Celestial Aviation Services Limited v Unicredit Bank AG (London Branch)

This is a Part 8 claim in two separate proceedings which have been heard together. In each case, the Claimants claim various forms of relief designed to assist in obtaining payment under standby Letters of credit which were confirmed by the Defendant, “UniCredit” the London branch of a German bank, which Letters of credit in turn confirmed Letters of credit issued by an entity called Sberbank Povolzhsky Head Office (“Sberbank”).

UniCredit was the confirming bank under seven standby Letters of credit under which the Claimant in Action CL-2022-000135 (“Celestial”) is the beneficiary. The Letters of credit were issued in 2017 and 2020 in relation to leases of aircraft to two Russian companies which were entered into between 2005 and 2014. The seven Celestial Letters of credit subdivide into: (i) the AAL Letters of credit (i.e. the four Letters of credit issued in relation to the leases entered into with AAL, as defined further below) and (ii) the Aurora Letters of credit (i.e. the three Letters of credit issued in relation to the leases entered into with Aurora, as defined further below).

In March 2022, Celestial made valid demands under the Letters of credit. It is common ground that – subject to the question of sanctions – UniCredit is liable to pay under the Letters of credit.

UniCredit is also the confirming bank under standby Letters of credit issued to the Claimants in Action CL-2022-000216, (“Constitution”). Those Letters of credit were issued in relation to leases of aircraft as detailed below. Once again, valid demands were made under those Letters of credit, on dates set out below. Once again, it is common ground that – subject to the question of sanctions – UniCredit is liable to pay under the Letters of credit.

All of the Letters of credit are payable in US Dollars.

UniCredit refused to pay under the various Letters of credit, 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 Ukraine.

Celestial is a company incorporated in the Republic of Ireland which provides services in connection with the leasing of aircraft. Celestial is a wholly-owned subsidiary of AerCap Holdings N.V. (“AerCap”), a Dutch company which is the world’s largest aircraft leasing company.

The Celestial case relates to a number of leases of aircraft which were entered into in the period from 2005-2014 between (i) certain subsidiaries of AerCap as lessors and (ii) two Russian lessees. The leases were the subject of certain novations and amendments. In their most recent form:

On 21 August 2017, Sberbank (who are a Russian bank) issued four irrevocable standby Letters of credit, two of which were issued in relation to the 35420 Lease and two of which were issued in relation to the 35421 Lease. These were the AAL Letters of credit. On 23 August 2017, UniCredit confirmed each of these Letters of credit. UniCredit is a German bank which, so far as relevant for the purposes of this claim, operates through its branch in London.

On 23 November 2020, Sberbank issued three irrevocable standby Letters of credit in relation to the 2222 Lease, 2243 Lease and 3838 Lease. These were the Aurora Letters of credit. On 25 November 2020, UniCredit confirmed each of these Letters of credit.

In relation to each of these Letters of credit:

On 2 March 2022, Celestial made a written demand for payment on UniCredit in respect of the AAL Letters of credit. In summary, each of the demands stated that Celestial was drawing upon the relevant letter of credit due to AAL’s failure to comply with its obligations under the relevant lease. The amounts demanded were in the total amount of USD44,527,383.98. The demands stipulated payment to an account held in London.

On 4 March 2022, Celestial made a written demand for payment on UniCredit in respect of the Aurora Letters of credit. Again, each of the demands stated that Celestial was drawing upon the relevant letter of credit due to Aurora’s failure to comply with its obligations under the relevant lease. The amounts demanded were in the total amount of USD1,302,000. The demands stipulated payment to an account held in Dublin.

Initially two of the demands were not compliant but amended demands were submitted in the required form, as is common ground between the parties.

UniCredit was therefore required to pay USD 44,527,383.98 to Celestial within four business days of 2 March 2022 (i.e. 8 or at latest 10 March 2022) and USD 1,302,000 within five banking days of 4 March 2022 (ie 11 or at latest 14 March 2022).

Events of Default under the Leases arose following the imposition of sanctions as a result of the conflict in Ukraine in February 2022. As a result, Celestial terminated the leasing of the aircraft on 3 and 4 March 2022. As at 19 August 2022, four of the five aircraft were located in Russia, but any continued use of or access to the aircraft is, as is common ground, without Celestial’s consent (and in breach of the terms of the lease). One of the aircraft was outside Russia at the time of termination of its leasing and AerCap has been able to repossess it.

On 7 and 11 March 2022, UniCredit informed Celestial that it refused to make payment of the amounts due under the Letters of credit. According to UniCredit, it was prohibited from doing so by reason of Regulation 28 of the Russia (Sanctions) (EU Exit) Regulations 2019 No. 855 (the “UK Regulations”) as amended on 1 March 2022 by Regulation 4(2)(d) of the Russia Sanctions (EU Exit) (Amendment) (No.3.) Regulations 2022/195.

Celestial filed the present Part 8 claim on 15 March 2022.

UniCredit subsequently asserted that US sanctions were another reason why it was prohibited from paying USD sums under the Letters of credit absent from the OFAC, with effect from 26 March 2022 or 13 April 2022.

UniCredit relied on two further provisions of the Regulations, namely the asset freeze provisions under regulations 11 and 13.

In this case, the Claimants are Irish-incorporated entities operating in the aviation industry as aircraft lessors. In 2008 and 2014 they each entered into an aircraft leasing agreement with the Russian cargo airline AAL (the “Leases”).

Again the Defendant, UniCredit, is the London branch of a bank incorporated in the Federal Republic of Germany.

On 8 February 2018 and 24 December 2020, Sberbank issued five irrevocable standby Letters of credit to secure AAL’s obligations to Constitution under the Leases (the Letters of credit). Each of the Letters of credit was confirmed by UniCredit on 12 and 13 February 2018 and 4 January 2021.

Each of the Letters of credit is governed by English law and expressly incorporates the UCP.

On 24 February 2022 the Russian Federation invaded Ukraine. On the following day, the Council of the European Union implemented sanctions against Russia by way of Council Regulation (EU) 2022/328 (the “EU Regulation”) which came into force on 29 March 2022. Further sanctions were implemented by the US on 24 February 2022 (taking effect on 26 March 2022) and the UK on 28 February 2022 (taking effect on 1 March 2022).

The EU Regulation effected a change in law relevant to the operation of the Leases, and on 28 February 2022 and 3 March 2022 the Constitution notified AAL of the change in law and required AAL to cease the operation of the aircraft.

Following a number of Events of Default by AAL, the Claimants terminated the leasing of the aircraft under the AAL Leases on 4 and 25 March 2022.

It is common ground that Constitution made conforming demands for payment under one of the Letters of credit on 11 March 2022 and four Letters of credit on 24 March 2022.

UniCredit was therefore required to pay USD 2,604,737.03 and USD 8,181,376.06 to Constitution 3 within 5 banking days of 11 March and 24 March 2022 respectively (ie 18 or at latest 21 March 2022 in relation to the first demand and 31 March or at latest 1 April in relation to the second) ; and USD 12,706,396.84 to Constitution 5 within 5 banking days of 24 March 2022, (ie by 31 March or at latest 1 April 2022).

UniCredit again refused to make payment absent a licence, relying initially on UK Regulation 28 and EU Sanctions imposed by Article 3c of the EU Regulation. In subsequent correspondence and its evidence before this Court it has also sought to rely on US Sanctions, and, more recently, on UK Regulations 11 and 13.

Thus, UniCredit’s defence in this action raises exactly similar issues to those raised in the Celestial action.

UniCredit applied for licences to permit payment to Celestial and Constitution, on the assumption that payment would otherwise be prohibited under the relevant sanctions. The position in relation to UniCredit’s licence applications is as follows:

The following main developments have taken place since the hearing:

So far as the Celestial Letters of credit are concerned:

So far as the Constitution Letters of credit are concerned, payment in settlement of these liabilities (excluding interest and costs) was made on 21 November 2022.

As explained above, the parties now have reached agreement in relation to the principal amounts owing under the Letters of credit. That leaves costs and interest to be resolved. As explained below, however, the issues of costs and interest require resolution of a number of underlying matters which remain in dispute.

In particular, the following matters remain in issue, which I have been asked to determine:

The issue of US law, it is said, remains relevant. The claim was for payment in USD in accordance with the demands. Thus, this issue will be relevant to the question of interest and costs. The incidence of costs in relation to the US law issue is likely to depend on the Court’s resolution of the underlying issue. Secondly, the Court’s decision on this question is likely to be of more general interest to market participants and practitioners (including on the Ralli Bros point).

If the answers to the US law issues are “yes”, there might then arise a further question whether UniCredit was required to make payment in an equivalent sterling sum in accordance with the Demands, i.e., to accounts at US banks (as reflected in the draft amendments made to Celestial’s claim). The parties do not suggest that I need, at least at this stage, resolve that issue. As noted above, UniCredit has offered to settle liabilities arising from the remaining Letters of credit by way of payment in an equivalent sterling amount in London to accounts at non-US banks, and Celestial and Constitution have accepted that offer. As matters stand, therefore, this is not a live question that requires resolution; should this issue become relevant (for example, on the question of interest and costs), the parties’ submission is that it would most appropriately be addressed following judgment on the preceding issues.

Finally, there remains an issue in relation to EU sanctions (see below). All parties agree that the analysis in relation to the relevant EU sanctions is materially the same as in relation to the UK Regulations, so (in practice) no separate issue is likely to arise following the Court’s decision in respect of the UK Regulations. Moreover, the position of Celestial and Constitution is that the EU law analysis is irrelevant to the issues which arise.

As regards the remaining issues, UniCredit’s position is as follows:

The position of Celestial and Constitution is as follows:

I turn to set out the most important elements of the chronology, which I take from the chronology agreed between the parties.

On 1 March 2022 the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations amended Regulation 28 UK Regulations (“Regulation 28”) to apply to “restricted goods” including civilian aircraft with immediate effect.

On 2 March 2022 Celestial made written demands for payment under 4 Letters of credit numbered 285, 329, 276 and 338. These were the AAL Letters of credit.

On 3 March 2022, the leasing of the Aurora 2243 aircraft was terminated.

On 4 March 2022, the leasing of the Aurora 2222 and 3838 aircraft was terminated.

Also on 4 March 2022, Celestial made written demands on three other Letters of credit, numbered 1177, 1186 and 1195. These were the Aurora Letters of credit.

On 4 March, again, Constitution gave notice to AAL of the termination of the leasing of the 35233 Aircraft.

On 7 and 11 March 2022, UniCredit stated that it believed that it would be a breach of Regulation 28 for it to make or receive payment under the AAL Letters of credit (7 March letter) and the Aurora Letters of credit (11 March letter).

On 9 March 2022, Sberbank transferred the sum of USD 7,207,360 in partial satisfaction of its obligations to UniCredit under the Celestial Letters of credit.

On 11 March 2022, Constitution made a written demand for payment under the 202 letter of credit. On the same day, UniCredit wrote to Sberbank asking that it not make any further payment since UniCredit was concerned that it would be a breach of Regulation 28 for it to receive payment.

The deadline for the payment of the Celestial Letters of credit expired on the dates set out above. Celestial commenced Part 8 proceedings on 15 March 2022.

On 17 March 2022 UniCredit wrote to Constitution stating that it believed that it would be a breach of Regulation 28 for it to make or receive payment under the Constitution Letters of credit.

By 18 March 2022 the deadline for payment under the Constitution letter of credit 202 had expired.

On 18 March 2022 Sberbank transferred to UniCredit the sum of US 17,866,275.21 in partial satisfaction of its obligations under the Celestial Letters of credit.

On 21 March 2022 UniCredit wrote to Sberbank asking that it not make any further payment since UniCredit was concerned that it would be a breach of Regulation 28 for it to receive payment.

On 24 March 2022 Constitution made written demands for payment under each of the 007, 008, 009 and 010 Letters of credit.

On that same day (24 March 2022) UniCredit applied for a licence to OFSI and ECJU pursuant to the UK licencing regime.

On 25 March 2022, Constitution gave notice of termination in relation to the 35237 Aircraft.

On 26 March 2022, OFAC’s Directive 2, referred to above, became effective, prohibiting all US financial institutions from processing any transaction involving Sberbank.

On 28 March 2022, the EU Regulation referred to above came into force at the end of a suspension period.

On 29 March 2022, UniCredit wrote to Constitution stating that it believed that it would be a breach of Regulation 28 for it to make or receive payment under the Constitution Letters of credit.

By 31 March 2022 at the latest, the deadline for payment of the Constitution Letters of credit numbered 007, 008, 009 and 010 had passed.

On 6 April 2022, the UK designated Sberbank for the purposes of asset freezing measures under Regulations 11 to 15 of the UK Regulations.

On that same day, OFAC added Sberbank to the Specially Designated Nationals and Blocked Persons List, but also issued General Licence 22 which permitted US persons to engage in wind down transactions with Sberbank until 13 April 2022.

On 8 April 2022, EU Regulation 2022/576 introduced Article 3c(6) which allowed the responsible regulators of EU Member States to issue licences in respect of Article 3c.

On 13 April 2022, OFAC’s General Licence 22 expired.

On 14 April 2022, UniCredit applied to the Bundesbank (the German EU regulator) for a licence.

On 27 April 2022, Constitution commenced Part 8 proceedings against UniCredit.

On 29 April 2022, UniCredit applied to OFAC for a licence. I believe that this was in relation to both Celestial and Constitution.

On 12 May 2022, UniCredit obtained a licence from the Bundesbank to pay Celestial and Constitution.

On 22 September 2022, UniCredit obtained a licence under Regulation 28 from ECJU to make payment to Celestial and Constitution, subject to OFSI providing a licence.

On 13 October 2022, OFSI provided a licence under Regulations 11 and 13, as I have noted.

As I have also noted, OFAC have still not provided a licence. However, payment has been made, but in currencies other than dollars, by agreement.

The issues in outline can therefore be summarised as follows:

My understanding is that I am not asked to make any determination as to EU law at this stage.

During the course of this judgment, where I make reference to the Claimants’ contentions, the reference is to the submissions made by Celestial, which were adopted orally by Constitution. It is only if Constitution’s written argument made independent points that I refer to those arguments. (Footnote: ²)

The Claimants’ contentions were as follows:

Turning to the present case:

The importance of a purposive approach to construing sanctions legislation is illustrated by R (on the application of M) v HM Treasury [2008] 2 All ER 1097. In that case, the relevant sanctions prohibited any funds being made available “for the benefit of” a designated person. The question arose whether the spouse of the designated person was entitled to receive social security payments. HM Treasury took the view that the spouse’s receipt of social security benefits would breach the sanctions (without a licence) since the benefits would be spent on running the family household from which the designated person would benefit. Lord Bingham rejected that argument, principally by reference to the purpose of the sanctions; see [12]:

“The committee’s opinion is that this intrusive regime is not required by art 2(2) of the 2002 Regulation. First, it is not required to give effect to the purpose of the Security Council resolution, which was obviously to prevent funds from being used for terrorist activities. Indeed, the licence tells Mrs M that the licence conditions are ‘to provide safeguards against the risk of these funds being diverted to terrorism’. It is however hard to see how the expenditure of money on domestic expenses, such as buying household food, from which Mr M derives a benefit in kind, can create any risk that he may divert funds to terrorism.”

That conclusion was supported by other considerations as addressed at [13]-[16] in the judgment of Lord Bingham, including the “disproportionate and oppressive result” to which HM Treasury’s interpretation would give rise.

While that case concerned a different issue of construction, two general points are to be noted. The first is again the focus on a purposive approach. The core of Lord Bingham’s analysis is that the language ‘for the benefit of’ was to be understood by reference to the purpose of the sanctions, namely to prevent funds being diverted to terrorism. Since the spouse’s domestic expenditure created no risk that the designated person would divert funds to terrorism, it followed that receipt of social security benefits was not to be regarded as ‘for the benefit of’ the designated person. A similar approach is apposite in this case. As explained above: (i) the purpose of Regulation 28 is to stop the supply of aircraft to Russia; (ii) payment under the Letters of credit creates no risk of aircraft being supplied to Russia. Second, Lord Bingham was concerned to arrive at an interpretation which, consistent with the purpose of the sanctions, would avoid a disproportionate or intrusive effect. Yet that is precisely the effect which Regulation 28 would have on Celestial on UniCredit’s interpretation.

UniCredit contended that:

In general, it seemed to me, the parties’ position on this topic did not differ to any material degree. The only real difference in emphasis was that the Claimants placed more weight on the importance of a purposive interpretation, whereas UniCredit emphasised the importance of a literal approach. In my judgment, it is important to approach the wording of the statute in the light of its purpose, and I prefer the Claimants’ approach in this regard.

The Claimants placed significant reliance on this (undoubted) principle, whilst UniCredit said that this reliance was misplaced.

The Claimants argued that it is fundamental to the nature of a letter of credit that it gives rise to autonomous payment obligations which operate independently of the underlying transaction. The payment obligations under a letter of credit are thus commonly described as equivalent to cash (Footnote: ¹⁴) and it is often said that Letters of credit are the “lifeblood of international trade”. (Footnote: ¹⁵)

The bank is under a primary obligation to pay against the presentation of stipulated documents. The bank’s payment obligation under a letter of credit is not triggered by, and is not concerned with, any breach in respect of the underlying transaction. (Footnote: ¹⁶) This autonomy principle is reflected in article 4(a) of the UCP:

“A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary.”

That principle is reflected in authorities such as Salam Air v Latam Airlines [2020] EWHC 2414 per Foxton J at [23]-[26], Brindle & Cox, Law of Bank Payments at 7-008 and Jack, Documentary Credits (4^th ed.) at 1.34. The exceptions to the autonomy principle are strictly limited and none have any bearing on the present case: (Footnote: ¹⁷) in particular, there is no illegality or fraud affecting the underling Leases.

Since the payment obligations under the Letters of credit are by their nature free-standing and wholly independent of the Leases, it was said that this supports the analysis that UniCredit’s payment under those Letters of credit cannot be regarded as “in pursuance of or in connection with” the supply of aircraft under the Leases.

It is no answer to this point, the Claimants argued, for UniCredit to point to the definition of “funds” as including a letter of credit. That is concerned with the issuance of a letter of credit as a means of financing. Regulation 28 prohibits the provision of a letter of credit, where that is “in pursuance of or in connection with” the supply of restricted goods to Russia. If a letter of credit were now sought to be issued for the purpose of financing a supply of restricted goods, that would plainly be prohibited by Regulation 28. The analysis is quite different, however, in circumstances where (as in this case) the Letters of credit were lawfully issued and the only question is whether payment can now be made thereunder. Those payment obligations are autonomous; discharge of those payment obligations cannot be regarded as in connection with the underlying supply of goods.

UniCredit, for its part, accepted the autonomy principle, and argued that it normally causes no difficulty in cases in which it arises; but argued that here it does not arise. UniCredit does not contend, for example, that doubts over its ability to be reimbursed by Sberbank affect its own obligations owed to the Claimants as confirming bank, or that it is not liable because of an absence of default in relation to the underlying contract.

Instead, UniCredit contended, this case is about whether sanctions legislation imposed in response to Russia’s invasion of Ukraine has the effect of suspending performance by UniCredit of its own payment obligation. This is not, it was said, a question of contract law, but of criminal law. The issue is not whether the terms of the Letters of credit require payment but whether the terms of the applicable sanctions legislation prevent it. UniCredit submitted that they do. In this regard, it was argued that it is important to appreciate the interconnected nature of the various obligations in the arrangement. For example:

I have concluded that the Claimants are correct in their contention that the autonomy principle supports their position, although I think that this is easier to explain when I turn to Regulation 28 itself, as I am just about to do. However, I would make one overarching comment. That is that I do not accept that this is not a matter of contract, but of criminal law. It is both. The question is whether, because compliance with a contractual obligation would involve the commission of a criminal offence, compliance is excused.

The primary legislation for the UK Russian sanctions regime is found in SAMLA. Section 1 of SAMLA provides that an appropriate Minister may make regulations imposing financial or trade sanctions for one of a number of specified purposes.

The UK Regulations were made by the Secretary of State on 10 April 2019 in the exercise of the powers conferred by SAMLA. The UK Regulations were originally made to replace, with substantially the same effect, the EU sanctions regime relating to Russia that (prior to Brexit) were in force under EU legislation and related UK regulations. In particular, EU Regulation No. 833/2014 was enacted on 31 July 2014 in response to Russia’s occupation of Crimea.

The UK Regulations have since been amended on several occasions, most recently on 21 July 2022. Most relevant for present purposes, the UK Regulations were subject to substantial changes following the start of the conflict in Ukraine in February 2022.

The purposes of the UK Regulations are stated in regulation 4 of the UK Regulations as follows:

“The regulations contained in this instrument that are made under section 1 of [SAMLA] are for the purposes of encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine.”

The purpose of the UK Regulations was elaborated upon in the report provided by the Minister of State for Europe pursuant to section 2(4) of SAMLA. Para 6 of the report described the purpose of the UK Regulations in materially the same terms as stated above. Para 8 of the report stated that: “Sanctions are intended to increase pressure on Russia to achieve the outcome of Russia ceasing actions which are destabilising Ukraine, or undermining Ukrainian sovereignty”. According to para 13(a) of the report, the intention of the financial and immigration sanctions on designated persons was as follows:

“The intention is to apply pressure in order that the Government of Russia changes its behaviour, and to send a strong message that actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine will not be tolerated. Applying these restrictions to individuals involved in this destabilising activity is intended to both directly and indirectly bring about behaviour change in the Government of Russia.”

Para 13(b) explained that the purpose of the trade sanctions was to curtail Russian access to certain equipment and services, in particular those affecting the defence and energy sectors “to exert greatest pressure on the Russian State, and thereby increase the costs to Russia in respect of Russian action in Ukraine”.

Regulation 28 forms part of Chapter 2 of Part 5 of the UK Regulations. Part 5 is concerned with trade. Within that, Chapter 2 is concerned with restricted goods, restricted technology and related activities.

“Restricted goods” comprises eight categories of goods: critical-industry goods, dual-use goods, military goods, aviation and space goods, oil refining goods, quantum computing and advanced materials goods, defence and security goods, and maritime goods. “Aviation and space goods” is in turn defined as including aircraft. “Restricted technology” refers to technology or software associated with these goods.

The central purpose of the trade sanctions in Chapter 2 of Part 5 of UK Regulations is to stop the supply of restricted goods or restricted technology to Russia. Hence: Regulations 22 and 24 prohibit the export or supply of restricted goods to Russia; Regulation 25 prohibits a person from making available restricted goods or technology to a person connected with Russia; Regulation 26 prohibits a person from transferring restricted technology to a place in Russia or to a person connected with Russia; and Regulation 27 prohibits a person from providing technical assistance relating to restricted goods/technology to a person connected with Russia or for use in Russia.

Regulation 28 concerns the provision of financing for the supply of restricted goods/technology. It provides as follows:

“Financial services and funds relating to restricted goods and restricted technology

(1)

A person must not directly or indirectly provide, to a person connected with Russia (Footnote: ²²), financial services in pursuance of or in connection with an arrangement whose object or effect is—

(a)

the export of restricted goods,

(b)

the direct or indirect supply or delivery of restricted goods,

(c)

directly or indirectly making restricted goods or restricted technology available to a person,

(d)

the transfer of restricted technology, or

(e)

the direct or indirect provision of technical assistance relating to restricted goods or restricted technology.

(2)

A person must not directly or indirectly make funds available to a person connected with Russia in pursuance of or in connection with an arrangement mentioned in paragraph (1).

(3)

A person must not directly or indirectly provide financial services or funds in pursuance of or in connection with an arrangement whose object or effect is—

(a)

the export of restricted goods to, or for use in, Russia;

(b)

the direct or indirect supply or delivery of restricted goods to a place in Russia;

(c)

directly or indirectly making restricted goods or restricted technology available—

(i)

to a person connected with Russia, or

(ii)

for use in Russia;

(d)

the transfer of restricted technology—

(i)

to a person connected with Russia, or

(ii)

to a place in Russia; or

(e)

the direct or indirect provision of technical assistance relating to restricted goods or restricted technology—

(i)

to a person connected with Russia, or

(ii)

for use in Russia.

…

(6)

Paragraphs (1) to (3) are subject to Part 7 (Exceptions and licences).

…”

“Financial services” and “funds” are defined in sections 60 and 61 of SAMLA. “Funds” means “financial assets and benefits of every kind”. A non-exhaustive list is set out in section 60, which includes e.g. cash, payment instruments, deposits, securities and debt instruments and Letters of credit. “Financial services” means any service of a financial nature, e.g. insurance and banking services.

Breaking Regulation 28(3) down into its constituent elements, this involves the following elements (in summary):

So far as element (1) is concerned, the transaction in question (i.e. payment by UniCredit under the Letters of credit) plainly involves a provision of funds. That is the provision of funds by UniCredit to Celestial, i.e. discharge of the payment obligations under the Letters of credit.

So far as element (3) is concerned, the Claimants accepts that each of the Leases was (until termination of the leasing) an arrangement whose object or effect was the supply of restricted goods to, or for use in, Russia, or to a Russian person. There was therefore a relevant “arrangement” for the purposes of Regulation 28(3) until termination of the leasing.

The critical dispute focuses on element (2). The question is whether payment by UniCredit to Celestial under the Letters of credit is “in pursuance of or in connection with” the supply of aircraft under the Leases, for the purposes of Regulation 28(3).

Much of the above was common ground. UniCredit accepted that SAMLA was passed in 2018 in anticipation of the UK exiting the EU because the UK’s implementation of UN and other multilateral sanctions regimes was hitherto largely dependent upon the European Communities Act 1972 (Footnote: ²³). As set out in its preamble, the purpose of Part 1 of SAMLA is to:

“make provision enabling sanctions to be imposed where appropriate for the purposes of compliance with United Nations obligations or other international obligations or for the purposes of furthering the prevention of terrorism or for the purposes of national security or international peace and security or for the purposes of furthering foreign policy objectives”.

As part of the transition process, the existing EU sanctions framework was in large part replicated in UK law by way of numerous regulations made under SAMLA, which came into force on 31 December 2020. Thus, the UK Regulations were made and came into force on that date, and revoked the relevant retained EU legislation. (Footnote: ²⁴)

SAMLA requires that regulations made pursuant to it state their purpose or purposes (s.1(3)). UniCredit also relied on Regulation 4, cited above, in this context.

In keeping with the UK’s general sanctions framework, UniCredit argued that the UK Regulations establish a regime of both prohibition and control, in which the blunt effects of widely drawn restrictive measures may be moderated by its licensing regime. UniCredit contended that this is an integral part of the scheme of the UK Regulations. (Footnote: ²⁵) The importance of the licensing regime to “mitigate any unintended negative consequences”, it was said, is expressly recognised in the Statutory Report accompanying the UK Regulations. (Footnote: ²⁶) The Report also acknowledges that, by tempering the effects of the widely drawn restrictive measures, the licensing regime serves to ensure its application was reasonable.

The prohibitions in Regulation 28 (aviation trade sanctions) and Regulations 11 and 13 (asset freezing measures), both have at their centre the terms “funds” and “financial services”, phrases which I have already addressed.

UniCredit argued that both phrases are defined in the broadest terms. The examples that follow these definitions comprise illustrative, non-exhaustive lists. The term “funds” explicitly includes “Letters of credit” (Footnote: ²⁷), “guarantees” and “other financial commitments”. (Footnote: ²⁸) The term “financial services” expressly includes “banking and other financial services consisting of – (ii) … financing of commercial transactions …(v) providing guarantees or commitments” (SAMLA s.61(1)(b)).

Since February 2022, the UK Regulations have been amended 14 times. The first amendment came into force in the lead up to the invasion, (Footnote: ²⁹) the second on 1 March 2022 in response to the invasion. This introduced new aviation sanctions into Regulation 28. This rapid introduction of the UK sanctions was against the wider backdrop of similar sanctions measures being introduced in other jurisdictions, such as the EU and the US. The provisions of Regulation 28 have been set out above.

A breach of trade sanctions is a criminal offence punishable upon conviction by a sentence of up to 10 years’ imprisonment or a fine (or both). (Footnote: ³⁰) Civil penalties may also be imposed, up to a maximum of the greater of either £1,000,000 or 50% of the estimated value of the funds or resources (Footnote: ³¹) now on a strict liability basis. (Footnote: ³²) It is also an offence intentionally to engage in activities with the object or effect of (directly or indirectly) circumventing sanctions or enabling or facilitating the circumvention of sanctions. (Footnote: ³³)

UniCredit contended that the key issue for me to resolve is whether payment to the Claimants as beneficiaries under the Letters of credit would constitute the provision of financial services or funds in connection with relevant arrangements under Regulation 28(3), a question of statutory interpretation.

UniCredit argued as follows:

The licensing scheme is a specific aspect of Regulation 28. (Footnote: ³⁹) As such, it is a part of its purpose. (Footnote: ⁴⁰) The trade licensing regime in the UK Regulations is a mechanism to address the issue of transactions which the Government considers do not undermine the purposes of the regime, but which are caught by the wording of the Regulations as a result of its broad scope. The licensing framework provides for categories of exceptions by way of General Licences and permits individual scrutiny of transactions and specific exemptions where appropriate.

The creation of the licensing regime necessarily implies that there are transactions or activities which fall within the scope of the Regulations by reason of its broad application, but which the authority recognises ought to be permitted at its discretion. This recognises that the broad drafting of the Regulations means that some conduct will be caught which there are policy or other reasons to permit, or other factors specific to each case which mean that intervention by the authority is appropriate.

Thus, the statutory guidance, the ‘Russia Guidance’ issued on 25.03.22, stated, in respect of the trade sanctions:

“For some prohibitions there are some specific activities that DIT considers are likely to be consistent with the aims of the sanctions. These are set out in the table below. If you think that your proposed activity falls within one of these specific descriptions you should make this clear and explain why you believe this to be the case in your application for a licence.

You should not assume that a licence will be granted or engage in any activities prohibited by trade sanctions until your licence has been granted.”

This iteration of the Guidance stated:

“A licence may be granted for the provision of technical assistance, brokering services, financial services or funds related to aviation and space goods and technology if the Secretary of State is satisfied that the technical assistance, brokering services, financial services or funds are necessary for the execution of obligations arising from contracts concluded before 8 March 2022, or ancillary contracts necessary for the execution of such contracts, provided that the activity is completed before 28 March 2022. This licensing ground will no longer be available for use from 28 March 2022.”

This guidance indicates that the provision of funds or financial services after the commencement date in connection with arrangements which were entered into before that commencement date fall within Regulation 28 and individual licences are thus required where the contracts were concluded before the commencement provisions. (Footnote: ⁴¹) This undermines the Claimants’ argument that the purpose of the trade sanctions was to apply restrictions only to prospective trade or financial support once the sanctions had been implemented and that, therefore, had no retrospective application. To the contrary, the scheme of the sanctions demonstrates that such transactions would be caught by the sanctions but would likely be amenable to the licensing regime.

The Claimants’ reliance on suggested policy reasons why payment should not be caught by the Regulations (e.g. the timing of the sanctions in relation to the provision of the restricted goods, the fact that the transactions have now been terminated, the independence of the obligations under the Letters of credit, the fact that payment to the Claimants will not result in payment to a person connected with Russia or a designated person) may all be reasons in support of the grant of a licence to permit the payments to be made within the existing framework, as underscored by the ECJU licence issued on 22 September 2022. However, they are not matters relevant to the statutory interpretation of Regulation 28. The Claimants’ complaints about the administration of the licensing regime likewise do not assist in the interpretation of the scope of the prohibitions within Regulation 28.

I have come to the clear conclusion that UniCredit was not relieved of the obligation to make payment to the Claimants under the various Letters of credit by reason of Regulation 28. I reach this conclusion for the following reasons.

I also accept the Claimants’ submission that it is important to take a step back in this regard and ask whether the fulfilment of an independent obligation owed by a German bank to Irish companies can be said to be intended to benefit the Russian entities who happen to be involved in other elements of the overall transaction. In my judgment, the answer to this question is quite clear – it cannot.

Nor, lastly, do I accept UniCredit’s submission that the Regulation should be read broadly on the basis that any vagaries that such a reading might lead to can be assuaged by the use of the licensing system. Indeed, the extracts from the guidance relied on by UniCredit seem to me to militate against such an approach. Those extracts suggest that the licencing authorities may take the view that prohibited transactions may nonetheless be licenced if they are thought to be “consistent with the aims of the sanctions”; but that in turn indicates that a licence may be granted in relation to transactions even though they are prohibited on a proper reading of the sanctions, not that the sanctions should be regarded as all embracing, subject only to the licencing regime.

Regulation 11 provides:

“11.

—(1) A person (“P”) must not deal with funds or economic resources owned, held or controlled by a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources. …

…(4) For the purposes of paragraph (1) a person “deals with” funds if the person—

(a)uses, alters, moves, transfers or allows access to the funds,

(b)deals with the funds in any other way that would result in any change in volume, amount, location, ownership, possession, character or destination, or

(c)makes any other change, including portfolio management, that would enable use of the funds.

(5)

For the purposes of paragraph (1) a person “deals with” economic resources if the person—

(a)exchanges the economic resources for funds, goods or services, or

(b)uses the economic resources in exchange for funds, goods or services (whether by pledging them as security or otherwise).

(6)

The reference in paragraph (1) to funds or economic resources that are “owned, held or controlled” by a person includes, in particular, a reference to—

(a)funds or economic resources in which the person has any legal or equitable interest, regardless of whether the interest is held jointly with any other person and regardless of whether any other person holds an interest in the funds or economic resources;

(b)any tangible property (other than real property), or bearer security, that is comprised in funds or economic resources and is in the possession of the person.

(7)

For the purposes of paragraph (1) funds or economic resources are to be treated as owned, held or controlled by a designated person if they are owned, held or controlled by a person who is owned or controlled directly or indirectly (within the meaning of regulation 7) by the designated person”.

Thus, Regulation 11 provides (in relevant part) that a person “must not deal with funds or economic resources owned, held or controlled by a designated person…”. Sberbank is a designated person. Sberbank is, of course, the issuing bank in respect of the Letters of credit. However, UniCredit’s payment obligation to pay Celestial under the Letters of credit (as the “confirming bank”) is separate and independent from that of the issuing bank. (Footnote: ⁴²) Discharge of that payment obligation will not in any way involve UniCredit dealing with funds or economic resources owned, held or controlled by Sberbank. (Footnote: ⁴³)

On 6 April 2022, Sberbank was designated under Regulation 5 of the UK Regulations for the purposes of asset freezing measures and it would constitute a breach of Regulations 11 and 13 for UniCredit to make payment under the Letters of credit prior to obtaining a relevant licence from OFSI. Accordingly, on 11 April, UniCredit amended its extant licence application to OFSI. (Footnote: ⁴⁴)

Regulation 11 operates to prevent payment to the Claimants under the Letters of credit irrespective of whether any funds are received from Sberbank. As with Regulation 28(3), the correct approach for establishing the meaning of the provision is to start with its words, read in its statutory context and in light of the legislative purpose.

Regulation 11 prohibits dealing with funds or economic resources “owned, held or controlled by a designated person”. As noted above, “funds” means “financial assets and benefits of every kind” including Letters of credit. (Footnote: ⁴⁵) Letters of credit constitute “funds” under s.60(1)(f) of SAMLA, and funds are “owned, held or controlled by a designated person” where the person has any legal or equitable interest in them, regardless of whether any other person holds such an interest. (Footnote: ⁴⁶) Those interests are not extinguished by the presence of other co-existing interests. In this case, the Letters of credit are “owned held or controlled” by Sberbank within the meaning of those terms because Sberbank retains a legal interest in them, including, but not only, rights to preserve their terms.

“Dealing with” funds is defined in Regulation 11(4). The term includes dealing with the funds in any way which would result in a change in their character, as well as making a change to enable use of the funds. Prohibited “dealing with” funds of a designated person is not restricted to conduct which enables use of the funds by the designated person. The provision is widely drafted to cover use of the funds etc. by any person. If UniCredit paid the Claimants, this would change the character of the Letters of credit since, amongst other things, it would extinguish the obligation of Sberbank to pay the Claimants, trigger Sberbank’s reimbursement obligation, and enable the funds in question to be used. That those funds would be used by the Claimants rather than directly by the designated person, Sberbank, may be a point in favour of the grant of a licence permitting such use but, again, it does not assist in a narrow construction of the provision itself.

The exemption in Regulation 58 of the sanctions regulations does not remove the Letters of credit from the scope of Regulation 11 as the Claimants contend. That Regulation provides as follows:

“58.

—(1) The prohibition in regulation (asset-freeze in relation to designated persons) is not contravened by an independent person (“P”) transferring to another person a legal or equitable interest in funds or economic resources where, immediately before the transfer, the interest—

(a)is held by P, and

(b)is not held jointly with the designated person.”

This is because UniCredit would not be transferring an interest it holds in the Letters of credit to the beneficiaries if it made payment, which is what the exemption in Regulation 58(1) envisages. It would, instead, be discharging its obligation under the letter of credit with the result that the character of the letter of credit is changed.

I can deal with this contention briefly. Again, in my judgment, UniCredit’s contentions are ill-founded.

Regulation 13 provides as follows:

“13.

—(1) A person (“P”) must not make funds available to any person for the benefit of a designated person if P knows, or has reasonable cause to suspect, that P is making the funds so available. …

… (4) For the purposes of this regulation—

(a)funds are made available for the benefit of a designated person only if that person thereby obtains, or is able to obtain, a significant financial benefit, and

(b)“financial benefit” includes the discharge (or partial discharge) of a financial obligation for which the designated person is wholly or partly responsible.”

The Claimants argued that this Regulation was again not engaged. The payment obligation under the Letters of credit crystallised upon a conforming demand being made. Such a demand was made on UniCredit; hence the crystallisation of UniCredit’s payment obligation as confirming bank. No such demand was made by the Claimants on Sberbank. Sberbank therefore has no extant payment obligation towards the Claimants.

Even if Sberbank (as issuing bank) did have a payment obligation to the Claimants, Sberbank would not be enriched as a result of UniCredit discharging its payment obligation. In those circumstances, Sberbank would be required to reimburse UniCredit, as UniCredit accepts. Sberbank would therefore receive no relevant ‘benefit’ by virtue of UniCredit’s payment to the Claimants – payment by UniCredit would simply substitute Sberbank’s obligation to the Claimants with an equivalent obligation to UniCredit.

Moreover, any payment obligation which Sberbank (as issuing bank) would have towards the Claimants would be unenforceable by reason of the asset-freeze restrictions. That is a further reason why there is no relevant enrichment to Sberbank as a result of UniCredit’s discharge of its payment obligations. As things stand, the Claimants would have at most an unenforceable right against Sberbank. In those circumstances, it would be unreal to suggest that discharge of UniCredit’s payment obligation confers any relevant benefit on Sberbank.

Standing back, there is a fundamental artificiality about UniCredit’s reliance on regulation 13. Regulation 13 is intended to stop a payment being made for the benefit of a designated person. Viewing the matter with any degree of commercial realism, the payments under the Letters of credit are made for the benefit of the Claimants. Even if there were any benefit to Sberbank (which there is not, as explained above) that benefit would be no more than collateral or incidental.

Finally, Sberbank did not become a designated person until 6 April 2022. Regulation 13 cannot therefore excuse non-payment prior to 6 April 2022. The Claimants would therefore be entitled to claim damages for non-payment prior to that date.

Making payment under the Letters of credit after the relevant date would also constitute a breach of Regulation 13, by “making funds available for the benefit of [Sberbank,] a designated person”. This is because:

Once again, I can deal with UniCredit’s case briefly.

Overall, therefore, I reject UniCredit’s case based on Regulation 13.

As I understand the position, I am not asked to reach any conclusions in this judgment as to s.44, which the parties believe will only arise as part of a judgment on consequential matters. Accordingly I do not consider this further.

On UniCredit’s own case, US sanctions had no relevant effect until either 26 March 2022 or 13 April 2022.

Here, the position does differ slightly, as I understand it, between Celestial and Constitution. As regards Celestial, it was said that even if it were the case that payment under the Letters of credit is now prohibited under US sanctions, US sanctions can provide no defence to the non-payment prior to 26 March 2022. The Claimants are accordingly entitled to damages (which may be given in sterling) for non-payment prior to 26 March 2022, or to payment. All of the obligations to make payment to Celestial accrued prior to 26 March, as noted above. Neither US measure could affect such obligations, on the face of things, Celestial argued.

As to Constitution, then it was argued that the second US sanction could have no impact on the payment obligations, since all of those had matured prior to 13 April 2022. As regards the first sanction, which came into force on 26 March 2022, then some of the payment obligations might be affected, but the first one could not be.

UniCredit’s written argument did not address this issue. In oral argument, as I understood the position, their argument was that, even if the US sanctions did not give them a defence as at the time that the payment obligations had to be fulfilled, if, as at the time that those obligations arose s.44 of SAMLA gave them a defence to the claim, then they could rely on the US sanctions in force as at the moment when they ceased to satisfy the provisions of s.44.

I can express my conclusions on this issue briefly in the light of what has been said above.

Is the question of lawfulness under US law of any relevance to this claim?

UniCredit says that it would commit an offence under US law if it made payment to the Claimants under the Letters of credit. The sole connection which the payment has to the US is that the payment obligation is in USD. According to UniCredit, it would be committing an offence under US law by making a USD payment.

The answer to this question, the Claimants say, is ‘no’. The Letters of credit are governed by English law. The starting-point is that questions about whether the Letters of credit are valid and enforceable are decided by reference to the law which governs those Letters of credit i.e. English law. The fact that the Letters of credit or their performance would be regarded as unlawful under the law of some other country “is generally speaking irrelevant”: see e.g. Dana Gas PJSC v Dana Gas Sukuk Ltd [2017] 2 CLC 735 at [46] per Leggatt J; Banco San Juan Internacional v Petroleos de Venezeula SA [2020] EWHC 2937 (Comm) at [76] per Cockerill J.

The principle in Ralli Bros v Compania Naviera Sota y Aznar [1920] 2 KB 287 operates as a “limited exception” to that general rule. (Footnote: ⁵¹) The rule in Ralli Bros provides that the English court will not enforce an obligation which requires a party to do something which is unlawful by the law of the country in which the act has to be done: see Dana Gas at [79]. Thus, the rule is engaged only if performance of the obligation would require the performing party to act unlawfully in the required place of performance.

The authorities distinguish between situations where (i) performance necessarily involves an act which is unlawful by the law of the country in which that act takes place and (ii) the party equips itself for performance by an illegal act in another country. Only the first of these situations would engage the Ralli Bros rule: see Libyan Arab Foreign Bank v Bankers Trust [1989] QB 728 at pp.744-5. The Claimants argued that the current case was akin to Kleinwort Sons & Co v Ungarische Baumwolle Industrie AG [1939] 2 KB 678, in which the Court of Appeal held that since payment was to be made in England, the place of performance was England, such that unlawfulness under Hungarian law was irrelevant. The Ralli Bros principle was therefore not engaged. MacKinnon LJ held at p.694: “Here it is said that to pay this money in London is unlawful by the law of Hungary. If this contract had been to pay money in Budapest, no doubt that principle would have applied, and the law of Hungary would have been the lex loci solutionis, but the payment of the money was to be made in England, and the law of England is the lex loci solutionis. Therefore the exception where the performance is unlawful by the law of the country where the contract is to be performed does not arise, and the defendants can base no defence on that principle”. To similar effect, Atkinson J held at p.700: “In this contract the obligation is to pay certain money in London, and the contract is not concerned with the steps which the debtors may have to take to put themselves in a position to pay. It is concerned only with the payment itself, which is to be made in this country”. (Footnote: ⁵²)

The same principle, the Claimants argued, is illustrated in Libyan Arab Foreign Bank. The Libyan Bank sought to withdraw USD funds from its dollar account held in London with the London branch of a US bank (Bankers Trust). The US had imposed sanctions against Libya, to which Bankers Trust (as a US entity) was subject; this made it illegal under US law for Bankers Trust to make a payment in London to the Libyan Bank. In reliance on Ralli Brothers, Bankers Trust contended that it was excused from making payment on the basis that this would necessarily involve performance in New York. Staughton J rejected the bank’s argument that performance of its payment obligation in England would necessarily involve performance of an unlawful act in New York – for example, the judge held that it would be possible for Bankers Trust to pay by delivery of cash in the form of dollar bills which would not require any unlawful action in New York (see p.764). According to Dixon: Goode on Payment Obligations in Commercial and Financial Transactions (4^th ed.) at 5-46:

“This decision demonstrates the importance of identifying the due place of payment because, as has been shown, the law of that place may have an impact the enforceability of the bank's repayment obligation. This will, however, usually be the place where the account is held. In the Libyan Arab case, New York may be described as the place of settlement but, given the analysis adopted above, illegality in that place does not detract from the validity and enforceability of the bank's obligation to repay the deposit. London was the due place of payment.”

Here, UniCredit was required to make payment to an account in London in the case of the Celestial AAL Letters of credit, and to an account in Dublin in the case of the Aurora Letters of credit and in Dublin in the case of Constitution. The place of performance of the payment obligations is therefore England and Ireland respectively. (Footnote: ⁵³) As such, the position is analogous to Kleinwort Sons. The place of performance of the payment obligation is England or Ireland.

It bears emphasis that the Ralli Bros rule is engaged only if it is illegal for the performing party to perform in the place of performance. It is not enough for UniCredit to say that it would be practically impossible for it successfully to make a USD payment because correspondent banks would in practice block the payment. This is reflected by the reasoning of Cockerill J in Banco San Juan. This was a claim brought by a Puerto Rican bank (BSJI) against PDVSA, a Venezuelan state-owned company, for repayment due under loan facilities. The loan facilities were English law governed. The loan facilities required repayment to be made in USD to a stipulated account held in New York. The US had imposed sanctions on Venezuela. PDVSA sought to resist payment on the grounds that the sanctions prohibited payment to be made in USD to the designated account in New York. The judge said, obiter, at [107] that it was not illegal or a breach of US sanctions for PDVSA (a non-US entity based outside the US) to make payment, in the sense of taking steps it would need to take to make the payment to BSJI in the stipulated account. The judge said at [110] that had she been required to decide the point, she would have rejected the defence based on illegality. The judge also observed at [106] and [111] that the real underpinning of PDVSA’s case was factual impossibility rather than illegality. (Footnote: ⁵⁴) That is not within the scope of the Ralli Bros rule: see [106].

In the alternative, the Claimants argued that if (i) the question of lawfulness under US law is relevant to the enforceability of the Letters of credit and (ii) UniCredit would commit an offence under US law if it made payment in USD, this would not provide UniCredit with a defence to the claim. The only reason why the US law position is arguably relevant is because payment is to be made in USD. If payment were instead made in Euros or sterling, no issue of US law would arise. However, I understand that the parties do not wish me to deal with this argument in this judgment, but to leave it for any argument at the stage of consequentials. I therefore say no more about it at this stage.

The governing law of each of the Letters of credit is English law. It is a well-recognised principle of English law – known as the principle in Ralli Bros – that the Court will not compel performance of an obligation (or award damages for its breach) where this would require an unlawful act in the place of performance. As explained by Staughton J in Libyan Arab Foreign Bank v Bankers Trust Co [1989] 1 QB 728 (“LAFB”) at 743F, “Performance of a contract is excused if…it necessarily involves doing an act which is unlawful by the law of the place where the act has to be done.”

In this regard, a distinction is drawn between acts undertaken to equip a party to perform the contract and performance itself.

Where the Ralli Bros principle is not engaged, considerations of public policy may still militate against the enforcement of a contract where a sufficiently serious breach of foreign law is involved which reflects important policies of the foreign state such that enforcement would be contrary to public policy. This is a more flexible principle. If the principle in Ralli Bros is engaged, the contract will not be enforced. If the principle is not engaged, then the Court goes on to consider whether the more flexible principle nevertheless militates against enforcement. (Footnote: ⁵⁵)

Here, the following matters arise on the face of the Letters of credit:

In LAFB, a Libyan bank (the customer) held accounts with Bankers Trust (the banker) in both New York and London. Against the backdrop of sanctions imposed by the US government targeting Libyan persons and assets, the customer demanded repayment of USD balances standing to the credit of its London account. The demands made in that case were expansive and presented on various alternative bases – first USD in cash or by banker’s draft, then USD by any commercially recognised method, and finally in sterling.

Staughton J tested each payment method against the question of whether it would necessarily involve an act in the USA, where it would have been unlawful by reason of the sanctions. He held that any payment which involved clearing through the US would necessarily involve an act in the USA, which would be illegal there. This was also the case in respect of any clearing system outside the USA, since clearing would still ultimately be required in the USA. The judge also inclined to the view that payment by banker’s draft would give rise to the same problem, though it was unnecessary for him to decide the point.

The essence of Staughton J’s decision thus far is correctly summarised in Brindle & Cox, The Law of Bank Payments, 5^th Ed. (2017) at para 3-020:

“the withdrawal or transfer of funds from an account governed by English law can be blocked by the law of any foreign state through whose jurisdiction the funds must necessarily pass. As has already been noted above, even an offshore transfer of funds may necessitate those funds passing through the country of the currency of the transfer so that the transaction is partly performed in that country.”

In LAFB itself, this difficulty was ultimately sidestepped by the judge’s conclusion that the customer was entitled to demand (a) payment of USD in cash in London, which it was accepted would not involve any illegal action in New York (764F), alternatively (b) payment in sterling (766H). UniCredit argued that neither possibility arises in this case: neither method would comply with the terms of the Letters of credit or the demands made under them.

Accordingly, the Ralli Bros principle is squarely engaged. The suggestion in the Claimants’ skeleton arguments that the use of a correspondent bank in the US is merely preparatory to performance is clearly wrong both on the evidence (UniCredit’s act of performance is to issue a payment instruction nominating the beneficiary’s destination account, an instruction which then causes funds to flow inevitably through a correspondent bank account in the US) and fails to engage with the actual decision in LAFB, which is indistinguishable.

There is accordingly no need – and no room – for consideration of the more flexible principle which may operate where the Ralli Bros rule does not apply. Even if this is wrong, however, the more flexible principle leads to the same result.

In order to consider this issue fully, I think it is necessary to examine the LAFB decision carefully. I start with the headnote in the case, which provides as follows:

“The plaintiffs, a Libyan bank, had a call account with the London branch of the defendants, an American bank. They also had a demand account with the defendants' New York branch. The arrangement was that the plaintiffs maintained a peg balance of U.S.$500,000 in the New York account. Each morning, in the light of the balance of the New York account at the end of the previous day's trading, funds were transferred to or from London so that the peg balance was maintained. At 2 p.m. each day the balance of the New York account was again determined and similar transfers made between the two accounts. At 2 p.m. on 7 January 1986 a sum of U.S.$165.2m. was available for transfer to London and at 2 p.m. on 8 January there was a sum of U.S.$161.4m. available. Neither sum was transferred. At 4 p.m. on 8 January 1986 the President of the United States of America signed an executive order freezing all Libyan property in the United States or in the possession or control of United States persons including overseas branches of United States persons. The plaintiffs demanded payment of U.S.$131m., the balance standing to the credit of the London account at the close of business on 8 January 1986 and a further U.S.$161m. on the basis that that sum should have been transferred from the New York to the London account on 8 January. Payment was demanded by banker's draft, in cash or by any other commercially recognised method of transferring funds. The defendants refused to pay contending that it would be impossible for them to make any payment to the plaintiffs without committing an illegal act in the United States. The plaintiffs commenced proceedings, claiming the sums in debt or damages or, alternatively, on the ground that the contract had been frustrated:-

Held, giving judgment for the plaintiffs,

(1)

that the defendants would be excused from complying with the plaintiffs' demands for payment if the payment was illegal by the proper law of the contract or it involved doing an act which was  unlawful in the place in which it was to be performed; that there was only one contract between the parties in respect of the New York and London branches of the defendants but the contract was governed by both English and New York law; and that, applying the general rule that the contract between a bank and its customer was governed by the law of the place where the account was kept, the rights and obligations of the parties in respect of the London account were governed by English law.

(2)

That the plaintiffs had to show that they had made a demand for payment with which the defendants were obliged to comply; that, in respect of their credit balances with the London branch the plaintiffs had a personal right to demand cash or an account transfer; that, since by making a demand for payment the plaintiffs had exercised their right unilaterally to determine the management account arrangement, it was no longer a term of the contract that all transactions should pass through New York; that no such term could be implied from the usage of the international market in Eurodollars, and that, therefore, the London branch had obligations to make transfers from that account on the instructions of the plaintiffs which did not involve infringement of United States law in the United States.

(3)

That, although the plaintiffs demanded a banker's draft on the defendants' London office, a draft for the sums demanded would not have been eligible in the circumstances for London dollar clearing and, therefore, the defendants were not obliged to comply with the demand for a banker's draft; but that a demand for cash was an assertion of a customer's fundamental right and delivery by the defendants of cash in London of the sums claimed would not have involved illegal action in New York, and that, therefore, since the plaintiffs had made a demand for cash, they were entitled to receive payment in dollars or, if payment in dollars was impossible, in sterling and, accordingly, the defendants were liable to the plaintiffs for breach of their obligation to provide cash on the plaintiffs' demand.

(4)

That the defendants were in breach of contract in failing to transfer U.S.$165.2m. to the London account at 2 p.m. on 7 January and in not transferring U.S.$161.4m. to London at 2 p.m. on 8 January as a result of which there had been a net loss to the London account of U.S.$161.4m.; that, but for the breaches of contract that sum would have been recoverable by the plaintiffs from the London account; and that therefore, the plaintiffs were entitled to recover a further U.S.$161.4m.

(5)

That the effect of the Presidential order was to suspend the defendants' contractual obligation; that the parties had not been altogether discharged from further performance of the contract; and that, accordingly, the contract had not been frustrated.”

The judge’s reasoning was set out in a series of paragraphs. As UniCredit indicated, in the earlier paragraphs of his judgment, the judge dealt with a series of propositions as to how payment might have been effected. However, in my judgment, the ratio decidendi of that judgment is to be found at the end of the judgment. I do not accept that the judge “sidestepped” any issue.

I have to say that it is perhaps somewhat artificial and unsatisfactory to be asked to deal with these arguments piecemeal. However, since that is what the parties have asked me to do, I leave out of account for present purposes that part of the judgment which deals with payment in a currency other than dollars (which is that part numbered (x) in his judgment) and concentrate instead on the paragraphs dealing with dollar payments in cash. Here, the judge said as follows:

“(ix)

Cash - dollar bills

Of course it is highly unlikely that anyone would want to receive a sum as large as U.S. $131m. in dollar bills, at all events unless they were engaged in laundering the proceeds of crime. Mr. Osbourne said in his report:

"As to the demand for payment in cash, I regard this simply as the assertion of a customer's inalienable right. In practice, of course, where such a large sum is demanded in this manner, fulfilment of the theoretical right is unlikely, in my experience, to be achieved. A sensible banker will seek to persuade his customer to accept payment in some more convenient form, and I have yet to encounter an incident of this nature where an acceptable compromise was not reached, even where the sum was demanded in sterling."

I would substitute "fundamental" for "inalienable"; but in all other respects that passage accords with what, in my judgment, is the law. One can compare operations in futures in the commodity markets: everybody knows that contracts will be settled by the payment of differences, and not by the delivery of copper, wheat or sugar as the case may be; but an obligation to deliver and accept the appropriate commodity, in the absence of settlement by some other means, remains the legal basis of these transactions. So in my view every obligation in monetary terms is to be fulfilled, either by the delivery of cash, or by some other operation which the creditor demands and which the debtor is either obliged to, or is content to, perform. There may be a term agreed that the customer is not entitled to demand cash; but I have rejected the argument that there was any subsisting express term, or any implied term, to that effect. Mr. Sumption argued that an obligation to pay on demand leaves very little time for performance, and that U.S. $131m. could not be expected to be obtainable in that interval. The answer is that either a somewhat longer period must be allowed to obtain so large a sum, or that Bankers Trust would be in breach because, like any other banker they choose, for their own purposes, not to have it readily available in London.

Demand was in fact made for cash in this case, and it was not complied with. It has not been argued that the delivery of such a sum in cash in London would involve any illegal action in New York. Accordingly I would hold Bankers Trust liable on that ground.”

In my judgment, this case is authority for the proposition that where a dollar payment is required under the contract, then the customer is entitled to demand such payment in cash. That is so whether or not performance of the obligation by tender of cash involves an unlikely situation. I would reject the argument that the terms of the letter of credit preclude an obligation to pay in cash. Clearly the Letters of credit anticipate that payment will be made through a correspondent bank. However, that does not mean that the bank is entitled to insist on making payment in this way, despite the fact that such a payment cannot in fact be made or lawfully made.

UniCredit’s further argument is that the LAFB case turned on the fact that a demand was made for payment in cash, whereas here no such demand was made, at least at the outset. In my judgment, this is to confuse the trigger for the obligation (the demand) with the manner in which that obligation (to make payment) may have to be fulfilled. It may be that the demand made upon UniCredit assumed that payment would be made through a correspondent bank. However, that did not mean that UniCredit could not choose to perform in any other way, including via the tender of cash. Where the fundamental obligation is to make payment, and where it is possible to make such payment, then the bank must do so.

As I have noted above, the later “blocking” sanction relied on by UniCredit only came into force on 13 April, after all of the relevant payment obligations in this case had matured. For the purposes of this judgment, therefore, I concentrate on the earlier CAPTA provisions, on the footing that these may arguably be relevant to some of the Constitution obligations, if I am wrong in my conclusions as to the relevance of US law.

In view of the fact that these conclusions involve consideration of factual issues (foreign law being an issue of fact) and in view of the fact that my consideration herein is obiter, I will try to deal with this matter briefly.

Directive 2 under E.O. 14024 prohibits (inter alia) “the processing of a transaction [by a US financial institution] involving foreign financial institutions determined to be subject to the prohibitions of this Directive, or their property or interests in property”. (Footnote: ⁵⁶) The central issue here is whether a payment by UniCredit as confirming bank would “involve” Sberbank, or its property or interests in property.

The Claimants’ summarised the views of the experts on CAPTA as follows:

Dealing first with OFAC’s general approach to implementing sanctions, the Claimants pointed out that OFAC is the agency primarily responsible for the imposition and enforcement of US Sanctions. Both experts agree that OFAC is afforded a wide margin of discretion in interpreting sanctions legislation, and that the Courts afford a degree of deference to its conclusions.

However, OFAC’s determinations are ultimately subject to the supervision and final legal determination of the US Courts, which have the power to overrule its substantive decisions and are the final arbiters as to the meaning of legislation. (Footnote: ⁵⁷) Mr Wall therefore rightly notes the importance of distinguishing between the law itself as established in statutes and regulations and articulated by the courts on the one hand and the administrative agency’s discretionary interpretation of the law on the other. By contrast, Mr Fleming focussed throughout his report on what OFAC would do without addressing the question as to whether the US Courts would endorse or overturn its approach.

The CAPTA Sanctions were issued on 24 February 2022, but did not take effect until 26 March 2022. At that point they prohibited U.S financial institutions from “(1) opening or maintaining a correspondent account or payable-through account for or on behalf of foreign financial institutions determined to be subject to the prohibitions of the Directive; and (2) “processing transactions involving foreign financial institutions determined to be subject to the prohibitions of this Directive, or their property or interests in property.” (emphasis added). Sberbank was listed as being subject to Directive 2 from its inception.

It is only the second prohibition that is arguably engaged in this case, as there is no suggestion that payment under the Letters of credit required the correspondent banks to open or maintain an account with Sberbank (as distinct from UniCredit). The key question is therefore whether payment by UniCredit to Constitution under the Letters of credit is a transaction “involving” Sberbank, its property, or its interests in property.

On this question, the Claimants argued that the opinion of Mr Wall was to be preferred to that of Mr Fleming:

UniCredit contended as follows:

It is never easy to determine questions of foreign law without having the ability to hear from the experts and explore the rationale for their views. However, doing the best that I can on the basis of the materials available, I am not satisfied that UniCredit, on whom the burden clearly rests, have established that the provisions of CAPTA applied to the Constitution Letters of credit so as to prohibit performance of UniCredit’s payment obligations thereunder.

I reach this conclusion for the following reasons:

To sum up, therefore, I hold, as a matter of fact that:

As noted in the summary of the parties’ arguments, the Claimants argue the Ralli Bros rule does not excuse a party from performance unless and until that party makes reasonable efforts to apply for or is refused a licence: see Banco San Juan [84], [90]. Since this issue is heavily fact dependent, and does not arise in the light of my earlier decisions, then in a case in which I am being asked to give judgment simply as a guidance to the market, I do not consider it useful to consider or determine questions of fact. Accordingly, I do not consider this issue further.

Again, my understanding is that I am not asked to reach any conclusions as to EU law at this stage and thus I do not consider this further.

I should finish by thanking all Counsel involved for their illuminating and helpful arguments. I hope that I have dealt in this judgment with all of the matters that the parties wished me to deal with at this stage. I would be grateful if the parties could seek to agree an order to give effect to this judgment, and to identify what, if anything, remains to be dealt with.