A London court has ruled that UniCredit should have made payments due under letters of credit (LCs) even after the introduction of UK and US sanctions against issuing bank Sberbank. 

After Russia’s invasion of Ukraine last February, authorities in the US and Europe imposed a ban on providing aircraft-related goods and services to Russia. 

That created a legal clash between UniCredit and Ireland-headquartered Celestial Aviation Services, a subsidiary of Dutch aircraft leasing company Aercap Holdings, as well as with two Constitution Aircraft Leasing entities also based in Ireland. 

The companies had agreed several years earlier to lease planes to two Russian airlines, underpinned by LCs issued by Sberbank and confirmed by the London branch of Munich-headquartered UniCredit Bank AG. 

Following the outbreak of war, the leasing companies issued demands for payment with a combined value of around US$68mn. They argued in court filings that payment would not be affected by the introduction of sanctions, as neither Sberbank nor the Russian airlines would benefit in any way. 

But UniCredit responded that UK sanctions legislation prevents a bank from providing any LC “in connection with” the provision of restricted goods to Russia. 

In a High Court decision last week, Christopher Hancock KC ruled that UniCredit was not blocked from making payment under UK sanctions law. 

He found that the purpose of the sanctions was to apply prospectively rather than retrospectively, and that payment would in no way benefit Sberbank nor the Russian airlines themselves. 

“It is important to take a step back in this regard 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,” he said. 

“In my judgement, the answer to this question is quite clear – it cannot.” 

Hancock, sitting as a deputy court judge, added that in an LC structure, payment to the beneficiary exists independently from other aspects of the transaction. 

UniCredit had also argued that because the LCs were denominated in US dollars, making payment would involve a US clearing bank and therefore be a breach of US sanctions against Russia. 

Hancock acknowledged that was the expectation when the LCs were issued, but said a customer could alternatively demand payment in cash, avoiding the involvement of US-based clearing or correspondent banks, without falling foul of sanctions. 

In both cases, UniCredit had already settled all liabilities under the LCs before the judgement was issued, including by offering to pay Celestial and Constitution equivalent sterling amounts to accounts held with non-US banks. 

The ruling could affect the payment of interest and costs, however. 

In an analysis of the case, Brick Court Chambers describes the judgement as “significant”, noting it has previously been “a rarity” for companies to seek a relief from the effect of UK sanctions on a payment obligation. 

“This decision paves the way to further cases of this kind,” it says. 

It adds that the potential scope of US sanctions is considered “far-reaching given that US dollar payments will typically be processed via a correspondent bank in the US”.  

“The deputy judge’s decision significantly narrows the relevance of US sanctions to an English law governed payment obligation,” it says. 

The case also addresses the role of licensing. After the dispute with the two leasing companies arose, UniCredit sought licences from authorities in the UK and US that would give it permission to make payment. 

The UK Office of Financial Sanctions Implementation eventually granted a licence, albeit after the relevant hearing, while as of last week’s ruling the US Office of Foreign Assets Control had not yet responded to the bank’s application. 

Hancock ruled that sanctions should not “be regarded as all embracing, subject only to the licensing regime”, but rather that a licence can be issued on a prohibited transaction as long as it is consistent with the intention of the restrictions. 

UniCredit, Celestial Aviation Services and Constitution Aircraft Leasing did not comment when contacted by GTR.