes (see Judgment paras.75-77), the matter was clearly relevant as it was not “dispute[d] in this case that if [Confirming Bank] succeeds in its appeal on reg. 28(3) then it will not be required to pay interest for any period before the grant of the ECJU and [UK] OFSI licences.” It was acknowledged that the statute would require clearer language to disallow any legal claim regarding non-payment; put differently, Confirming Bank faced considerable difficulty in alleging “having a complete immunity from suit for so long as it held a reasonable belief, or perhaps even asserted that it did so.” (para.81). In the appellate court’s view, resolving the tension of what type of suits could be brought and the timing thereof (i.e. declarations, forms of liability and limitations issues):
the answer to the conundrum lies in focusing on precisely what s.44(2) applies to, namely civil proceedings to which a person ‘would, in the absence of this section, have been liable in respect of the act’. The ‘act’ here is an omission, being a failure to pay under the LCs. [para.86].
The statute aims to relieve persons and banks from being pressured into potentially breaching sanctions by removing fear of civil litigation: “The section is concerned to protect against a liability which is created as a result of something done (or not done) in the reasonable belief that it is in compliance with a sanctions regulation. It is not concerned to protect against pre-existing liabilities.” (para.87).
Having analysed the text, purpose and proper (and improper) scenarios in which s.44 could be invoked, the appellate court turned first to the interest awarded by the trial court and the basis on which it did so. Interest was awarded to Beneficiaries at the US Prime rate under Section 35A of the Senior Courts Act 1981 (para.91) up to the date of LC payment. In also applying Lonestar Communications Corp LLC v. Kaye,[[15]] the trial court rejected Beneficiaries claims for a 2% uplift as no evidence was provided to show higher rates were incurred borrowing US dollars. S.35A provides the courts with discretionary supplemental relief regarding claims for “recovery of a debt.”
An “interest claim” is not independent of the underlying cause of action, but rather a power the court may choose to award. As the appellate court found nothing in s.44 to prevent a cause of action for debt recovery, “it logically follows that a[n] [interest] claim which is no more an adjunct of that, and has no independent foundation, should also not be barred.” Put differently, the power to award interest is meant to make a creditor whole had the debtor made timely payment, and the same should apply for an action or omission later adjudged under s.44. The appellate court noted in conclusion that the rate of interest awarded is also a matter of court discretion.
Similar to interest, the appellate court briefly concluded that s.44 would not protect a party from an award of costs. Moreover, “even if s.44 was engaged in any respect, it could only protect [Confirming Bank] in respect of acts or omissions in the reasonable belief that they were in compliance with regulations under s.1 of SAMLA. It provides no protection in relation to US sanctions.” (para.100).
Before reaching its final conclusion regarding US sanctions, the appellate court discussed the Ralli Bros principle which the trial court decided could be avoided by paying in cash or a different currency, whether sterling or euros. Ralli Bros stands for a limited exception to the general rule that “the enforceability of a contract governed by English law is determined without reference to illegality under any other law. The exception applies where contractual performance necessarily requires an act to be done in a place where it would be unlawful to carry it out”. (para.105). In this context, sanctioned LC payments in USD through US correspondent banks.
The appellate court, however, was not persuaded with the trial court’s reasoning and did not endorse the decision “that cash could be paid, or the alternative argument that payment could be made in a different currency. Quite apart from the fact that no demand for payment in cash or in a different currency was actually made, neither proposition appears to” consider the LC text. (para.108).
Reviewing the LCs, which required “strict conformity”, the court noted that a confirming bank’s undertaking to honour arises upon presentation of complying documents (also citing UCP600 Article 8). This is reinforced in UCP600 Article 2, defining ‘Complying Presentation’ and Article 7(c) details an issuing bank’s reimbursement undertaking to a nominated bank that has honoured complying documents. The same is reiterated in UCP600 Article 15, and the court notably mentioned that UCP600 Article 10(a) prevents LC amendment without issuer, confirming bank and beneficiary consent. It was clear from the LC that a complying demand would state payment via (1) transfer; (2) in US dollars; (3) to a specified account. Although a decision on whether Ralli Bros applied was avoided in light of the following conclusion, the appellate court expressed that
therefore, the judge was wrong to apply the Libyan Bank case as he did, without reference to the terms of the contract [LC] and without taking account of the fact that in Libyan Bank payment in cash was both contractually permitted and in fact demanded. [para.114].
English case law provides that a party seeking to avoid performance by relying on Ralli Bros cannot do so where it could have taken reasonable steps to avoid the illegality. This raised the issue of whether Confirming Bank undertook such steps to obtain a US licence from OFAC to permit payment. Undoubtedly, the burden was on Confirming Bank to pursue licences. Initially, the appellate court was not moved by Beneficiaries’ suggestion that Confirming Bank unreasonably delayed it application (submitted 29 April 2022) to OFAC as the promulgation of many new sanctions and their impact on numerous commercial transactions occurred in the US, EU and UK. Rather, the appellate court agreed that the terms of the application were unreasonable.
It was Issuer that Confirming Bank would look to for reimbursement, a bank soon added to the US OFAC Specially Designated Nationals list, however, the text ‘frame[d] the application in a way that link[ed] payment under the LCs to payment by [Issuer].”[[16]] While not “commercially unreasonable”, the appellate court considered the overall focus of processing receipts from Issuer as unreasonable efforts to pay Beneficiaries. As such, Confirming Bank was precluded from relying on US sanctions to invoke illegality in performance.
In sum, the appeal was allowed in part, reversing on the finding that UK sanctions did not apply and affirming the decision to disallow reliance on US sanctions, albeit for different reasons.
On the instructions of the applicant and for its account, we, Sberbank [Issuer] … hereby establish this irrevocable transferable standby letter of credit to authorise the beneficiary as lease manager of the aircraft to draw on [UniCredit London branch] (the ‘confirming bank’) an amount or amounts not exceeding a total of US dollars 3,600,000-00 … by signed written demand certificate in the following format (with the bracketed sections and the blanks completed):
Drawings under this standby letter of credit will be honoured upon receipt of such a demand certificate by mail, courier service or by hand at the counters of the confirming bank and the confirming bank will make payment to beneficiary's account specified in the demand certificate, value date no later than close of business on the 4 (fourth) succeeding Russia/London /USA business day following receipt of the demand certificate. If any drawing hereunder does not conform with these terms, confirming bank shall promptly notify you of that, state the reason(s) why and hold the document(s) presented at your disposal (or return them to you if you so request).
…
This standby letter of credit constitutes an obligation to make payment against strictly complying documents.”
Provided Confirmation Text:
“The above Issuing Bank has opened [an] Irrevocable Transferable Standby Letter Of Credit in your favour, a copy of which is enclosed. This copy forms an integral part of the Irrevocable Transferable Standby Letter Of Credit.
We herewith confirm this Irrevocable Transferable Standby Letter Of Credit and undertake to honour drawings under the above mentioned Irrevocable Transferable Standby Letter Of Credit up to and not exceeding the amount of USD 3,600,000.00 provided that the documents are presented in strict conformity with the terms and conditions of this Irrevocable Transferable Standby Letter Of Credit.…
This Irrevocable Transferable Standby Letter Of Credit is subject to Uniform Customs and Practice for Documentary Credits (2007 Revision International Chamber of Commerce Publication no.600.”
[[1]]: These standbys supported leasing of five aircraft.
[[2]]: Celestial-Beneficiary is a subsidiary of AerCap Holdings N.V. (Parent), a Dutch company.
[[3]]: Formerly UniCredit Bank A.G.
[[4]]: These LCs supported leasing of two aircraft. All leases were entered into between 2005 and 2014 and the LCs were issued between 2017 and 2020.
[[5]]: For convenience, Celestial-Beneficiary and Constitution-Beneficiaries are hereinafter “Beneficiaries”.
[[6]]: In principle, Celestial-Beneficiary claimed USD 45.8 million and Constitution-Beneficiaries claimed USD 23.5 million.
[[7]]: Following the hearings, the parties settled the principal amounts in October and November 2022 with some payments made in US dollars and others in sterling.
[[8]]: Specifically, the Russia (Sanctions) (EU Exit) Regulations 2019, SI 2019/855 (as amended in 2022). There was no appeal on the decision that UK Regs.11 and 13 did not support dishonour.
[[9]]: Ralli Bros v. Compañia Naviera Sota y Aznar, [1920] 2 KB 287 [England].
[[10]]: UK Reg.28(3) provides in part “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 … (c) directly or indirectly making restricted goods or restricted technology available … (ii) for use in Russia …”.
[[11]]: As mentioned, provided text is reprinted below.
[[12]]: “The LCs were issued only because of, and no doubt in amounts determined by reference to, the leases and they were triggered by an assertion of default under them.” (Judgment para.61)
[[13]]: This Section provides in part: “44 Protection for acts done for purposes of compliance (1) This section applies to an act done in the reasonable belief that the act is in compliance with – (a) regulations under section 1... (2) A person is not liable to any civil proceedings to which that person would, in the absence of this section, have been liable in respect of the act. (3) In this section ‘act’ includes an omission.”
[[14]]: See Celestial Aviation Services Ltd. v. UniCredit Bank, London Branch, [2023] EWHC 1071 (Comm) [England]
[[15]]: [2023] EWHC 732 (Comm) [England] (concluding Commercial Court default interest rate for USD awards should be US Prime)
[[16]]: The opening section of the licence application is reprinted Judgment para. 127
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