Key Takeaways
- UK sanctions can suspend a bank’s obligation to pay under a letter of credit (LC), even where the beneficiary’s demand complies fully with the LC’s terms.
- In UniCredit Bank GmbH, London Branch v Celestial Aviation Services Ltd [2026] UKSC 10, the Supreme Court held that regulation 28(3)(c) of the Russia sanctions regulations prohibited payment under 12 standby LCs securing aircraft leases to Russian airlines until licences were obtained.
- Only a factual connection between the payment and the underlying lease is required. The payment does not need to cause aircraft to stay in Russia.
- Leases made years before the 1 March 2022 amendment, and leases terminated before payment fell due, can still be caught.
- Section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) protects a party that reasonably believes non-payment complies with sanctions against a debt claim, interest and associated costs.
- Statutory interest does not run while payment is prohibited, and issuing proceedings before licences are granted may count against a claimant on costs.
- Banks, lessors and lessees should analyse the whole transaction chain and pursue licences promptly rather than relying on the LC’s terms alone.
- Go Legal is rated Excellent with over 300 five-star reviews and 5/5 on Trustpilot and Google, placing our solicitors among the best-reviewed litigation lawyers in England and Wales.
Can UK Sanctions Suspend Payment Under an Aircraft-Leasing Letter of Credit?
Yes. UK sanctions can suspend a bank’s obligation to pay under a letter of credit where the payment is factually connected with an aircraft-leasing arrangement caught by the Russia sanctions regime. This applies even when the demand is fully compliant, the LC is governed by English law and the beneficiary has no connection with Russia.
That is the effect of the Supreme Court’s unanimous March 2026 decision in UniCredit Bank GmbH, London Branch v Constitution Aircraft Leasing (Ireland) 3 Ltd and another; UniCredit Bank GmbH, London Branch v Celestial Aviation Services Ltd [2026] UKSC 10. The court held that sanctions suspended payment under 12 standby LCs until the necessary licences were granted. It also gave banks and other payers wide protection from civil claims while they reasonably believe sanctions prevent payment.
For lessors, the decision means an LC may not deliver cash when it is most needed. For banks, it confirms that a compliant demand is the start of the analysis, not the end. Our commercial disputes solicitors advise banks, lessors, airlines and guarantors on sanctions-affected payment disputes and licensing strategy. Book a free consultation or call 0207 459 4037.
Background: The Aircraft Leases and the 12 Letters of Credit
The dispute arose because Russian airlines defaulted on aircraft leases just as new UK sanctions took effect, leaving a German bank holding demands it believed it could not lawfully pay.
The parties
- UniCredit Bank GmbH, a German bank acting through its London branch, confirmed all 12 LCs and was the defendant.
- Sberbank Povolzhsky Head Office, a Russian bank, issued the LCs.
- Celestial Aviation Services Ltd, an Irish company wholly owned by AerCap Holdings NV, was the beneficiary of seven LCs.
- Constitution Aircraft Leasing (Ireland) 3 Ltd and Constitution Aircraft Leasing (Ireland) 5 Ltd, Irish lessors in the Aircastle leasing business, were beneficiaries of the other five.
- AirBridge Cargo Airlines LLC and JSC Aurora Airlines, both Russian, were the lessees.
The seven Celestial LCs related to leases of two aircraft to Airbridge and three to Aurora. The five Constitution LCs related to leases of two aircraft to Airbridge.
The letters of credit
The leases were entered into between 2005 and 2014. The LCs were opened between 2017 and 2020. All of this was lawful at the time.
Each LC was denominated in US dollars, governed by English law and incorporated the Uniform Customs and Practice for Documentary Credits (UCP 600). A compliant demand crystallised the bank’s obligation to pay within four business days or five banking days, depending on the LC. Some LCs required only a signed demand. Others also required a statement that the lessee had breached its lease, without any particulars.
One example was a US$3.6m LC issued in Celestial’s favour on 21 August 2017 for a Boeing 747-400ERF. It stated:
“This standby letter of credit however creates primary obligations on us and is independent from the lease.”
The sanctions change
After Russia’s further invasion of Ukraine on 24 February 2022, the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2022, SI 2022/195, amended regulation 28(3)(c) of the Russia (Sanctions) (EU Exit) Regulations 2019 with effect from 1 March 2022. Aircraft became “restricted goods”.
As amended, regulation 28(3)(c) prohibits directly or indirectly providing financial services or funds “in pursuance of or in connection with” an arrangement whose object or effect is making restricted goods available to a person connected with Russia or for use in Russia.
Default, demands and licences
The airlines defaulted and the lessors made compliant demands in March 2022. Constitution’s demand of 22 March 2022, for example, said only that Airbridge had “failed to comply with its obligations under the aircraft lease agreement”.
The lessors terminated the leases between 3 and 25 March 2022, before payment fell due. Payment was due no later than 14 March 2022 under the Celestial LCs and between 18 and 31 March 2022 under the Constitution LCs. Four of the five Celestial aircraft and one Constitution aircraft remained in Russia, used without the lessors’ consent.
UniCredit refused to pay, citing regulation 28(3)(c), and applied for licences to the Office of Financial Sanctions Implementation (OFSI) and the Export Control Joint Unit. The Export Control Joint Unit granted licences on 22 September 2022, conditional on OFSI. OFSI granted its licence on 13 October 2022. UniCredit paid three Celestial LCs the next day and the remaining principal in November 2022.
Celestial had sued on 15 March 2022 for a principal claim of US$45.8m. Constitution sued on 27 April 2022 for US$23.5m. By the time of trial, the principal had been paid. The fight was over interest and costs.
How the lower courts decided
The High Court held that regulation 28(3)(c) did not prohibit payment and that the bank’s belief otherwise was unreasonable. It awarded interest under section 35A of the Senior Courts Act 1981 from the due dates.
The Court of Appeal, in 2024 EWCA Civ 628, disagreed. It held payment was prohibited until licences were obtained, so no interest ran during that period. It found the bank’s belief reasonable but said section 44 SAMLA could not protect the bank against a debt claim, interest or costs. It awarded interest for the period of around six weeks between the OFSI licence and payment under nine LCs, and that award was not appealed.
The Issues Before the Supreme Court
The Supreme Court had to answer four questions that any bank, lessor or lessee in a similar position would ask.
- Must the payment cause the prohibited supply? The lessors argued that paying Irish companies through a German bank neither helped Russian aviation nor pressured Russia, so there was no causal link. The bank said the regulation deliberately cast a wide net, with licensing available to deal with unintended consequences.
- Were leases made before 1 March 2022 “arrangements”? The lessors said the leases were lawful when made, pre-dated the amendment and had been terminated before payment fell due. The bank said the regulation applied to arrangements whenever made, and termination did not change their object.
- Was payment “in connection with” the leases? The lessors relied on the LCs’ independence from the leases. The bank said a factual connection was enough, and the LCs expressly referred to the leases.
- Does section 44 SAMLA protect against a debt claim, interest and costs? The bank said its failure to pay was an omission made in reasonable belief that it was complying with sanctions. The lessors said section 44 does not reach recovery of a pre-existing debt or interest and costs ancillary to it.
The Decision: What the Supreme Court Held
The Supreme Court dismissed the lessors’ appeals and allowed the bank’s cross-appeals. Payment under all 12 LCs was prohibited until the licences were obtained, and section 44 protected the bank against the debt claim, interest and costs while its reasonable belief lasted.
1. No causal connection is required
Regulation 28(3)(c) requires a connection between the funds and an arrangement, not between the funds and the prohibited supply of aircraft. The court distinguished the two statutory phrases:
“The words ‘in connection with’ are far broader than ‘in pursuance of’. In conjunction with the phrase ‘in pursuance of’ they mean anything which factually connects the provision of the funds to the arrangement. The phrase does not require there to be any causal connection.”
The court read the regulations in light of their purpose of pressuring Russia, including by disrupting strategic industries such as aviation. A wide prohibition with licensing as a safety valve served that purpose:
“The net is cast wide because vital public interests are involved and the arbiter of those interests should be public authorities involved in the licensing process.”
The breadth of the definitions supports this. Under section 60(1) SAMLA, “funds” means financial assets and benefits of every kind, expressly including letters of credit. Under regulation 2, “arrangement” includes any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable.
2. Pre-sanctions leases are caught
A lease that was lawful when made and performed can still be a relevant arrangement. Nothing in the amendment limited it to arrangements entered into on or after 1 March 2022:
“The prohibition is in relation to funding of arrangements whenever the arrangements were made or performed.”
This does not make earlier payments unlawful. It means a payment made after 1 March 2022 can be prohibited even though the lease and LC behind it are years older.
3. Terminating the lease does not break the connection
The object of a lease is fixed objectively when it is made:
“The object of the leases is unchanged by their termination: it is and always has been the making available of aircraft for use in Russia or to a person connected with Russia.”
The court also warned that the lessors’ approach could be exploited. Parties could structure leases so that payment fell due only after termination, supplying aircraft while taking later funding outside the prohibition.
4. LC autonomy does not displace the prohibition
The LCs were independent of the leases as private payment obligations. That did not stop the leases being the relevant arrangements. The LCs were issued in connection with the leases and named them, which was a sufficient factual connection:
“There is no requirement for a causative connection between the provision of financial services or funds and the prohibited supply.”
The parties agreed that the bank’s obligation was therefore suspended, not extinguished, until the UK licensing process completed on 13 October 2022, and that statutory interest did not accrue in the meantime.
5. Section 44 covers debt, interest and costs
Section 44 SAMLA protects a person from civil liability for an act or omission done in the reasonable belief that it complies with sanctions regulations. The court decided this point because it is likely to affect many other cases.
A debt claim is only brought because the debtor has omitted to pay, so liability is “in respect of” that omission. Failing to pay interest or costs is also an omission connected to the unpaid debt. The court held:
“I consider that section 44 would have provided protection to the Bank against an action to recover a debt, an award of interest on the amount of the debt, and an award of associated costs.”
Section 44 is a defence, not a bar. “Section 44 does not prohibit civil proceedings.” A claimant can still sue, but the defence will defeat the claim while the reasonable belief holds.
When payment may be prohibited
| Situation | Why payment can still be prohibited |
|---|---|
| The beneficiary is not Russian or designated | The test looks at the connection to the underlying arrangement, not the payee |
| The LC is governed by English law | Contractual governing law does not override sanctions legislation |
| The demand strictly complies with the LC | Documentary compliance does not make a prohibited payment lawful |
| The lease was made before 1 March 2022 | The prohibition applies to arrangements whenever made |
| The lease was terminated before payment fell due | Termination does not change the lease’s original object |
Getting this wrong is serious. Contravening regulation 28(3)(c) is a criminal offence under regulation 28(7), punishable on indictment by up to ten years’ imprisonment, a fine or both under regulation 80(2). Section 146 of the Policing and Crime Act 2017 also allows substantial civil penalties on a strict-liability basis.
Impact on Stakeholders: What Banks, Lessors and Lessees Should Do Now
The decision shifts sanctions risk onto the timing of payment. Each party in an LC chain now needs a plan for a licensing delay of months, not days.
Banks and confirming banks
A bank can no longer treat a non-Russian beneficiary or an independent LC as a safe harbour. The question is whether the payment is factually connected to an arrangement within regulation 28(3).
In practice, a bank should review the whole transaction, not only the named beneficiary:
- the applicant, beneficiary and issuing bank;
- beneficial ownership and any designated-person involvement;
- the payment route and receiving institutions;
- the underlying aircraft and lease;
- the purpose of the transaction; and
- the current designation and licensing position.
Section 44 depends on a reasonable belief, so the bank’s records matter. Keep a dated note of the screening results, legal analysis and licence applications supporting the decision not to pay. Once a licence is granted, the bank accepted in this case that neither regulation 28(3)(c) nor section 44 protects continued non-payment. Pay promptly, because interest can run from that point.
A bank facing competing claims to LC proceeds or genuine uncertainty may ask the court for a declaration or stakeholder-style relief before paying anyone.
Lessors and LC beneficiaries
An LC is weaker security where the underlying asset is exposed to a sanctioned jurisdiction. Neither termination nor the age of the lease will take payment outside the prohibition.
When a bank refuses to pay on sanctions grounds, a beneficiary should consider:
- cooperating with, or making, a licence application to speed up payment;
- seeking a declaration on whether the prohibition applies;
- claiming damages only where payment was not prohibited, the refusal was unreasonable and no section 44 defence is available; and
- drawing other security or pursuing guarantors.
A court will not order a payment that sanctions prohibit, so an injunction compelling payment is unlikely while the prohibition lasts.
LC disputes will often be heard in the English High Court under the governing law clause, while the lease may contain an arbitration clause. Sanctions law applies whichever forum hears the dispute. Urgent interim relief may be appropriate where assets, security or evidence are at risk.
Airlines, lessees and guarantors
A blocked LC payment does not automatically extinguish the lessee’s underlying lease debt. The lessor may still terminate, repossess or call on guarantees.
Each of those steps needs its own sanctions analysis. Before acting, a lessor should check whether sanctions excuse the lessee’s default, and repossession may require a licence where the aircraft is in Russia or controlled by a designated person. Where a sanctions-related default creates wider financial distress, our insolvency solicitors can advise on creditor action, guarantees and insolvency risk.
Creditors considering a debt claim
The decision reaches beyond aircraft. Any creditor owed money under a contract connected with a sanctioned arrangement may find the debt valid but temporarily unenforceable.
Suing early carries real cost risk. The court said the prohibition is relevant to whether proceedings were started unnecessarily before licences were obtained. Statutory interest will not run during the prohibition, and section 44 may defeat the claim entirely while the debtor’s belief is reasonable.
Drafting new leases and LCs
Contract terms cannot remove sanctions risk, but they can decide who carries it. New leases, LCs and guarantees should address:
- suspension of performance while payment is prohibited;
- which party applies for licences and who bears the cost;
- information-sharing and cooperation obligations;
- alternative lawful payment mechanics and substitute security;
- governing law and dispute resolution; and
- who bears interest and costs during a licensing delay.
Common mistakes
- Assuming LC autonomy overrides sanctions.
- Screening only the named beneficiary.
- Relying on LC terms agreed before a sanctions amendment.
- Paying without checking current designations and licences.
- Failing to document the reasonable belief behind non-payment.
- Not applying for a specific licence where no general licence applies.
How to Apply for an OFSI Licence for an LC Payment
A specific licence is needed where no exception or general licence covers the payment. In an aircraft transaction, an export control licence from the Export Control Joint Unit may also be needed, as it was in UniCredit, where that licence only took effect once OFSI granted its own.
Check for a general licence first
General licences are time-limited and cover only the activities described in their terms. Check the consolidated list and OFSI’s published licences immediately before paying, because designations and licences can change with little notice. A general licence issued on 12 October 2026 for certain ground-rent and service-charge payments, for example, does not cover aircraft-leasing LCs.
What a specific licence application should include
The bank, lessor or lessee can apply. A coordinated application is usually better, because OFSI needs a consistent account of the transaction. Government guidance asks for full information about the parties, financial institutions and ultimate beneficiary, and for applications to be made well before the licence is needed.
The application should normally cover:
- the parties, banks and beneficial owners;
- the aircraft and the lease terms;
- the LC terms, the demand and the payment amount;
- why payment is needed, such as discharging security, preventing insolvency or preserving an asset;
- evidence that no designated person will benefit; and
- the proposed payment route, including any blocked-account arrangements.
Explain why payment is necessary and proportionate, and why it does not undermine the purpose of the sanctions regime. OFSI assesses each application on its facts.
While the application is pending
Treat the payment obligation as suspended, not extinguished. Reserve contractual rights in writing and reassess if a licence is granted, refused, varied or expires, if any party or bank is newly designated, or if the payment route changes.
Frequently Asked Questions
Get Expert Help With Sanctions-Affected Letter of Credit Payments
Sanctions can freeze an LC payment for months, and the wrong move in either direction is costly. Paying without a licence risks criminal and civil penalties. Suing too early risks losing interest and costs.
Seek advice promptly if:
- an LC demand involves a sanctioned jurisdiction, aircraft or payment route;
- a bank refuses payment on sanctions grounds;
- you are considering terminating a lease or repossessing an aircraft;
- a licence application may be needed, or parties disagree about who should apply; or
- competing claims exist over LC proceeds.
Preserve the LC and lease documents, payment instructions, screening reports, correspondence with the bank, OFSI and the Export Control Joint Unit, and every licence application. These records may decide whether a section 44 defence succeeds or a damages claim is viable.
Our solicitors advise lessors, airlines, banks and guarantors across England and Wales on sanctions screening, licence applications, declarations, enforcement strategy and insolvency risk. To discuss your position, book a free consultation or call 0207 459 4037.
