Russian sanctions and payments under letters of credit

Factual background

The Appellants leased civilian aircraft to two Russian airlines. Letters of credit were issued as security for obligations under the leases. Payments under the letters of credit were to be made by the Respondent, the London branch of a German bank, to the Appellants. Shortly after regulation 28(3)(c) (see right) was amended to encompass certain civilian goods, including critical-industry goods such as aircraft, the Appellants terminated the leases and demanded the return of the aircraft. However, most aircraft continued to be used in Russia without the Appellants’ consent and in breach of the lease terms. The Appellants demanded that the Respondent pay them under the letters of credit. The Respondent did not immediately pay but applied for licences to do so. The Appellants commenced proceedings, in which the following issues were raised: (i) whether the obligation of the Respondent to make payments under letters of credit was prohibited by regulation 28(3)(c) until licences to do so were obtained; and (ii) the interpretation of section 44 Sanctions and Anti- Money Laundering Act 2018 (see below). ISSUE Whether the obligation of a bank to make payments under various letters of credit was prohibited by a UK sanction imposed on Russia, until licenses to do so were obtained. FIRST

Issue

The central issue was russian sanctions and payments under letters of credit.

Procedural history and reasoning

JUDGMENT [2023] EWHC 663 (Comm) Regulation 28(3)(c) The Appellants were successful in the High Court. The Judge identified the purpose of regulation 28(3)(c) as being “to ensure that financial assistance was not provided to Russian parties in relation to, inter alia, the supply of aircraft.” The Judge reasoned that the payments under the letters of credit were outside the purpose of regulation 28(3)(c) as the supply of the aircraft had occurred long before the prohibition came into effect. He held that regulation 28(3)(c) did not prohibit the Respondent from making payments to the Appellants under the letters of credit. SECOND HIGH COURT JUDGMENT [2023] EWHC 1071 (Comm) Section 44 The Judge found that the Respondent believed that regulation 28(3)(c) applied, but that that belief was not a reasonable one. Therefore, section 44 was not engaged.

SECTION 44 Sanctions and Anti- Money Laundering Act (SAMLA) 2018 Protection for acts done for purposes of compliance (1) This section applies to an act done in the reasonable belief that the act is in compliance with - (a) regulations under section 1, or (b) directions given by virtue of section 6 or 7. (2) A person is not liable to any civil proceedings to which that person would, in the absence of this section, have been liable in respect of the act. (3) In this section “act” includes an omission. COURT OF APPEAL JUDGMENT [2024] EWCA Civ 628 Males, Snowden and Falk LJJ The Court of Appeal held that payment under the letters of credit would be in connection with an arrangement, the aircraft leases, under which aircraft were made available to a person connected with Russia for use in Russia. Therefore, the Respondent was correct that payment under the letters of credit was prohibited until licences to do so were obtained.

The Court held that the effect of regulation 28(3)(c) was that the Respondent’s obligation to pay was suspended and could not be enforced during the period between the obligation to pay arising and the UK licences being obtained. The section 44 issue was addressed by the Court on an obiter basis. It overturned the Judge’s finding that the Respondent’s belief was not a reasonable one and held that on its proper construction, section 44 would not have protected the Respondent from “an action to recover a debt which is otherwise lawfully due but which has not been paid”. SUPREME COURT JUDGMENT The Supreme Court unanimously dismissed the Appellant’s appeal on the regulation 28(3)(c) issue and allowed the Respondent’s cross-appeal on the section 44 issue.

Decision and key points

The Supreme Court held that regulation 28(3)(c) of the Russia (Sanctions) (EU Exit) Regulations 2019 prohibited payments under the letters of credit until licences were obtained and interpreted “in connection with” as requiring a factual connection.

1. UK sanctions regulations “cast a wide net” and, as in this case, can catch letters of credit that were entirely lawful when issued but subsequently restricted by amendments.
2. The phrase “in connection with” requires a factual, not a causal, connection.

Why this decision matters

The Supreme Court's treatment of Russian sanctions and letters of credit affects payment risk, contractual performance and illegality arguments in international trade finance. The reasoning assists parties separating sanctions exposure from independent payment obligations.

Particularly relevant to: Banks, trade-finance teams, lessors, international businesses and sanctions litigators.

Related practice areas

Commercial litigation

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