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A UK appeals court has overturned a ruling against UniCredit in a closely watched sanctions case, finding that the bank was right to refuse payments under letters of credit (LCs) issued before Russia’s invasion of Ukraine. 

UniCredit had been ordered to pay interest and costs to three aircraft leasing entities in a March 2023 ruling, despite believing the payments would be in breach of UK sanctions on Russia – but a Court of Appeal ruling this week has reversed that decision. 

The case relates to aircraft leasing arrangements with Russian airlines agreed several years before the invasion, involving Celestial Aviation Services and two Constitution Aircraft Leasing entities, all based in Ireland. 

The deals were underpinned by standby LCs issued by Sberbank and confirmed by the London branch of UniCredit Bank AG, the German arm of the Italian lender. 

However, after the invasion, authorities in the UK, EU and US introduced a ban on providing aircraft-related goods and services to Russia. 

The leasing companies issued demands for payment with a combined value of around US$68mn, arguing the LCs were unaffected by the sanctions because neither Sberbank nor the Russian airlines would benefit. 

UniCredit did not immediately pay, arguing that UK sanctions legislation blocks banks from providing funds – including under LCs – that are “in connection with” the provision of restricted goods, including aircraft. 

After the leasing companies turned to the courts to recover funds, a London court ruled in March last year that UniCredit should have made the payments. 

The dispute has been flagged as a landmark case for trade finance, with Brick Court Chambers saying last year that the initial “significant” judgment “paves the way for further cases of this kind”. 

That 2023 ruling concluded that sanctions do not apply retrospectively, and there would have been no benefit to sanctioned Russian entities if the payments were made. 

But a June 11 Court of Appeal ruling has overturned that decision, finding in UniCredit’s favour instead. 

A panel of three judges agreed that making payment under the LCs would “obviously” be considered “in connection with” supplying aircraft to Russian companies. 

The initial ruling had invoked the International Chamber of Commerce’s autonomy principle, whereby an LC is independent from the underlying trade transaction – meaning a confirming bank’s obligations are unaffected by problems arising from the applicant’s relationship with the issuing bank. 

However, the appeals court concluded that this principle does not mean “the factual reality of a connection with the leases can be ignored” in the case of a sanctions clash. 

It also ruled that UK sanctions restrictions apply to the LC payments even though the relevant legislation was introduced after the leasing arrangements were terminated. 

Any other interpretation would “leave significant gaps in the UK regulations”, Justice Falk said. 

“On the face of it, parties could simply wait until an export or supply of goods was completed (whether done in breach of sanctions or by a supplier who is not caught by them) before supplying funds, without being caught by [sanctions]. That cannot have been intended.” 

The judges supported another argument made by UniCredit – that it was acting with reasonable belief that UK sanctions did apply – rejecting suggestions the bank’s “real reason for not paying was a concern about its cashflow”. 

However, they ruled that UniCredit is not able to rely on US law. The bank had argued that because the LCs were dollar denominated, making payment would involve a US clearing bank and therefore be in breach of sanctions. 

The initial ruling dismissed that argument, suggesting UniCredit could instead pay in alternative currencies or cash, while the appeal added that the lender had not shown reasonable efforts to obtain a licence from US sanctions authorities to authorise the payments. 

Because UniCredit had already settled all liabilities under the LCs before last year’s judgement, including by providing payment in sterling via non-US banks, the appeal ruling only affects interest and costs. 

UniCredit declined to comment when contacted by GTR. AerCap and Aircastle, parent companies of Celestial and Constitution respectively, did not immediately respond to requests for comment.