International banking group UniCredit wrongly withheld USD68.9 million (EUR63 million) in payment guarantees from subsidiaries of lessors AerCap and Aircastle, for fear of busting Western sanctions against Russia, the London-based High Court of England and Wales has ruled.

The judgement, handed down remotely on March 23, 2023, relates to two cases heard together. In both, the claimants - AerCap subsidiary Celestial Aviation Services (CATIL) and Aircastle subsidiary Constitution Aircraft Leasing - were trying to obtain payment under standby letters of credit that were confirmed by the London branch of UniCredit - an international banking group headquartered in Milan that became the fifth-largest of Germany's financial institutions when it merged with HypoVereinsbank (HVB) in 2005. These letters of credit, in turn, confirmed irrevocable letters of credit issued by Russian majority-state-owned bank Sberbank (parent of Russian lessor Sberbank Leasing). The letters of credit are governed by English law.

In the Celestial case, the AerCap subsidiary was the beneficiary of seven standby letters of credit confirmed by UniCredit. They were issued in 2017 and 2020 to cover aircraft leases between 2005 and 2014 to two Russian airlines. These included two B747-400ERFs leased to AirBridgeCargo (RU, Ulyanovsk Vostochny): VP-BIG (msn 35420) and VP-BIK (msn 35421), both stored at Moscow Sheremetyevo, according to ch-aviation fleets data. Three A319-100s were leased to Aurora (HZ, Yuzhno-Sakhalinsk): RA-73678 (msn 2222) and RA-73673 (msn 3838), while VP-BWL (msn 2243) has since been stored at Roswell in the United States.

Following Russia's invasion of Ukraine on February 24, 2022, the two Russian carriers defaulted on their lease obligations. The European Union, the US, and the UK imposed sanctions against Russia following the invasion. As a result, Celestial terminated the leases on March 3 and 4, 2022. By August 19, 2022, four of the five aircraft were still in Russia. One was outside Russia at the time of the lease termination, and AerCap was able to repossess it.

Demands for payment

On March 2, 2022, Celestial made a written demand for USD44.5 million from UniCredit regarding the AirBridgeCargo letters of credit due to the Russian cargo carrier's failure to comply with its lease obligations. On March 4, Celestial followed up with a written demand for USD1 million due to Aurora's failure to comply with its obligations. As per the contract, UniCredit was supposed to have paid by March 10 and March 14, 2022, respectively.

On March 7 and 11, 2022, UniCredit informed Celestial that it refused to make payment of the amounts due under the letters of credit, claiming it was prohibited from doing so because of EU sanctions against Russia. It subsequently claimed that US sanctions were another reason it could not pay US dollar sums under the letters of credit. Consequently, Celestial filed legal charges in London on March 15 of that year.

The case involving Constitution Aircraft Leasing relates to two leases in 2008 and 2014 with AirBridgeCargo, which defaulted following the war in Ukraine, resulting in the claimants terminating the leases on March 4 and 25, 2022. Constitution issued demands for payment from UniCredit amounting to USD 2.6 million, USD8.1 million, and USD12.7 million, respectively, to be paid by April 1, 2022. Again, UniCredit refused to pay, relying on regulations under UK and EU sanctions and, later, US sanctions. UniCredit's defence raised similar issues to those in the Celestial action.

UniCredit applied for licences to permit payment to Celestial and Constitution, assuming that payment would otherwise be prohibited under the relevant sanctions. The EU and UK granted these, but the US licence was still pending at the time of the court ruling. The claimants argued that the licence applications were misleading in that they suggested that granting a licence to make payment to the claimants should be dependent on the granting of a licence for payment by Sberbank to UniCredit.

Following approval in October 2022 from the UK's Office of Financial Sanctions Implementation (OFSI), which administers financial sanctions, UniBank paid the principal amounts due under three of the seven letters of credit to Celestial in US dollars. No interest was paid. In November, the remaining letters of credit were settled in sterling.

That left the payment of costs and interest, which required the court to resolve underlying matters which remained in dispute. Celestial and Constitution maintained that payment was never prohibited by the UK and EU sanctions regulations, a topic relevant to interest and costs. Also, the issue of US law was relevant to the US dollar claims in interest and costs.

Explaining the judgement

Considering the UK sanctions regulations, Judge Christopher Hancock said it would be a "bizarre result" for the regulation to be read as prohibiting UniCredit from paying Celestial under the letters of credit. "That would in no way further the policy objective underlying Regulation 28, which is to restrict Russia's access to aircraft and other restricted goods. It would serve only to penalise Celestial (and give UniCredit a corresponding windfall) - and absolutely no consequences would be felt in Russia or by Russian persons. Such an interpretation would be contrary to the purpose of the regulations."

"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," the judge said. Explaining his conclusion, he said the aircraft had been supplied long before the prohibition came into effect. He pointed out that UniCredit was not dealing with Sberbank's property when making payments under the letters of credit. UniCredit was instead satisfying its own independent contractual obligations.

"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 judgement, the answer to this question is quite clear - it cannot," he concluded.