Celestial Aviation Services Ltd v Unicredit Bank GmbH, London Branch (formerly Unicredit Bank AG, London Branch)

Hearing dates: 14 and 15 May

Approved Judgment

This judgment was handed down remotely at 2.00pm on 11 June 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction

This is an appeal by UniCredit Bank GmbH, formerly UniCredit Bank AG (“UniCredit”), a German bank acting through its London branch, against decisions of Christopher Hancock KC sitting as a Deputy High Court judge (the “judge”). The judge decided that UniCredit's obligations as confirming bank under certain standby letters of credit (“LCs”) issued by the Russian bank Sberbank Povolzhsky Head Office (“Sberbank”) in connection with civilian aircraft leasing transactions were not affected by sanctions imposed by the United Kingdom and United States in response to the invasion of Ukraine in February 2022.

The judge's orders were made in two Part 8 claims against UniCredit which were tried together and which raise materially identical issues. The Claimants (and Respondents in the appeal) are, in the first claim, Celestial Aviation Services Ltd (“Celestial”) and, in the second, Constitution Aircraft Leasing (Ireland) 3 Ltd and Constitution Aircraft Leasing (Ireland) 5 Ltd (together, “Constitution”).

Celestial and Constitution are Irish-incorporated entities. Celestial is a member of the AerCap aircraft leasing group and provides services related to that activity. The Constitution claimants act directly as aircraft lessors. The Celestial LCs were issued in connection with leases by AerCap subsidiaries to AirBridge Cargo Airlines LLC (“AAL”) (as to two aircraft) and JSC Aurora Airlines (“Aurora”) (as to three aircraft), and the Constitution LCs were issued in connection with leases of two aircraft to AAL. The leases were entered into between 2005 and 2014. Both AAL and Aurora are Russian airlines.

There are a total of twelve LCs in issue. Each of them is denominated in US dollars, governed by English Law and incorporates the Uniform Customs and Practice for Documentary Credits, 2007 Revision, International Chamber of Commerce Publication no. 600 (the “UCP”). Celestial is the beneficiary of seven of the LCs and Constitution are between them the beneficiaries of the other five. The LCs were issued between 2017 and 2020.

The leases were terminated for default during March 2022, although most of the aircraft have not been recovered. Around the time of the terminations Celestial and Constitution made conforming demands for payment on the LCs. UniCredit's position was that it was unable to make payment because of the effect of sanctions. Celestial and Constitution issued proceedings in March and April 2022 respectively, claiming the amount owed in debt (or alternatively in damages), interest, a declaration in relation to the sanctions position and costs. The principal amount claimed was approximately US $45.8m for Celestial and $23.5m for Constitution.

In the meantime, UniCredit applied for licences from the relevant authorities. Licences were received from the Bundesbank in respect of EU sanctions and were subsequently obtained from the UK authorities. Following this, in October and November 2022, the principal amounts due under the LCs were settled, in three cases by payments made in US dollars and in the other cases by payments made in sterling with the agreement of the parties. An application for a licence in respect of US sanctions remains outstanding.

The Part 8 claims were heard by the judge at a two day hearing in September 2022, so before any of the principal amounts had been paid. By the time the trial judgment was handed down in March 2023 (the “March judgment”) the financial dispute between the parties was confined to interest and the costs of the dispute.

The issues

The issues raised by UniCredit's appeal are fourfold:

(1) whether payment under the LCs by UniCredit would have been “in connection with” an arrangement the object or effect of which is the supply of aircraft to or for use in Russia, or to a Russian person, and so prohibited by reg. 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019, SI 2019/855 (the “UK Regulations”);

(2) if that prohibition did not apply, whether UniCredit nonetheless has a defence under s.44 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”), on the basis that its belief that it was complying with the UK Regulations was reasonable;

(3) whether the question of illegality under the US sanctions regime was engaged under the Ralli Bros principle ( Ralli Bros v Compañia Naviera Sota y Aznar [1920] 2 KB 287) on the basis that effecting payment in US dollars required the involvement of a correspondent bank in the United States; and

(4) if the US sanctions regime was engaged, whether payment in accordance with the demands would have been illegal under that regime.

The judge concluded in his March judgment that reg.28(3) of the UK Regulations was not engaged. (He reached the same conclusions in respect of regs.11 and 13 of the UK Regulations, in respect of which there is no appeal.) He further decided that UniCredit could and should have avoided any issue with US sanctions, by paying in cash if necessary, and that in any event it had not established that either of the relevant US sanctions provisions would have been engaged if payment had been made timeously. In a further judgment handed down in May 2023 following a hearing on consequential matters (the “May judgment”) the judge also decided that UniCredit could not rely on s.44 SAMLA, holding that it had established the necessary subjective belief but that its belief was not a reasonable one.

Celestial and Constitution have filed Respondent's Notices which raise the following additional arguments:

(1) an argument that there was no “arrangement” within reg. 28(3) since there was no prohibition on the supply of aircraft when they were supplied;

(2) as regards s.44 SAMLA, arguments that a) the judge should not have accepted that UniCredit had established the necessary subjective belief, and b) even if s.44 applied, it did not extend to statutory interest and costs;

(3) in respect of US law, arguments that it was irrelevant because a) no act of performance was required in the United States, b) payment could have been made in sterling or euros, or c) the payment obligations accrued before any prohibition came into effect, and in any event the relevant provisions did not prevent the payments and, further, UniCredit could not rely on US law because it had failed to take reasonable steps to obtain a licence.

At first sight a decision in UniCredit's favour on reg. 28(3) would render it unnecessary to deal with the other issues. However, that is not entirely correct. The UK licence process completed on 13 October 2022 but payment was only made promptly thereafter, on 14 October, in respect of three of Celestial's LCs (the ones paid in dollars: see above). The remaining four Celestial LCs were paid around six weeks later on 25 November 2022. Constitution was paid under its LCs on 21 November 2022. The reason for the delay into November was UniCredit's position under the US sanctions regime. The claim for interest extends to that six week period.

Mr Quest KC, Ms Barnes KC and Mr Sheehan KC appeared for UniCredit. Mr Quest made submissions on reg. 28, s.44 SAMLA and the Ralli Bros issue. Ms Barnes made submissions on the position under US law. Mr Hobson KC appeared for Celestial and Mr Shah KC and Ms Sagan for Constitution. Mr Hobson made submissions on reg. 28 and s.44 SAMLA, and Mr Shah made submissions on the Ralli Bros issue and the position under US law, with each of them adopting the submissions of the other.

SAMLA

The primary legislation governing the UK sanctions regime is contained in SAMLA. The UK Regulations are made pursuant to SAMLA, the main regulation power being conferred by s.1 of that Act.SAMLA also confers power to create criminal offences for breach of sanctions.

The preamble to SAMLA records that it is:

“An Act to make provision enabling sanctions to be imposed where appropriate for the purposes of compliance with United Nations obligations or other international obligations or for the purposes of furthering the prevention of terrorism or for the purposes of national security or international peace and security or for the purposes of furthering foreign policy objectives…”

Section 1(3) of SAMLA requires regulations made under s.1 to state the purpose of the regulations, which must be one of the purposes specified. Leaving to one side compliance with UN and other international obligations, the purposes specified in s.1(2) include that the relevant Minister...