English Court Says Sanctions Did Not Prevent Bank from Paying under LCs

Further to previous reporting (“Aviation Company Says Bank Wrongfully Dishonored LCs Backing Russian-Leased Planes”, April 2022 DCW 6), the Commercial Court in London issued judgment on 23 March 2023 in favor of Celestial Aviation Services and Constitution Aircraft Leasing after the aircraft lessors which as beneficiaries had made admittedly conforming demands on UniCredit Bank as confirming bank for letters of credit of Russia’s Sberbank aggregating over USD 69 million.

UniCredit’s position for initially not paying the conforming draws on its confirmations was based on UK, US, and EU sanctions regulations prohibiting it from making payment. After Russia’s February 2022 invasion of Ukraine, those sanctions prohibited transactions in connection with providing restricted goods, technology, and related financial assistance to Russian companies.

UniCredit applied for and was granted licenses by the government export regulation authorities of the UK Office of Financial Sanctions Implementation (OFSI), the UK Export Control Joint Unit (ECJU), and Germany’s central bank (Bundesbank) to pay the LCs. Licenses were applied for with the US Office of Foreign Assets Control (OFAC), but no response was received from it as of the date of the opinion.

OFSI, ECJU, and Bundesbank granted licenses to UniCredit to make payment for the draws on its confirmations of Sberbank’s LCs even though, the lessors claimed, UniCredit’s applications were misleading because they conditioned the license to pay on UniCredit’s right to recover payment from Sberbank as issuing bank.

After these licenses were granted but before the case was decided, UniCredit paid the draw amounts to the aircraft lessors. The case proceeded to determine UniCredit’s liability for interest and costs. Resolution of that liability required the Court to determine whether UniCredit’s position on sanctions regulations was a valid defense against making payments to draws submitted to it as confirming bank. The Court looked into and decided against UniCredit not only on the sanctions prohibiting Russian companies from obtaining or using restricted goods (which included aircraft) and technology, but also on the matter of whether payment of the LC confirmations constituted financial assistance to Russian companies “in connection with” restricted goods and technology.

The aircraft lessors’ position as beneficiaries adopted by the Court was that UniCredit’s confirmations of the LCs were primary and autonomous obligations of UniCredit under governing LC rules and principles, including UCP600 Article 4(a) which provides that banks “are in no way concerned with or bound by” the sale or other contract, such as the underlying lease transaction in this case. The beneficiaries argued and the Court noted that payment does not result in or facilitate delivery of restricted goods or technology or financial assistance regarding them to Russia, particularly due to the fact that the confirmations were issued and leases entered into well before the sanctions regulations took effect and that after the invasion of Ukraine, the leases were terminated and the Russians confiscated the lessors’ aircraft.

The Court also noted that the sanctions did not suspend UniCredit’s obligation to make payment on its confirmations because the regulations were not in force when the payment obligation matured. With respect to OFAC sanctions, the Court stated that even if UniCredit’s making payment in US dollars violated US sanctions, it would have been possible to overcome those sanctions by UniCredit’s paying in another currency, e.g., Euros.