UniCredit Bank GmbH v Constitution Aircraft Leasing: a landmark on sanctions, letters of credit, and the protection of compliance

The decision in UniCredit Bank GmbH v Constitution Aircraft Leasing is the first time the Supreme Court has considered the scope of UK Russia-related trade sanctions as they apply to financial instruments – specifically, standby letters of credit. It is also the first authoritative ruling on the protection afforded by section 44 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) to persons who refrain from making payments in the reasonable belief that doing so would breach sanctions.

The judgment resolves two questions of major practical significance:

1. Does regulation 28(3)(c) of the Russia (Sanctions) (EU Exit) Regulations 2019 (as amended) prohibit a confirming bank from paying under letters of credit connected to pre-existing aircraft leases with Russian lessees, even where the leases have been terminated and no new aircraft are being supplied?
2. If a bank reasonably believes it is prohibited from paying, does section 44 of SAMLA protect it from a claim for the debt itself, interest, and costs?

The Supreme Court answered both questions yes. The result is a decision with far-reaching consequences for banks, lessors, traders, and anyone involved in financial arrangements that touch sanctioned jurisdictions

Background

The parties and the transactions

The appellants – Celestial Aviation Services Ltd, Constitution Aircraft Leasing (Ireland) 3 Ltd, and Constitution Aircraft Leasing (Ireland) 5 Ltd – are Irish aircraft leasing entities. They had leased civilian aircraft to two Russian airlines, AirBridge Cargo Airlines and JSC Aurora Airlines, under leases entered into between 2005 and 2014.

To secure the lessees’ obligations, the Russian bank Sberbank issued twelve irrevocable standby letters of credit, each confirmed by UniCredit Bank GmbH acting through its London branch (“the Bank”). The letters of credit were governed by English law and incorporated the UCP 600.

The sanctions landscape

When the letters of credit were opened (2017 – 2020) and the leases entered into (2005 – 2014), there was nothing in the UK sanctions regime that prevented payment. Regulation 28(3)(c) of the 2019 Regulations, in its original form, concerned only financial services or funds relating to military goods and technology.

Everything changed on 1 March 2022, five days after Russia’s full-scale invasion of Ukraine. The Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2022 extended regulation 28(3)(c) to cover “restricted goods”, a category that now includes civilian aircraft as “critical-industry goods”.

Demands, refusals, and litigation

Shortly after 1 March 2022, the lessors terminated the aircraft leases and demanded the return of the aircraft. Most were not returned and remain in Russia.

The appellants made compliant demands on the Bank under the letters of credit in March 2022. The Bank refused to pay, contending that regulation 28(3)(c), as amended, prohibited it from doing so. The Bank applied for licences from HM Treasury’s Office of Financial Sanctions Implementation and the Export Control Joint Unit; these were granted in September and October 2022.

The appellants commenced proceedings arguing that the sanctions had never prohibited payment. After the licences were granted, the principal amounts (approximately US$69.3 million in total) were paid. The remaining dispute concerned interest on the late payments and costs.

The decisions below

At first instance, Christopher Hancock KC (sitting as a Deputy High Court judge) held that regulation 28(3)(c) did not prohibit the Bank from paying because the supply of aircraft had occurred long before the sanctions amendment. He also found the Bank’s belief that it was prohibited was not reasonable, so section 44 of SAMLA did not assist it.

The Court of Appeal reversed on the sanctions point, holding that payment was prohibited. It also found (obiter) that the Bank’s belief was reasonable, but held that section 44 would not have protected the Bank from a claim to recover a debt that was “otherwise lawfully due”.

The Supreme Court’s analysis

Issue one: the scope of regulation 28(3)(c)

The appellants advanced three main arguments for why regulation 28(3)(c) did not catch the Bank’s payments. The Supreme Court rejected all of them.

No requirement for a causal connection

The appellants’ primary submission was that regulation 28(3)(c) requires a causal link between the provision of funds and the prohibited supply of aircraft. Since the aircraft were already in Russia (unlawfully retained by the airlines in breach of the terminated leases), paying the Irish lessors under the letters of credit would not cause any aircraft to be made available to Russia. Therefore, the argument went, the payments fell outside the mischief of the regulation.

Lord Stephens (with whom all other members of the court agreed) rejected this for several reasons:

• The statutory language does not require causation. Regulation 28(3)(c) prohibits the provision of funds “in connection with” an arrangement whose object or effect is making restricted goods available. The phrase “in connection with” is deliberately broader than “in pursuance of”, which appears alongside it. “In pursuance of” covers funds provided under or in accordance with the arrangement; “in connection with” extends to anything that factually connects the funds to the arrangement. No causal nexus is required (para 80).
• The purpose of the regulation is served by casting a wide net. The court accepted the Bank’s submission that the Amended Regulations achieve their purpose – putting pressure on Russia by disrupting strategic industries – through a deliberately broad prohibition coupled with a licensing regime as a safety valve. The report laid before Parliament expressly states that the licensing framework “will mitigate any unintended negative consequences” (para 76).
• Banks cannot see the bigger picture. Lord Stephens gave a practical illustration: a bank may not know that a payee intends to use the funds to finance a new venture involving making aircraft available to persons connected with Russia. The licensing authority, however, may have that intelligence and can refuse the licence. This justifies channelling decisions through public authorities with institutional competence, rather than leaving banks to make their own assessments (para 79).
• Compliant demands under letters of credit do not require details. The Bank would not know, merely from a compliant demand, whether the aircraft were still being used in Russia. Expecting a confirming bank to make its own inquiries – when it has no contractual right to do so and no assurance of receiving accurate answers – is inconsistent with the autonomous nature of letters of credit and with the public interests at stake (para 78).

The leases are “arrangements” within the regulation

The appellants argued in the alternative that the aircraft leases were not “arrangements” within regulation 28(3)(c) because:

1. They were not prohibited when entered into. The court held there is nothing in the wording of the regulation that limits “arrangement” to arrangements that were prohibited at the time they were made. The regulation specifies arrangements by their object or effect, not by whether they were lawful when created (para 83).
2. They were existing, pre-amendment arrangements. Again, the court found no textual support for confining the regulation to arrangements entered into on or after 1 March 2022 (para 84).
3. They had been terminated before the demands fell due. This was the most nuanced argument. The appellants relied on the present tense – “an arrangement whose object or effect is” – to argue there must be temporal coincidence between the provision of funds and a live arrangement. Lord Stephens rejected this. The object of the leases was determined when they were made: to make aircraft available to Russian airlines for use in Russia. Terminating the leases for default does not retroactively change that object. The word “is” describes the type of arrangement, not a requirement that the arrangement be ongoing at the moment funds are provided (paras 85–87).The court also noted a practical absurdity that would follow from the appellants’ construction: parties could draft leases so that payment obligations arise only after termination, thereby avoiding the prohibition entirely (para 87).

Issue two: section 44 of SAMLA

Although the resolution of the first issue meant the court did not need to decide the section 44 point, it chose to do so because the question of construction “is likely to affect a significant number of other cases” (para 90).

Section 44(2) provides that a person is not liable to any civil proceedings to which they would otherwise have been liable “in respect of” an act (which includes an omission) done in the reasonable belief that it is in compliance with sanctions regulations.

The Court of Appeal had held that section 44 does not protect against a claim to recover a pre-existing debt. Its reasoning was that a debt claim is not really “in respect of” the non-payment; rather, it seeks recovery of a sum owed irrespective of the debtor’s action or inaction.

The Supreme Court disagreed. Lord Stephens’ reasoning was straightforward:

• Civil proceedings to recover a debt are only brought if the debtor fails to pay. The Bank’s liability in these proceedings is therefore “in respect of” its omission to pay upon receipt of a compliant demand (para 93).
• Claims for interest and costs are likewise “in respect of” the debtor’s failure to pay (para 93).
• Section 44 does not prohibit civil proceedings (which would require clear words as it would restrict access to justice). It provides a defence within those proceedings (para 93).
• The purpose of the protection — furthering the public objectives of the sanctions regime — supports this reading. A person with a reasonable belief that payment is prohibited should not face the dilemma of paying (and risking criminal liability carrying up to ten years’ imprisonment) or not paying (and accruing interest and costs) (para 91).

The court therefore held that section 44 would have protected the Bank against: (a) the debt claim itself; (b) interest on the debt; and (c) associated costs — for the period during which the Bank held its reasonable belief.

What the decision means in practice

For banks and financial institutions

This is arguably the most significant aspect of the judgment. The key takeaways are:

1. The net is cast extremely wide. Regulation 28(3)(c) does not require any causal link between the payment and the sanctioned activity. A purely factual connection between the funds and an arrangement whose object or effect involves making restricted goods available to a person connected with Russia (or for use in Russia) is sufficient. Banks must therefore treat with extreme caution any payment that has a factual nexus to such an arrangement, however historic.
2. Pre-existing and terminated arrangements are caught. The prohibition applies to arrangements entered into and performed long before the sanctions were imposed, and it survives termination of the underlying arrangement. Banks cannot assume that the expiry or termination of an underlying contract removes the prohibition on associated financial flows.
3. Apply for licences early. The court’s endorsement of the “wide net plus licensing” model means that the practical route to making a lawful payment is through the licensing regime. Banks should submit applications promptly on becoming aware of a potential prohibition. Delay in obtaining a licence will not excuse the bank from interest liability once the licence is granted (as the Court of Appeal’s unchallenged ruling on the six-week post-licence period demonstrates).
4. Section 44 provides real protection — but only while the belief is reasonable. The Supreme Court has confirmed that section 44 of SAMLA can shield a bank from debt claims, interest, and costs. This is a significant expansion of the protection compared to the Court of Appeal’s narrower reading. However, the belief must be reasonable, and it ceases to operate once a licence is obtained or the prohibition is otherwise removed. Banks should document their analysis carefully and in real time.

For lessors and other creditors

5. Creditors face a period of enforced patience. Where a bank’s payment obligation is caught by sanctions, the creditor cannot recover interest for the period during which the prohibition applies. The court proceeded on the basis that the prohibition suspends the obligation to pay; it does not extinguish it (para 67). Creditors retain their underlying rights, but enforcement is deferred.
6. Premature litigation carries costs risk. The court noted that commencing civil proceedings while the bank is prohibited from paying and before licences are obtained is a relevant factor in the exercise of discretion on costs (para 89). Creditors should consider carefully whether to issue proceedings or wait for the licensing process to run its course.
7. The licensing regime is the intended safety valve. If a payment is caught by the wide prohibition but falls outside its core mischief – for example, where funds flow to a non-Russian entity and do not facilitate any ongoing supply – that is an argument for granting a licence, not for reading down the prohibition (para 76).

For the sanctions licensing authorities

8. Greater responsibility falls on OFSI and the ECJU. The Supreme Court has effectively confirmed that the breadth of the prohibition is constitutionally legitimate because of the existence of the licensing regime. This places significant practical and legal weight on the licensing authorities to process applications efficiently and to grant licences where the payments do not undermine the sanctions’ objectives. The court’s analysis implies that refusal of a licence in circumstances where there is no causal link to a prohibited supply would require justification.

For the trade finance and forfaiting markets

9. Letters of credit are not immune from sanctions. The autonomous nature of letters of credit – the principle that payment depends on documents, not on the underlying transaction – does not insulate them from sanctions prohibitions. The connection to the underlying arrangement is assessed as a matter of fact, and the letter of credit in this case expressly referred to the relevant lease.
10. UCP 600 does not override mandatory sanctions law. Although the letters of credit incorporated the UCP 600, the court did not treat this as relevant to the sanctions analysis. Mandatory prohibitions in domestic law override contractual payment obligations, regardless of the governing rules of the instrument.

The ITFA intervened by way of written submissions only (instructed by Sullivan & Worcester UK LLP). Although the judgment does not engage in detail with the ITFA’s arguments, the fact of the intervention underlines the significance of the decision for the secondary market in trade finance instruments. Forfaiters who have purchased receivables connected to arrangements caught by regulation 28(3)(c) will need to consider whether their own payment obligations or rights to receive payment are similarly affected.

Wider implications

The relationship between sanctions and private law

The court was careful to note that the parties had proceeded on the basis that regulation 28(3)(c) suspends rather than extinguishes private law rights (para 67). Lord Stephens expressly stated that he proceeded on that assumption “without deciding” the point. This leaves open a potentially significant question: could a differently drafted sanctions provision have the effect of permanently extinguishing a private law obligation? Future litigation may need to grapple with this.

Retrospective effect

The decision confirms that sanctions can, in substance, have retrospective effect on pre-existing contractual arrangements. The prohibition does not merely prevent new arrangements; it captures financial flows connected to arrangements entered into years or even decades before the sanctions were imposed. While this is consistent with the statutory language, it is a striking result. Parties entering into long-term contracts with counterparties in jurisdictions that may become subject to sanctions should be aware that future sanctions amendments could freeze associated payment obligations with no compensation for the resulting delay.

The constitutional dimension

The court’s endorsement of the “wide net plus licensing” model has a constitutional dimension. Lord Stephens emphasised that “vital public interests are involved and the arbiter of those interests should be public authorities involved in the licensing process” who “have institutional competence and are accountable through the relevant Minister to Parliament” (para 77). This is a clear signal that the courts will afford considerable latitude to the executive in designing sanctions regimes, provided the licensing mechanism exists as a counterbalance.

Section 44 as a shield

The Supreme Court’s expansive reading of section 44 is likely to have consequences well beyond the Russia sanctions context. Section 44 applies to any act or omission done in reasonable belief of compliance with any regulations made under section 1 of SAMLA – which covers the full range of UK sanctions regimes (Iran, North Korea, Myanmar, and so on). The confirmation that it operates as a defence to debt claims, interest, and costs gives significant comfort to banks and other intermediaries who err on the side of caution in ambiguous cases.

However, the standard remains one of reasonable belief. The Court of Appeal’s finding that the Bank’s belief was reasonable was not challenged on appeal, so the Supreme Court did not need to explore the boundaries of reasonableness. This will inevitably be tested in future cases, particularly where a party’s interpretation of the sanctions is more strained or where guidance from OFSI suggests a different reading

Summary of key holdings

Issue	Holding
Does reg 28(3)(c) require a causal connection between funds and the prohibited supply?	No. “In connection with” requires only a factual connection to an arrangement whose object or effect is making restricted goods available.
Are pre-existing, pre-amendment arrangements caught?	Yes. There is no limitation to arrangements entered into after 1 March 2022.
Do terminated arrangements remain caught?	Yes. The object of the arrangement is determined when it is made and is not altered by termination.
Was the Bank prohibited from paying under the letters of credit?	Yes, until licences were obtained.
Does s 44 SAMLA protect against a debt claim, interest, and costs?	Yes, for the period during which the reasonable belief is held.

Conclusion

UniCredit v Constitution Aircraft Leasing is a decision of major importance. It confirms that the UK’s sanctions regime operates as a deliberately broad prohibition tempered by administrative licensing – and that the courts will not read in limitations that Parliament chose not to include. For practitioners, the message is clear: when in doubt, apply for a licence; do not assume that the absence of a causal link, the age of the arrangement, or its termination will take a payment outside the scope of the prohibition.

At the same time, the court has provided genuine reassurance to those who comply in good faith. The expansive reading of section 44 means that banks and other intermediaries who reasonably believe they are prohibited from paying will not be penalised for that caution through interest or costs awards. In a regime where criminal penalties of up to ten years’ imprisonment are at stake, that reassurance matters.

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