Celestial Aviation Services Ltd. v. Unicredit Bank, London Branch [2023 EWHC 663]

Beneficiaries sued Confirming Bank that alleged sanctions prohibited honouring complying demands.

Celestial Aviation Services Ltd. v. Unicredit Bank, London Branch [2023 EWHC 663]

[2023] EWHC 663 (Comm) [England]

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Cases Referenced:
Ralli Bros v. Compania Naviera Sota y Aznar [1920] 2 KB 287 [England]
Libyan Arab Foreign Bank v. Bankers Trust Co. [1989] 1 QB 728 [England]

Subsequent Celestial litigation:
Celestial Aviation v. UniCredit Bank [2023 EWHC 1071]

Note: To secure lease obligations for civilian aircrafts, AirBridge Cargo Airlines LLC and JSC Aurora Airlines (collectively, “Applicants”), Russian companies, applied for and caused Sberbank Povolzhsky Head Office (Issuer) to issue seven standby letters of credit1 in favor of Celestial Aviation Services Ltd. (Celestial-Beneficiaries), an Irish aircraft lessor.2 The standbys were later confirmed by UniCredit Bank, London Branch (Confirming Bank),3 were subject to English law and UCP600, and were payable in US dollars.

To secure separate aircraft lease obligations, the AirBridge- Applicant again applied for and caused Issuer to issue five standby LCs4 in favour of Constitution Aircraft Leasing (Ireland) 3 & 5 Ltd. (Constitution-Beneficiaries). These standbys were also subject to English law and UCP600. Again, Confirming Bank added confirmations.

After the Russian invasion of Ukraine in February 2022, various sanctions were imposed against Russia by the EU, UK, and US, and, pursuant to contractual Events of Default, Beneficiaries5 accordingly began terminating relevant leases and demanding payment on the standbys from Confirming Bank. The timing of the demands and the effect of the new sanctions policies will be detailed later; generally, the demands were made beginning early through mid-March 2022. In total, Confirming Bank received demands for nearly USD 70 million across the 12 standbys.

Confirming Bank, however, refused payment, initially responding that it was prohibited from honouring pursuant to UK sanctions that were amended 1 March 2022. Confirming Bank later sought to rely on EU sanctions and ultimately cited US sanctions as its basis for dishonour. Notably, Confirming Bank applied to the appropriate offices for licences.6 As Beneficiaries raised “exactly similar issues” in their separate Part 8 claims, the action was heard together and this Judgment followed. The High Court of Justice, Hancock, J., ruled in favour of Beneficiaries, finding Confirming Bank could not properly rely on UK or US sanctions to resist payment.

Before reaching the legal analysis, the Judge noted some key developments since the September 2022 hearing. As the UK offices extended relevant licences, Confirming Bank honoured three of the first seven standbys, paying in USD. Later, Confirming Bank offered to make “voluntary payment” to the Beneficiaries “in settlement of liabilities arising from all remaining Letters of credit (excluding interest and costs) by way of payments of equivalent sterling amounts in London to accounts held at non-US banks.”

The offers were accepted and payments to the respective Beneficiaries occurred in November 2022. As the parties had reached agreement on the principal amounts due under the standbys, the final matter to be resolved concerned what, if any, interest and costs were owed. This required, as mentioned previously, a detailed review of when each sanctions policy came into effect and whether, at the relevant times, Confirming Bank had properly relied on stated regulations to refuse payment. As a general matter, Beneficiaries argued that, despite each cited sanctions policy, Confirming Bank was never prohibited from honouring.

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