Court of Appeal provides clarity on the UK's Russia Regulations and actions taken for sanctions compliance under section 44 of SAMLA
In Celestial Aviation Services Limited v Unicredit Bank AG, London Branch [2024] EWCA Civ 628, the Court of Appeal considered the scope and application of:
- Regulation 28(3) of the Russia (Sanctions) (EU Exit) Regulations 2019, SI 2019/855 (the "UK Regulations");
- Section 44 of the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA"); and
- The Ralli Bros principle.
Background
UniCredit was the confirming bank under a number of US dollar denominated standby letters of credit ("LCs") which had been issued by Sberbank Povolzhsky Head Office ("Sberbank") in relation to leases of aircraft to two Russian companies. In March 2022, Celestial Aviation made valid demands under the LCs as their beneficiary.
UniCredit refused to pay under the LCs on the primary basis that it was prohibited from doing so by Regulation 28(3) of the UK Regulations, which prevented financial services and funds being provided "in pursuance of or in connection with" an arrangement, the "object or effect" of which captures the supply of restricted goods (including aircraft) to Russia or their making available for use in Russia.
UniCredit further sought to avoid civil liability in relation this non-payment, in reliance upon the defence conferred by section 44 of SAMLA, namely that a person is not liable to civil proceedings where he / she has done or has omitted to do an act in the reasonable belief that it is in compliance with UK sanctions.
Commercial Court
As reported in our earlier article here, the Commercial Court found that UniCredit was not relieved of the obligation to make payment to Celestial Aviation under the LCs by reason of Regulation 28(3) of the UK Regulations.
The Court further considered that, although UniCredit held a subjective belief that it would be acting contrary to sanctions were it to make payment, that belief was not reasonably held. It therefore ruled that UniCredit could not rely upon s.44 SAMLA to avoid liability for its refusal to make payment under the LCs.
Court of Appeal
Application of Regulation 28(3)
On appeal, the Court of Appeal reversed the Commercial Court's conclusion that Regulation 28(3) of the UK Regulations did not prevent payment under the LCs. In reaching its decision, the Court of Appeal concluded that the lower court did not properly engage with the words used in Regulation 28(3) and erred in its assessment of the purpose of the UK Regulations. In particular, the Court of Appeal considered that:
- The purpose of the UK regulations is as set out in Regulation 4 of the UK Regulations1, which the Court summarised as "to put pressure on Russia"2;
- Aligned with precedent, the words "in connection with" within Regulation 28(3) are to be interpreted broadly3 and do not require any form of legal dependence, for example by reference to principles of causation. In justifying this expansive interpretation, the Court of Appeal characterised Regulation 28(3) as:
"…a relatively blunt instrument that is intended to cast the net sufficiently wide to ensure that all objectionable arrangements are caught, such that the overall purpose of putting pressure on Russia is achieved. That approach obviously risks catching arrangements that may not be seen to be within the overall mischief. The solution that the UK government has adopted for that is to provide for exceptions, both via the licensing regime, which as the report under s.2(4) of SAMLA stated is intended to "mitigate any unintended negative consequences" … and by further legislative exceptions contained in Part 7 of the UK Regulations."
- The application of Regulation 28 was not limited to arrangements entered into on or after 1 March 2022 and the lower court erred in its suggestion that it was to be applied only "prospectively";
- The autonomy principle does not override the undeniable factual reality that payment under the LCs would be "in connection with" the leases, which was itself plainly an arrangement to make aircraft available either to persons connected with Russia or for use in Russia4; and
- The Court also relied on statutory guidance on the UK Regulations, which stated that a licence may be granted for the provision of financial services or funds relating to aviation goods if the Secretary of State is satisfied that it is:
"necessary for the execution of obligations arising from contracts concluded before 8 March 2022…provided that the activity is completed before 28 March 2022".
The Court of Appeal therefore overturned the lower court's ruling and found that Regulation 28(3) of the UK Regulations did have the effect of preventing payment under the LCs.
Section 44
On the basis of the Court of Appeal's decision on the application of Regulation 28(3) above, it was not necessary for the Court to consider the application of section 44 of SAMLA. However, the Court of Appeal elected to do so on the basis that the legislation "raises points of significance which have not previously been considered by this court".
The Court of Appeal upheld the lower court's conclusion that UniCredit had the requisite subjective belief that its actions were in compliance with section 1 of SAMLA. In assessing whether that belief was reasonable, and parting ways from the Commercial Court, the Court of Appeal:
- Rejected the suggestion that UniCredit needed to "show its workings" to claim that its belief was reasonably held;
- Noted that UniCredit was required to form a view about new legislation at short notice; and
- Cautioned that it is important to avoid viewing the position with the benefit of hindsight, having heard argument from well-prepared leading Counsel and with the benefit of judicial consideration that might ultimately appear to make clear what was in fact not at all clear at the relevant time.
The Court also considered that if UniCredit did have to rely on section 44 to avoid liability under the LCs, section 44 would not have afforded UniCredit a defence against paying interest and costs.
The Ralli Bros issue
The Court of Appeal briefly considered the application of the Ralli Bros principle, a limited exception to the general principle that the enforceability of a contract governed by English law is determined without reference to illegality under any other law. The exception applies where contractual performance necessarily requires an act to be done in a place where it would be unlawful to carry it out5.
Each of the LCs expressly required that demand would be for: (i) the transfer; (ii) of US dollars; and (iii) to a specified bank account. The Court of Appeal noted that a demand for payment in cash or in sterling or euros (as proposed by Celestial Aviation) could therefore not be a conforming demand.6 On this basis, the Court of Appeal concluded that the Ralli Bros principle could be engaged if the act of performance, in this case effecting payment in US dollars to the specified account, would have required the involvement of a correspondent bank in the United States in what is more than a preparatory step.
However, the Court held that, even if the Ralli Bros principle is engaged so that US sanctions are potentially relevant, UniCredit was precluded from relying on US sanctions because it did not make reasonable efforts to obtain a licence from the US authorities.
Practical implications
The Court of Appeal's decision brings welcome clarity for financial institutions on the application of Regulation 28(3) of the UK Regulations and adopts a common-sense approach to the defence available under section 44 of SAMLA. While context is everything, parties will be able to take some comfort from the Court of Appeal's approach to whether a belief was reasonably held that actions taken were to comply with sanctions.
The Court of Appeal's discussion of the Ralli Bros principle is also an important reminder that when seeking to rely upon the sanctions regime of a foreign jurisdiction, parties should promptly and proactively seek a licence from the relevant authorities in that jurisdiction.
1 I.e., to encourage the Russia Federation to "cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine".
2 See paragraph 53 of the Judgment.
3 In this respect, the Court of Appeal cited Rix LJ in Campbell v Conoco (UK) Ltd [2002] EWCA Civ 704, [2003] 1 All ER (Comm) 35 at [19] approvingly: "the words 'in connection with' … are widely regarded as being as wide a connecting link as one can commonly come across".
4 See paragraph 61 of the Judgment, where the Court of Appeal notes "The LCs were issued only because of, and no doubt in amounts determined by reference to, the leases and they were triggered by an assertion of default under them."
5 See for example Dana Gas PJSC v Dana Gas Sukuk Ltd [2017] EWHC 2928 (Comm), [2017] 2 CLC 735 at [79] per Leggatt J and Banco San Juan Internacional Inc v Petróleos De Venezuela S.A. [2020] EWHC 2937 (Comm), [2021] 2 All ER (Comm) 590 ("Banco San Juan") at [62], [77] and [79] per Cockerill J.
