Briefing

The Celestial Judgment – UK Supreme Court confirms wide reach of UK sanctions regulations, including over letters of credit

Irrevocable standby letters of credit (LCs) are widely used as a form of security, with the bank typically being obliged to pay the beneficiary on receipt of a compliant demand. The security is effective because of the autonomy principle underpinning LCs, which means that they are seen as wholly independent from any other elements in a transaction. That independence – and with it, the value of the security offered by standby LCs – has now arguably been affected by a Supreme Court judgment¹.

Background

Celestial Aviation Services Limited v Unicredit Bank GmbH, London Branch² concerned twelve irrevocable standby LCs issued by Sberbank and confirmed by UniCredit in connection with aircraft leases between Irish lessors and Russian airlines. The leases were entered into between 2005 and 2014, and the LCs were issued between 2017 and 2020. At the time they were opened, there was no prohibition under the UK sanctions regulations preventing the issuance or payment of these LCs.

This changed on 1 March 2022, when Regulation 28(3)(c) of the Russia (Sanctions) (EU Exit) Regulations 2019 (UK Russia Regulations) was amended so that it applied not only to military goods but also to “restricted goods,” including aircraft. The amendment prohibited the provision of financial services “in pursuance of or in connection with an arrangement” whose object or effect is to make aircraft available to persons connected with Russia or for use in Russia. After the invasion of Ukraine, the Russian lessees failed to return the aircraft, and many continued to be used in Russia without the lessors’ consent. The beneficiaries, Celestial and Constitution, made compliant demands under the LCs, but UniCredit withheld payment until it had obtained the appropriate licences.

Claims were brought by the beneficiaries seeking payment under the standby LCs following the Russian lessees’ default³. UniCredit argued that UK sanctions prohibited payment because it would amount to providing funds “in connection with” civilian aircraft, now classified as restricted goods. It also argued that if it was wrong about this, it had a defence under Section 44 of the Sanctions and Anti-Money Laundering Act 2018 (s44 SAMLA) because it held the reasonable belief that it was acting in compliance with the UK Russia Regulations.

The High Court originally found against UniCredit, holding that the standby LCs were independent and not caught by Regulation 28(3)(c) and that it could not rely on s44 SAMLA because its belief was not reasonable. However, following UniCredit’s appeal, the Court of Appeal overturned that decision, holding that on the ordinary meaning of the words used in the prohibition, Regulation 28(3)(c) would have prevented UniCredit from paying out under the standby LCs. Although it was therefore not required to deal with the issue relating to s44 SAMLA, nevertheless it held that it operated to provide a defence in relation to damages claims only..

The Supreme Court Judgment

The beneficiaries appealed and UniCredit cross-appealed. The Supreme Court was required to decide:

Under Regulation 28(3)(c) is there a requirement for a causal connection between the provision of financial services or funds and the prohibited supply?
Are the aircraft leases “arrangements” within Regulation 28(3)(c)?
Does the protection under s44 SAMLA include protection against an action to recover a debt, an award of interest on the amount of the debt, and an award of associated costs?

On 25 March 2026, the Supreme Court found that:

1. A factual connection is enough

Regulation 28(3)(c) is engaged wherever there is a factual link between the payment and the underlying arrangement (in this case, leases whose effect was to make aircraft available to Russian airlines). A causal or temporal connection is not required. The Regulation’s breadth was intentional, and payment under the LCs fell within its scope. The Supreme Court noted that the two phrases “in pursuance of” and “in connection with” in Regulation 28(3)(c) must have been intended to mean something different and “in connection with” is far broader in its meaning.

Although the LCs were described by the banks in the transaction as “creating primary obligations” and “independent from the lease,” the Supreme Court held that even legally distinct obligations (such as standby LCs) can be restricted if there is a factual connection with arrangements that fall within the Regulation. The licensing system was the mechanism for mitigating the effect of Regulation 28(3)(c). In this case, UniCredit was ultimately able to pay out under the LCs once a licence had been obtained.

2. The leases were “arrangements”

The meaning of “arrangement” was very broad and not time limited; it did not matter that the aircraft had been leased before the Regulation applied, or that the arrangement had since been terminated.

3. Section 44 SAMLA provided a defence

The Supreme Court, obiter, and in contrast to the Court of Appeal’s opinion, held that s44 SAMLA did provide 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 whilst it held the reasonable belief that the omission to pay was in compliance with Regulation 28(3)(c).

HFW comment

In essence, the Supreme Court found that the UK sanctions regulations are so widely drafted that they can cover even standby LCs. This has potentially significant consequences for companies with any form of exposure to Russia, and particularly those in the financial services sector. The emphasis of the judgment was on the breadth of the UK sanctions regulations and their purpose in putting pressure on Russia. Nevertheless, the effect of the judgment is arguably to undermine the autonomy principle and therefore the security offered by standby LCs.

For beneficiaries, this could mean reconsidering reliance on standby LCs as immediate security, or at least building into their risk assessment the possibility of delay while licensing is sought. For beneficiaries and issuing and confirming banks, the decision underscores the need for careful sanctions analysis at every stage of a transaction.

Overall, while licensing provides an important release mechanism, the effect of the judgment is to reduce the certainty and immediacy traditionally associated with standby LCs. It reaffirms that where sanctions apply, the autonomy principle must yield to regulatory objectives, even in longstanding, independently documented arrangements.

For a full analysis of the earlier Court of Appeal decision, please access our article which may be found here: Celestial Case: Rethinking Autonomous Payment Obligations | HFW

Footnotes

UniCredit Bank GmbH, London Branch (Respondent) v Constitution Aircraft Leasing (Ireland) 3 Ltd and another (Appellants); UniCredit Bank GmbH, London Branch (Respondent) v Celestial Aviation Services Ltd (Appellant) [2026] UKSC 10
[2023] EWHC 663 and 1071 (first instance) and [2024] EWCA Civ 628 (Court of Appeal)
Once it had obtained licences, UniCredit paid out under the LCs. The dispute therefore focused around interest and costs.