UniCredit Bank GmbH, London Branch v Constitution Aircraft Leasing (Ireland) 3 Ltd
DMC/SandT/26/07
England
UniCredit Bank GmbH, London Branch v Constitution Aircraft Leasing (Ireland) 3 Ltd & Others
UK Supreme Court: Hodge, Sales, Burrows, Stephens and Simler SCJJ: [2026] UKSC 10: 25 March 2026
Judgment Available on BAILII @ https://www.bailii.org/uk/cases/UKSC/2026/10.html
David Quest KC, Rachel Barnes KC and James Sheehan KC (instructed by Reynolds Porter Chamberlain LLP) for UniCredit/Confirming Bank (Respondent)
Mark Howard KC and Fred Hobson KC (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for Celestial/Lessor Beneficiary (Second Appellant)
Akhil Shah KC and Leonora Sagan (instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for Constitution/Lessor Beneficiaries (First Appellants)
STANDBY LETTERS OF CREDIT: CIVIL AIRCRAFT LEASES: SANCTIONS: UK SANCTIONS PROHIBITING PROVISION OF FINANCIAL SERVICES “IN CONNECTION WITH” EXPORT OR SUPPLY OF AIRCRAFT TO RUSSIA: WHETHER CONFIRMING BANK OBLIGED TO PAY BENEFICIARIES PENDING LICENCE BEING GRANTED UNDER UK SANCTIONS: WHETHER CONFIRMING BANK OBLIGED TO PAY INTEREST AND COSTS FOR DELAY INVOLVED IN MAKING PAYING BEFORE UK LICENCE GRANTED: REGULATION 28 OF RUSSIA (SANCTIONS) (EU EXIT) REGULATIONS 2019 (“REGULATIONS”): SECTION 44 OF SANCTIONS AND ANTI-MONEY LAUNDERING ACT 2018 (“SAMLA”)
Summary
The UK Supreme Court, in dismissing Celestial and Constitution’s appeal and in allowing UniCredit’s cross-appeal, held that:
(1) UniCredit was prohibited under regulation 28(3)(c) of the Regulations from making payments under the letters of credit, until licences to do so were obtained, which had the effect of suspending UniCredit’s obligation to pay the debt and the accrual of statutory interest for such time until the UK licence process was completed; and
(2) Section 44(2) of SAMLA did not prohibit civil proceedings but rather provided a defence in civil proceedings “in respect of” UniCredit’s failure to pay the debt, upon receipt of a compliant demand by Constitution and Celestial under the letters of credit, including its associated failures to pay claims for interest and costs.
Case note contributed by Jim Leighton, LLM (Maritime Law), LLB (Hons), BSc (Hons), Solicitor Advocate of England & Wales, IMI Qualified Mediator, LMAA Supporting Member and Deputy Editor of DMC’s CaseNotes
Background
The case involved three Irish aircraft lessors, Celestial Aviation Services and two Constitution Aircraft Leasing companies (collectively “Beneficiaries”), who were the beneficiaries under 12 standby letters of credit (“LCs”), denominated in US dollars, in a dispute against the confirming bank, UniCredit.
The core issue revolved around UniCredit’s refusal to make payments under the LCs, which had been issued by the Russian bank Sberbank Povolzhsky Head Office, until appropriate licences to make the payments had been granted. The LCs were issued to secure payments due to the Beneficiaries under their civil aircraft lease agreements (“Leases”) made with two Russian airlines between 2004 and 2014.
Under the terms of the LCs, UniCredit was obligated to make payments to the Beneficiaries in the event of any default by the Russian airlines under the Leases. Following the Russian invasion of Ukraine in 2022, the Russian airlines defaulted under the Leases. The Leases were terminated for default in March 2022, but most of the civil aircraft had not been recovered since. That led to the Beneficiaries making conforming demands to UniCredit for payment under the LCs. However, UniCredit sought to avoid making payments under the LCs, citing the imposition of sanctions against Russia by the UK.
The UK sanctions restricted transactions involving Russian entities and affected financial institutions, including transactions involving civil aircraft and Russian airlines and banks. The sanctions were designed to prevent financial flows to and from Russia and imposed significant restrictions on banks and other financial institutions operating in the jurisdiction of the UK.
UniCredit argued that the sanctions created legal risks and regulatory barriers that justified its refusal to make payments under the LCs. UniCredit contended that making such payments would expose it to penalties and legal liabilities under the sanctions regime, effectively rendering its obligations under the LCs unenforceable. UniCredit further argued that it was prohibited from conducting any transaction that could directly or indirectly benefit a Russian entity, including honouring the LCs.
The Beneficiaries contended that UniCredit’s refusal to make payments under the LCs was unjustified and constituted a breach of its contractual obligations. The Beneficiaries argued that the LCs were independent financial instruments, and UniCredit was required to honour them irrespective of any external factors, including the imposition of sanctions. The Beneficiaries maintained that UniCredit should not use the sanctions as a basis to avoid its obligations, given that the purpose of the LCs was to provide an unconditional financial guarantee.
The High Court held that payments under the LCs were outside the purpose of regulation 28(3)(c) (fn.1) as the supply of the aircraft had occurred long before the prohibition came into effect, and that UniCredit’s belief that regulation 28(3)(c) applied was not a “reasonable belief”, so that section 44 of SAMLA (fn.2) was not engaged on the facts. The result was that UniCredit was obliged to pay the debt and interest thereon under the LCs.
The Court of Appeal, in allowing UniCredit’s appeal on the interpretation of regulation 28(3)(c), held that payment under the LCs was “in connection with” an arrangement under which aircraft were made available to a person connected with Russia or for use in Russia. The result was that UniCredit was prohibited from making payment under the LCs until licences were obtained, which also suspended the obligation to pay the debt and interest.
The Beneficiaries appealed and UniCredit cross-appealed to the UK Supreme Court.
Judgment
Lord Stephens, with whom the other justices agreed, in giving the judgment dismissed the Beneficiaries’ appeal and allowed UniCredit’s cross-appeal for the following reasons.
Issue one: the true interpretation of regulation 28(3)(c)
(a) Under regulation 28(3)(c) is there a requirement for a causal connection between the provision of financial services or funds and the prohibited supply?
The Beneficiaries took the view that prohibiting a German bank from paying Irish entities did not disrupt Russia's strategic industries and did not encourage a change in Russian behaviour towards Ukraine, the LCs not being a cause of or causative of the mischief at which the Regulations were aimed.
However, the Beneficiaries’ submission that the application of regulation 28(3)(c) required there to be a causal connection between provision of financial services or funds and the prohibited supply of aircraft was not accepted for the following reasons.
First, the language of regulation 28(3)(c) did not require such a connection (fn.1).
Second, the very broad purpose of the Regulations and SAMLA was clearly to put pressure on Russia by, for instance, disrupting strategic industries such as aviation.
Casting the net widely with a licensing system available to mitigate any unintended consequences served the purpose of regulation 28(3)(c). Private individuals would be unable to see the larger picture but public authorities granting licences have institutional competence and are accountable through the relevant Minister to Parliament.
Third, regulation 28(3)(c) used different phrases (“in pursuance of” and “in connection with” the arrangement) thereby indicating that they have different meanings. The phrase “in pursuance of” the arrangement had the meaning of providing funds under or in accordance with the arrangement whose object or effect was making restricted goods or restricted technology available to a person connected with Russia or for use in Russia.
However, the use of the phrase “in connection with” in conjunction with “in pursuance of” indicated a clear intention to cast the net more broadly than financial services or funds provided under or in accordance with the terms of the relevant arrangements.
Therefore, the phrases in conjunction meant anything that factually connected the provision of the funds to the arrangement but did not require any causal connection.
(b) Are the aircraft leases arrangements within regulation 28(3)(c)?
The Beneficiaries’ submission that UniCredit was not prohibited from making payments under the LCs because the Leases were not “an arrangement” within regulation 28(3)(c) was not accepted for the following reasons.
Regulation 28(3)(c) referred to the “object or effect” of the arrangement. The object and effect of the Leases were objectively determined when they were made. In this case the object and effect of the Leases was to make aircraft available to two Russian airline companies for use in Russia. The later termination of the Leases did not retrospectively alter the object or effect of them, which remained unchanged.
(c) Conclusion on the first issue
Clearly, there was a factual connection between the payments under the LCs and the Leases which were the arrangements whose object or effect was to make restricted goods or restricted technology available. Therefore, payment under the LCs was in connection with the arrangements, namely the Leases, and required a licence to authorise payment.
Accordingly, UniCredit was prohibited from paying by regulation 28(3)(c) until the UK licensing process had led to the grant of licences authorising the payments under the LCs. The effect was that UniCredit’s payment obligation was suspended under the LCs without statutory interest accruing until the licence process was successful completed.
Issue two: does section 44(2) of SAMLA protect against an action to recover a debt, an award of interest on the amount of the debt, and an award of associated costs?
The purpose of section 44 (fn.2) was to protect a person who acts or omits to act in the “reasonable belief” that the act or omission is in compliance with, for instance, regulation 28(3)(c). The protection provided to the person furthers the public purpose of the sanctions provision, by supporting the prevention of payments being made related to sanctioned activities. A person with the requisite belief who, for example, declines to make payment should, therefore, have that protection because making payments might undermine the sanctions regime.
The protection provided by section 44(2) is that "[a] person is not liable to any civil proceedings to which that person would, in the absence of [section 44], have been liable in respect of the act." Further, section 44(3) provides that in section 44 an "act" also includes an omission to act, such as a failure to make a payment when due.
While section 44 did not prohibit civil proceedings, because it lacked sufficiently clear words to achieve that effect, it did provide a defence to civil proceedings. In this case the civil proceedings were for a debt. Civil proceedings to recover a debt are only brought if the person, here UniCredit, fails to pay the debt. As UniCredit’s liability is "in respect of" its omission to pay upon receipt of a compliant demand from the Beneficiaries under the LCs, the protection afforded fell within the language used in section 44(2).
Furthermore, a failure to pay a claim for interest or a claim for costs is also an omission "in respect of" UniCredit’s failure to pay the debt so as to fall within the language used in section 44(2). Therefore, section 44 would have provided protection to UniCredit against an action to recover a debt, an award of interest on that debt, and an award of costs, had it not been the case that regulation 28(3)(c) provided such protection.
Comment
This judgment concludes the debate about when a payor is not obliged to pay immediately, must seek a licence to make such payment and is protected from what would otherwise be the consequences of failing to make payment when due but for UK sanctions applying.
The UK Supreme Court has given effect to the natural and ordinary meaning of the language used in regulation 28(3)(c) the Regulations and section 44 of SAMLA. While the context here is letters of credit and aircraft leases, the same thinking can be applied to other types of contracts and payment obligations in connection with UK sanctions.
Footnote 1: Regulation 28(3)(c) of the Regulations materially states:
“(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—
…
(c) directly or indirectly making restricted goods or restricted technology available—
(i) to a person connected with Russia, or
(ii) for use in Russia…”
Footnote 2: Section 44 of SAMLA materially states:
“(1) This section applies to an act done in the reasonable belief that the act is in compliance with—
(a) regulations under section 1, or
…
(2) A person is not liable to any civil proceedings to which that person would, in the absence of this section, have been liable in respect of the act.
(3) In this section “act” includes an omission."
