Court of Appeal finds payment obligations under letters of credit suspended by UK Russian sanctions regime

The Court of Appeal has held that the UK sanctions regime excused a bank from making payment under various letters of credit issued in connection with the supply of aircraft to Russian airlines: Celestial Aviation Services Ltd v UniCredit Bank AG (London Branch) [2024] EWCA Civ 628.

Overturning the High Court's decision, the Court of Appeal adopted a more literal interpretation of Regulation 28 of the Russia (Sanctions) (EU Exit) Regulations 2019, which restricts the provision of financial services or funds in relation to the supply of certain restricted goods – in this case, aircraft.

Helpfully, in circumstances where the letters of credit required US dollars to be transferred to a specified bank account, the Court of Appeal rejected the suggestion that payment should be made through payment in cash or alternative currencies so as to avoid violations of US sanctions. The court referred briefly to the recent Supreme Court decision in MUR Shipping (considered here), in which the court held that a party was not required to accept payment in a non-contractual currency in order to exercise reasonable endeavours to overcome a force majeure event. In the present case, the Court of Appeal commented that, while MUR Shipping was of limited relevance, it did serve to re-emphasise the power of contracting parties to agree terms of their choice, including as to the manner of performance.

The decision also provides a warning about the requirement for parties to use reasonable efforts to obtain licences in sanctions cases, in order to rely on the well-recognised foreign illegality principle under Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287 – ie that the English court will not enforce an obligation which is unlawful in the place of performance. The principle could apply in this case (because payment in USD was required), but the court held that UniCredit was precluded from relying on it because it had not made reasonable efforts to obtain the relevant licence.

For more information, see this post on our Banking Litigation Notes blog.