Obligations Under the Letter of Credit Are Subject to Mandatory Execution, Despite the Sanctions Imposed

10 April 2023
Ellina Izotkina
Ksenia Skoromolova

The High Court of Justice on March 3, 2023 ruled1 on the dispute between UniCredit Bank (UK) and aviation companies Celestial Aviation Services Limited (Ireland, a subsidiary of AerCapHoldings N.V. (Netherlands)) and Constitution Aircraft Leasing (Ireland) on the issue of payment of funds under letters of credit of Sberbank.

Irish companies leased aircrafts to Russian companies AirBridge Cargo Airlines LLC and JSC Aurora Airlines. To ensure the fulfillment of obligations under the contracts, Russian companies provided letters of credit issued by Sberbank in 2017 and 2020, which were afterwards confirmed by UniCredit.

In March 2022, leasing agreements with Russian companies were terminated. Celestial Aviation Services Limited stated that UniCredit is liable to pay under these letters of credit since Russian companies violated obligations under the contracts2.

UniCredit refused to pay, alleging that it is prohibited from making payment by reason of the operation of sanctions affecting Russia which were imposed by the UK, the EU, and the US in response to the conflict in Ukraine3, and therefore the Irish companies went to court.

The court sided with the claimants, considering that UniCredit, despite the restrictive measures, was not relieved of its obligations as of a confirming bank to make payments under the letter of credit. First of all, as the court pointed out, restrictions are of a promising nature, which means that they can be applied only after their introduction, and their non-proliferation to legal relations that existed before the date of their adoption.

Since leasing agreements and open letters of credit existed long before the UK (as well as the US and the EU) imposed sanctions, and at that time they corresponded to the law in force at the time of their commission, restrictions imposed in 2022 cannot be applied to them.

In addition, as the court noted, only the applicants could be the beneficiaries of the payment. Neither Sberbank nor Russian companies could in any way receive any benefit in connection with payments under letters of credit, since Russian lessees retained their obligations to Sberbank, and UniCredit retained the right to sue the bank.

Finally, the court pointed out that the letter of credit itself is an obligation independent of other elements of the transaction. In other words, by making payments on letters of credit, UniCredit performed transactions not with the property of the subsidiary Sberbank, but fulfilled its obligations to make payments, independent of other circumstances.

While the case was heard by the court UniCredit applied to OFSI and OFAC for licenses to make payments. One of the licenses (UK) was obtained by the bank in October 2022, while the USA has not yet provided a response to the bank's filings.

At the same time, even before the court judgement was made, UniCredit fulfilled its obligations for payments under letters of credit (in pounds sterling instead of dollars provided for by letters of credit). However, the issue of paying interest and recovering court costs is still to be resolved later.

The decision of the High Court of Justice is an important stage in resolving disputes in relation to the fulfillment of obligations made  by foreign counterparties under contracts concluded before the adoption of massive anti-Russian sanctions in 2022.

1 The text of the judgement is available at the link: https://www.bailii.org/ew/cases/EWHC/Comm/2023/663.html.
2 Within the framework of this case, the issue of the legality of obligations’ non-fulfillment was not raised, since it was resolved earlier.
3 The Russia (Sanctions) (EU Exit) Regulations 2019:https://www.legislation.gov.uk/uksi/2019/855/contents/made