UK Law and Practice Contributed by: John Binns, BCL Solicitors LLP
whose object or effect is to… (c) directly or indirect - ly making restricted goods or restricted technology available (i) to a person connected with Russia, or (ii) for use in Russia”. In Celestial Aviation Services Ltd v UniCredit Bank GmbH, London Branch, the primary issue was wheth - er UniCredit was entitled to withhold payments under Letters of Credit (LOCs) issued in relation to aircraft leases to Russian airlines, on the basis that making the payments would have breached Regulation 28 (3). The High Court’s Decision Initially, the High Court ruled that UniCredit was not entitled to refuse payment under the LOCs, as the aircraft had been supplied before the relevant sanc - tions took effect in March 2022. So, “financial assis - tance” was provided at the point in time the LOCs were issued, which was before the regulation came into effect. Consequently, since the provisions were not retrospective, UniCredit was not relieved of its payment obligations. The Court of Appeal’s Decision The Court of Appeal overturned this decision, as it found that the lower court did not properly engage with the wording of Regulation 28 (3) and erred in its assessment of the purpose of the Russia regulations. The CoA found that making a payment under the LOCs constituted the provision of “funds” in connec - tion with an arrangement involving restricted goods, and thus breached Regulation 28 (3). It arrived at this finding after observing that the words “in connection with” are to be read broadly, and that they did not require any form of legal dependence; the test was one of factual connection. Here, the CoA found that a factual connection was made out, as the LOCs provided security for the lessees’ performance of their obligations under the leases, and it could readily be inferred that the leases required either the LOCs or some other acceptable security to be in place. The timing of the arrangement was irrelevant. The CoA also interpreted the Russia regulations broadly, finding that they applied to any arrangement
connected with the supply of restricted goods (includ - ing aircraft) to Russia, regardless of the timing of the arrangement. The CoA said that a broad interpretation was consistent with the overall purpose of the sanc - tions regime, which was to put pressure on Russia. While the broad reading may unintentionally capture arrangements that were otherwise compliant with the regulations, the risk was mitigated by exceptions and licences. Accordingly, UniCredit’s payment obligation under the LoCs would be suspended until the UK licence pro - cess was completed. The Effect of the Immunity The CoA’s decision effectively clarified that compli - ance with UK sanctions laws takes precedence over fulfilling contractual obligations, where such perfor - mance is likely to breach UK regulations. The decision also provides comfort to businesses that Section 44 of SAMLA protects if they withhold performance or payments, where they do so in the reasonable belief that they are complying with sanc - tions regulations. 6.2 Enforcement Effect of the Immunity on Court Awards In Celestial Aviation v UniCredit, UniCredit sought to rely on Section 44 of SAMLA to refuse to pay the High Court’s award of costs and damages to the respond - ent. As the CoA found in its favour on the primary issue, a determination was not necessary. However, the CoA provided its view in obiter comments due to the provision’s wider significance. The CoA upheld the High Court’s decision that Uni - Credit had the requisite subjective belief that the lease arrangements fell within Regulation 28 (3) and that payment under the LOCs would be a provision of funds in connection with them, notwithstanding the termination of the leases. The CoA rejected the submission that UniCredit had to “show its workings” in coming to this view, noting that having established the existence of a subjective belief, the question of whether the belief was reason- able is to be determined objectively.
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