Supreme Court Confirms Suspension Of Payment Obligations Under Letters Of Credit Due To UK Russian Sanctions Regime

The decision also clarifies the scope of protection offered by s.44 SAMLA, where payment is withheld in the reasonable belief of compliance with sanctions

In a seminal decision on the UK Russian sanctions regime, the Supreme Court has held that UniCredit Bank AG (UniCredit) was prohibited from making payments under various letters of credit (LoC) issued in connection with the supply of aircraft to Russian airlines: UniCredit Bank GmbH v Celestial Aviation Services Ltd & Anor [2026] UKSC 10.

The Supreme Court upheld the Court of Appeal’s interpretation of Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019 (see our blog post), which prohibits the provision of financial services or funds in relation to the supply of certain restricted goods – in this case, aircraft.

In particular, the Supreme Court confirmed that:

• There is no requirement for a causal connection between the provision of financial services/funds and the prohibited supply of goods under Regulation 28(3) (ie making aircraft available to Russia). It is sufficient that there is a factual connection between the payment and the arrangement (ie the aircraft leases). 
• In this case, there was "clearly" a factual connection between payments under the LoC and the arrangement so as to engage Regulation 28(3), because the LoC were issued in connection with those leases.

Importantly, the Supreme Court considered that the purpose of Regulation 28(3) is broadly to put pressure on Russia, including by disrupting strategic industries such as aviation. In the Supreme Court's view, this purpose was served by casting a wide net prohibiting payments but with the safety valve of a licensing system for mitigating harsh or unintended consequences. The decision underlines that the UK licensing regime is the primary mechanism for balancing hardship against policy objectives. Early engagement by financial services firms with the relevant licensing authority will therefore continue to be critical where exposure is identified (albeit that licences may not be available in all situations where sanctions impact a proposed transaction). 

The Supreme Court also considered the protection offered by s.44 of the Sanctions and Anti‑Money Laundering Act 2018 (SAMLA), where a party refuses to make payment in the belief that it is complying with the sanctions regime. It was not necessary to resolve this issue, given the Supreme Court's decision in respect of Regulation 28(3). However, it proceeded to do so, because the true interpretation of s.44 SAMLA is likely to affect a significant number of other cases. In summary, the Supreme Court overturned the Court of Appeal’s conclusions, holding that (had Regulation 28(3) not applied) s.44 SAMLA would have provided protection to UniCredit against an action to recover a debt, an award of interest on the amount of the debt, and an award of associated costs. The Supreme Court’s confirmation that s.44 SAMLA operates as a broad civil defence will be of interest to financial services firms.

We consider the decision in more detail below.

Background

Between 2017 and 2020, Sberbank issued several LoC to Celestial Aviation Services Limited and Constitution Aircraft Leasing (Ireland) 5 Limited (the lessors), both Irish-incorporated companies, in relation to leases of aircraft to Russian companies. The LoCs, denominated in USD and governed by English law, were all confirmed by UniCredit shortly after issue.

The leases were terminated during March 2022. Around the time of the terminations, the lessors made conforming demands for payment on the LoCs. UniCredit’s position was that it was unable to make payment due to sanctions and so the lessors 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. 

In the meantime, UniCredit applied for and obtained licences from the relevant licensing authorities. Following this, the principal amounts due under the LoC were settled. However, liability for costs and interest remained in dispute between the parties. 

High Court decision

The High Court held that UniCredit's payment obligations were not suspended or excused by virtue of sanctions imposed under the UK and US sanctions regimes. Our blog post considering the first instance decision in more detail can be found here.

UniCredit appealed to the Court of Appeal.

Court of Appeal decision

The Court of Appeal considered four issues, allowing the appeal in part (see our blog post). 

1. Interpretation of Regulation 28. Regulation 28(3)(c) provides that: 

   "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… directly or indirectly making restricted goods…available…to a person connected with Russia, or…for use in Russia". 

   The Court of Appeal held that Regulation 28(3)(c) prohibited payment by UniCredit under the LoCs. It concluded that payment under the LoC constituted the provision of funds "in connection with" arrangements whose object or effect was to make aircraft available to Russian airlines. It further held that the words “in connection with” did not require a causal link. The Court of Appeal did not consider the first instance rulings on the application of the UK's separate asset freezing restrictions and their application to the LoCs in light of Sberbank's designation.

2. Section 44 SAMLA. If the Court of Appeal had reached the contrary conclusion on Regulation 28 (and decided that it did not apply), it would have held that s.44 SAMLA did not protect UniCredit against an award of costs and interest. This was because s.44 SAMLA protects against a liability created because of something done (or not done) in the reasonable belief of UK sanctions compliance, whereas the underlying debt obligation owed by Unicredit would have existed notwithstanding sanctions exposure. 
    
3. UniCredit’s reliance on the Ralli Bros principle of foreign illegality. The Court of Appeal accepted that the foreign illegality principle in Ralli Bros could be engaged if the act of performance (in this case effecting payment in USD to the specified account), would have required the involvement of a correspondent bank in the United States. It rejected the finding by the High Court that the payment obligations could have been performed through payment in cash or in alternative currencies, to avoid violations of US sanctions.
    
4. US sanctions: reasonable efforts. However, notwithstanding that the Ralli Bros principle could apply in this case, on the facts, the Court of Appeal held that UniCredit was precluded from relying on the principle because it had not made reasonable efforts to obtain a licence from the US Office of Foreign Assets Control. 

The lessors appealed to the Supreme Court on the true interpretation of Regulation 28(3)(c), and UniCredit cross-appealed on the scope of the protection under s.44 SAMLA.

Supreme Court decision

The Supreme Court held that UniCredit was successful on both issues under appeal, dismissing the appeal in respect of Regulation 28 and upholding the appeal in respect of s.44 SAMLA.

Regulation 28(3)(c): scope of the payment prohibition

The Supreme Court upheld the Court of Appeal’s conclusion that payment by UniCredit under the LoC was prohibited by Regulation 28(3)(c). In particular, the Supreme Court confirmed that:

• The words “in connection with” in Regulation 28(3)(c) do not require a causal connection between the provision of financial services/funds and the prohibited supply of goods (ie making aircraft available to Russia). The Supreme Court expressly noted that the words “in connection with” are far broader than “in pursuance of” (also used in Regulation 28(3)(c)). In conjunction with the phrase “in pursuance of” they mean anything which factually connects the provision of the funds to the arrangement.
• It is sufficient that there is a factual connection between the provision of financial services/funds (on the one hand) and “an arrangement”, not the prohibited supply of goods (on the other). 
• The aircraft leases were “an arrangement” within Regulation 28(3)(c). The regulation refers to the “object or effect” of the arrangement, and the object and effect of the aircraft leases was to make aircraft available to two Russian airline companies for use in Russia (and this was not altered by termination of the leases).
• In this case, there was "clearly" a factual connection between payments under the LoC and the aircraft leases so as to engage Regulation 28(3), because the LoC were issued in connection with those leases.
• Importantly, the Supreme Court considered that the purpose of Regulation 28(3) is broadly to put pressure on Russia, including by disrupting strategic industries such as aviation. In the Supreme Court's view, this purpose was served by casting a wide net prohibiting payments but with the safety valve of a licensing system for mitigating harsh or unintended consequences.

UniCredit was therefore prohibited under Regulation 28(3)(c) from making payments under the LoC until the licences to do so were obtained. It was common ground that statutory interest did not accrue until the UK licence process was completed, and the court's exercise of discretion in relation to costs was also clearly affected by the outcome of this issue. 

The lessors' appeals were, therefore, dismissed.

Section 44 SAMLA: interest and costs

Although the Supreme Court's conclusion on Regulation 28(3)(c) meant that it did not need to resolve the s.44 SAMLA issue, it proceeded to do so, because the true interpretation of s.44 is likely to affect a significant number of other cases.

The Supreme Court emphasised that parties acting or omitting to act under the reasonable belief that their conduct complies with UK sanctions law should benefit from s.44 SAMLA's protection, as making payments in these circumstances could undermine the sanctions regime.

Importantly, the Supreme Court clarified that s.44 SAMLA does not bar civil claims from being brought in the first place; instead, it provides a defence for a person who acts or omits to act in the reasonable belief that doing so is required by UK sanctions law.

The Supreme Court overturned the Court of Appeal's conclusion in respect of s.44 SAMLA, holding that, because UniCredit’s liability arose from its omission to pay under the LoCs, any claim for the principal debt, as well as related interest and costs, constituted liabilities “in respect of” that same omission.

The Supreme Court therefore allowed UniCredit’s cross‑appeal, concluding that, had Regulation 28(3)(c) not applied, s.44(2) SAMLA would have provided UniCredit with a defence to all three forms of civil liability flowing from its non‑payment, namely: (i) an action to recover the debt; (ii) an award of interest; and (iii) an award of associated costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.