Payments on hold: Supreme Court confirms wide reach of UK Russia Sanctions
The Supreme Court has clarified the scope of the Russia (Sanctions) (EU Exit) Regulations 2019/855 in a decision of particular significance for financial institutions and lessors operating in cross-border aviation finance. It was held that a German bank was prohibited from making payments under letters of credit connected to aircraft leases with Russian airlines, even where those leases were lawful when entered into. In any event, the bank was protected as it reasonably believed that sanctions prohibited payment. The ruling confirms the broad reach of the sanctions regime and the availability of statutory protections for banks that withhold payment in compliance with sanctions regulations.
Background
The appeals in UniCredit Bank GmbH v Celestial Aviation Services Ltd and UniCredit Bank GmbH v Constitution Aircraft Leasing (Ireland) 3 Ltd and another [2026] UKSC 10 concerned letters of credit issued by UniCredit Bank GmbH (“UniCredit”) acting through its London branch, as security for aircraft lease obligations owed by Russian airlines to Irish lessors. The leases, entered into between 2005 and 2014, were terminated following Russia’s invasion of Ukraine and the subsequent expansion of UK sanctions to cover civilian aircraft with effect from 1 March 2022.
When the lessors demanded payment under the letters of credit, UniCredit refused, contending that payment would breach Regulation 28(3)(c) of the Regulations unless and until a licence was obtained. UniCredit further argued that section 44 of the Sanctions and Anti-Money Laundering Act 2018 (“SAMLA”) protected it from liability because it had withheld payment in the reasonable belief that sanctions prohibited payment. The lessors maintained that the prohibition did not apply and that section 44 could not excuse non-payment for an otherwise lawfully due debt, nor did it apply to awards of interest on debts or associated costs.
The lessors issued proceedings in the interim period prior to UniCredit obtaining a licence and making payment of the principal amounts under the letters of credit, following which the issues remaining in dispute were limited to interest and the costs of the proceedings.
Decisions of the lower courts
At first instance, the High Court found in favour of the lessors. It held that Regulation 28(3)(c) did not prohibit payment, and therefore the accrual of interest, because the aircraft leases and supply pre-dated the expanded sanctions covering civilian aircraft. On that analysis, the letters of credit were not “in connection with” an arrangement to which the object or effect was making restricted goods available in Russia. It also denied UniCredit’s reliance on section 44, holding that its belief that sanctions prevented payment was not reasonable.
The Court of Appeal reversed the High Court’s decision on Regulation 28(3)(c), holding that UniCredit’s payment obligations and the accrual of interest before the licences were granted were suspended because the letters of credit were issued “in connection with” the leasing arrangements. The Court of Appeal also disagreed that UniCredit’s belief that payment would breach sanctions was unreasonable; however, it upheld that section 44 would not have protected it from an action to recover the debt and interest, had those sums been lawfully due and not negated by the resolution of the Regulation 28(3)(c) issue. In the Court’s view, the purpose of section 44 is to prevent a situation where a person is “pressurised into doing something that risks breaching sanctions by a fear of being exposed to civil claims” and therefore does not apply to pre-existing liabilities (such as a debt and associated interest).
Issues before the Supreme Court
The Supreme Court considered:
- whether payment under the letters of credit was prohibited by Regulation 28(3)(c);
- whether the aircraft leases constituted “relevant arrangements” for the purposes of Regulation 28(3)(c), notwithstanding that they were lawful when entered into; and
- whether section 44 of SAMLA protected UniCredit from liability for non-payment, including claims for interest and costs.
The Supreme Court’s decision
The Supreme Court dismissed the lessors’ appeal and allowed UniCredit’s cross-appeal, concluding that payment was prohibited unless and until a licence was obtained. As a result, UniCredit’s obligation to pay was suspended, and no interest accrued during the period of suspension.
1. Broad interpretation of Regulation 28(3)(c)
The Court emphasised that the purpose of the Regulations is to advance public policy objectives, including exerting economic pressure in response to geopolitical events. Regulation 28(3) should be interpreted broadly and extends to a wider category of financial services connected with Russia. It is not necessary for there to be a causal link between payment and prohibited supply; a factual link is sufficient.
2. Leases as “relevant arrangements”
The Court rejected the argument that the leases fell outside the Regulation because they pre-dated the sanctions or were lawful when entered into. The leases were “relevant arrangements” for the purposes of Regulation 28(3)(c).
3. Section 44 of SAMLA
The Court confirmed that section 44 would have protected UniCredit from liability for an action to recover a debt, interest during the non-payment period, and an award of associated costs, where UniCredit acted in the reasonable belief that payment was prohibited by Regulation 28(3)(c).
Comment
The judgment provides authoritative guidance on the reach of UK financial sanctions. The Supreme Court’s purposive approach to Regulation 28(3)(c) confirms that transactions may be caught even where the underlying contracts did not breach sanctions regulations when entered into.
For financial institutions, the decision provides reassurance that refusal to pay on sanctions grounds can be justified, and that section 44 of SAMLA plays a key role in mitigating the risk of civil liability in such cases.
In practice, parties should:
- review existing contracts and security arrangements for potential sanctions exposure;
- consider whether licences are required to make payments;
- address sanctions risk expressly in contracts; and
- maintain robust sanctions compliance processes.
For further information please email the authors or your usual CMS contact.
