UK Supreme Court Holds Sanctions Suspended UniCredit's Obligation to Pay Letters of Credit to Aircraft Lessors

In a unanimous March 2026 decision, the UK Supreme Court held that UK sanctions can suspend a bank's obligation to pay under a letter of credit, even where the beneficiary's demand fully complies with the letter's terms. The case was UniCredit Bank GmbH, London Branch v Constitution Aircraft Leasing (Ireland) 3 Ltd and another, heard together with UniCredit Bank GmbH, London Branch v Celestial Aviation Services Ltd. The court dismissed the lessors' appeals and allowed the bank's cross-appeals: payment under all 12 letters of credit was prohibited until licences were obtained.

The dispute concerned 12 English-law, US dollar standby letters of credit governed by UCP 600, opened between 2017 and 2020. Seven, in favour of Celestial Aviation Services, related to leases of two aircraft to Airbridge and three to Aurora. Five, in favour of Irish lessors in the Aircastle leasing business including Constitution Aircraft Leasing (Ireland) 3 Ltd and Constitution Aircraft Leasing (Ireland) 5 Ltd, related to leases of two aircraft to Airbridge. The leases dated from 2005 to 2014. One example was a US$3.6m letter of credit issued to Celestial on 21 August 2017 for a Boeing 747-400ERF.

From 1 March 2022, an amendment to regulation 28(3)(c) of the Russia (Sanctions) (EU Exit) Regulations 2019 prohibited 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. The airlines defaulted and the lessors made compliant demands in March 2022. The lessors terminated the leases between 3 and 25 March 2022, before payment fell due.

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 letters of credit the next day and the remaining principal in November 2022. Celestial had sued on 15 March 2022 for US$45.8m; Constitution sued on 27 April 2022 for US$23.5m. By trial, the principal had been paid.

The Supreme Court held that regulation 28(3)(c) requires a connection between the funds and an arrangement, not between the funds and the prohibited supply of aircraft. 'In connection with' means anything that factually connects the provision of funds to the arrangement, with no causal link required. Leases lawful when made are still caught, because the prohibition applies to arrangements 'whenever the arrangements were made or performed'. Termination of the leases did not break the connection, since the object of a lease is fixed objectively when it is made.

Section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) protects a person from civil liability for an act or omission done in the reasonable belief that it complies with sanctions regulations. On that provision, the court held that a debt claim is brought because the debtor omitted to pay, so liability is 'in respect of' that omission.

The court also indicated that issuing proceedings before licences are granted may count against a claimant on costs.

The ruling closes off the argument that a standby letter of credit is a self-contained promise insulated from the lease behind it. Autonomy governs how the bank tests the demand; it does not override a statutory prohibition that attaches to the arrangement the funds are connected to. For lessors holding letters of credit as security against Russian-connected airlines, the instrument's value depended on licence timing as much as on its wording. In this case the licences arrived in September and October 2022, roughly seven months after the March 2022 demands.

The breadth of the court's reading matters beyond these 12 instruments. A 'factual connection' test with no causal link, applied to leases made lawfully between 2005 and 2014 and terminated before payment fell due, means the age of the transaction and the lessor's exit from it do not take payment outside the prohibition. That reaches banks issuing or confirming letters of credit, lessors drawing on them, and lessees whose obligations they secure, and it makes the whole transaction chain the unit of analysis rather than the instrument alone.

The practical sequence the decision rewards is licence application first, enforcement second: the section 44 holding protects a bank that withholds payment in reasonable belief of compliance, while a claimant who sues before licences are granted risks the point being used against it on costs. Further decisions applying the 'in connection with' test to other instruments tied to Russia-linked leases would show how far the reading extends.