Thank heavens: Why banks can keep calm and carry on after Celestial Aviation

It’s the kind of scenario that keeps a bank’s in-house trade finance lawyer up at night: Having received a complying demand under a documentary instrument, determining if the applicable sanctions laws and regulations prohibit the bank from paying that demand.

Thankfully, for banks and other financial institutions that must comply with UK government sanctions,[[1]] the recent UK Supreme Court judgment in Celestial Aviation[[2]] provides a clearer, more reassuring route through what is a particularly difficult to navigate area, especially for those doing business in the trade finance space.

Background

The Celestial Aviation dispute arose in 2022 and involved a number of standby letters of credit (SBLCs) issued by Russian bank, Sberbank, and confirmed by the London branch of German bank, UniCredit, between 2017 and 2020. The SBLCs were in favour of various Ireland-incorporated aircraft leasing companies, including Celestial Aviation, supporting the obligations of Russian airlines under civilian aircraft lease agreements. The SBLCs were English law-governed and subject to UCP600.

In response to Russia’s full-scale invasion of Ukraine in February 2022, the UK authorities amended Regulation 28(3) (the Regulation) of the UK’s Russian (Sanctions) (EU Exit) Regulations 2019/855,[[3]] effective 1 March 2022. That amendment extended the sanctions prohibitions beyond military goods and military technology to “restricted goods or restricted technology”, including civilian aircraft. Shortly after the Regulation was changed, the beneficiaries made demands to UniCredit under the SBLCs.

Following High Court and Court of Appeal proceedings in 2023 and 2024, it was left to the UK’s highest court, the Supreme Court, to have the final say. The key questions were:

• Whether the effect of the Regulation was to prohibit UniCredit from paying the beneficiaries’ demands; and
• Whether the effect of section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA Section 44) – the primary source of UK government sanctions – was to prohibit the beneficiaries from bringing civil proceedings against UniCredit for non-payment, or to provide UniCredit with a defence from liability in any civil proceedings brought.

see also: The Celestial Case: Does the UK Regulation Render Confirmer’s Payment Illegal?

The Regulation question

Under the amended Regulation 28(3)(c), it is prohibited to:

“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.”

The five-member Supreme Court panel unanimously upheld the Court of Appeal’s earlier decision and ruled that:

• the true interpretation of the words “in connection with” in Regulation 28(3)(c) is that only a factual connection, not a causal connection, needs to be established between the provision of financial services or funds and an arrangement which has the object or effect of making aircraft (or other restricted goods or technology) available to persons connected with Russia or for use in Russia. The SBLCs were issued “in connection with” such arrangements (the aircraft leases);
• it did not matter that the aircraft leases and the SBLCs were not initially prohibited, before the March 2022 amendments to the Regulation. The Regulation is not specifically limited to arrangements entered into on or after 1 March 2022. It is concerned only with the object or effect of the arrangements; and
• UniCredit was therefore prohibited by the Regulation from making payments under the SBLCs until the UK regulator issued licences authorising the payments. Statutory interest for any non-payment by UniCredit would only start to accrue when the UK licence process was completed.

The Section 44 question

SAMLA Section 44 is titled “Protection for acts done for purposes of compliance” and provides that a person “is not liable to any civil proceedings” as a result of complying with regulations made under SAMLA if they have a “reasonable belief” that they are acting in compliance with those regulations.

The Supreme Court partially disagreed with the Court of Appeal’s interpretation of this provision and held that:

• the true interpretation of SAMLA Section 44 is not that it prohibits civil proceedings (as that would prevent access to justice) but that it provides a defence in any civil proceedings brought; and
• UniCredit’s refusal to pay the demands under the SBLCs until the licences were issued was based on a reasonable belief that the Regulation prohibited UniCredit from paying. SAMLA Section 44 would therefore have protected UniCredit from liability for unpaid principal amounts of the SBLCs, interest on those amounts and associated costs, for the period before the licences were issued. Once the licences were granted, the SAMLA Section 44 protection for non-payment would no longer be available since a licence effectively both waives the prohibition under the Regulation and removes any reasonable belief that non-payment was required to comply with the Regulation.

Complex and time-pressured

Evaluating the potential impact of sanctions on a bank’s payment obligations under a documentary instrument adds an additional, more complex layer to the analysis that the bank must undertake when they receive a beneficiary’s demand. In examining a demand, the bank considers if, on its face, it complies with the terms and conditions of the instrument, the applicable rules, and international standard banking practice. However, a sanctions prohibition analysis – as distinct from operationally checking a screening system for “hits” on a sanctions list – is an altogether more demanding exercise, as illustrated by the contradictory, nuanced conclusions reached by the three UK courts in Celestial Aviation. This is usually a task for the bank’s in-house counsel, and outsourcing to specialist lawyers may not be an option with ever-tightening budgets for spending on external legal advice. 

As mandatory law, sanctions override the express terms of the documentary instrument (whether or not the instrument contains a sanctions clause) and the applicable rules, if any, incorporated into the instrument. The bank has to identify and interpret the substance of the applicable sanctions regulations, which involves carefully analysing their precise wording, and then consider to what extent those regulations apply to the specific transaction considered as a whole.

A sanctions prohibition analysis – as distinct from operationally checking a screening system for “hits” on a sanctions list – is an altogether more demanding exercise, as illustrated by the contradictory, nuanced conclusions reached by the three UK courts in Celestial Aviation.

Along with the technical complexity, there are invariably time pressures involved, too. Documentary instruments customarily have short payment deadlines following receipt of a compliant demand. In Celestial Aviation, UniCredit had varying deadlines under the SBLCs of “four business days” and “five banking days”, for example. Added to this, by their very nature, sanctions regulations can be introduced for the first time, or existing regulations changed, at very short notice in response to an increasingly volatile geopolitical climate, leaving commercial parties with little time to properly consider the practical impact that those new sanctions requirements may have on performance of their contractual obligations. In Celestial Aviation, the beneficiaries presented their demands shortly after the Regulations were amended, and it is certainly plausible that banks may in many instances receive complying demands and have to interpret and analyse the impact of new, hot-off-the-press sanctions regulations or amendments while the clock relentlessly ticks down to their payment deadlines.

“Wide net” and “safety valve”

The approved position that a bank need only identify a factual connection between the provision of funds and the prohibited underlying arrangement, is more consistent with the limited, face-value review that banks routinely conduct in documentary instrument practice, than with a requirement to investigate further to establish a causal connection. Bearing in mind the complexities around causation under English law, it is arguable that having to demonstrate a causal connection would have imposed an unreasonably onerous obligation on banks.

The Supreme Court accepted that a “wide net” was cast by the broad requirement of only a factual connection, but this was balanced by the “safety valve” of a licensing system. That system gives regulators the discretion to grant licences authorising conduct that would otherwise contravene sanctions, if they consider a discretionary permission to be appropriate in any given circumstances. Where a bank reasonably believes that making a payment would breach sanctions, it should clearly document that assessment internally. A licence application made in good faith to the regulator could secure much-needed breathing space, effectively pausing the countdown to the bank’s payment deadline pending the outcome of the application, with the assurance that the regulator is an authoritative arbiter of the matter.[[4]]

A classic dilemma

 There is a lot at stake for banks faced with sanctions issues of this kind. They must navigate the legal, financial, and reputational risks of either wrongfully paying a complying demand in breach of the sanctions regulations, or instead, wrongfully withholding payment from the beneficiary in breach of the bank’s undertaking to pay. The confirmation in Celestial Aviation of the SAMLA Section 44 protection for persons who reasonably believe they are acting in compliance with sanctions is a critical safeguard for banks. The Supreme Court’s view was that, without this protection, persons who reasonably believe that making a payment would breach sanctions, might otherwise be inclined to make the payment anyway, thereby undermining the sanctions regime. The general thrust of the point is understood, although in reality, a trade finance bank forced to choose between the two outcomes is more likely to risk being sued for wrongfully failing to pay a demand than the alternative of wrongfully paying the demand in breach of sanctions and facing potential criminal penalties, fines, and loss of banking licence as a result.

Given the wide application of UK government sanctions and London’s pre-eminence as a global financial centre, the Supreme Court’s interpretation and application of the relevant UK sanctions laws and regulations in Celestial Aviation will impact a considerable number of banks and financial institutions. Banks within the scope of UK government sanctions laws and regulations can breathe easier after the important and favourable guidance given. Other commercial parties, even if they view the settled approach as too broad and overly strict, should themselves benefit from the clarity provided.

The information in this article is current at the date of publication and is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always seek separate, specific legal advice about your particular circumstances. All views and opinions expressed by the author in this article are solely his and do not necessarily represent the opinions, policies or positions of any organisation he is affiliated with.

[[1]]: UK government sanctions apply to banks that either operate within the UK or are a UK-incorporated entity (wherever in the world they operate). See the Sanctions and Anti-Money Laundering Act 2018, section 21

[[2]]: UniCredit Bank GmbH, London Branch v Celestial Aviation Services Limited [2026] UKSC 10

[[3]]: The amendment was effected by the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2022, SI 2022/195

[[4]]: UK sanctions legislation generally does not expressly mandate that banks apply for a licence when faced with a sanctions prohibition, but English case law has established that where lawful performance would be available to a party through a licence, then that party cannot rely on illegality to excuse non-performance and must make reasonable efforts to apply for the licence or prove that the licence would have been refused: per Banco San Juan Internacional Inc. v. Petroleos de Venezuela S.A. [2020] EWHC 2937 (Comm), reaffirmed in the UK Court of Appeal’s judgment in Celestial Aviation Services Limited v. UniCredit Bank GmbH, London Branch [2024] EWCA Civ 628