The Court of Appeal has handed down judgment in
Amongst other points, the
- decided that Regulation 28 of the
Russia (Sanctions) (EU Exit) Regulations 2019, SI 2019/855 (theUK Regulations) prohibited payment under letters of credit because payment was "in pursuance of or in connection with" an arrangement prohibited by theUK Regulations, (in this case the supply of aircraft). The Court emphasised the breadth of the language in Regulation 28 noting that the provision is a "relatively blunt instrument that is intended to cast the net sufficiently wide to ensure that all objectionable arrangements are caught" and that it "risks catching arrangements that may not be seen to be within the overall mischief". The Court said the solution to mitigate any unintended negative consequences of theUK Regulations is the licencing regime. - rejected
UniCredit's reliance on section 44 of the Sanctions and Anti-Money Laundering Act 2018, which it held did not protect a party with the reasonable (but mistaken) belief that sanctions applied from being pursued in respect of interests and costs. - found that
UniCredit could not rely on illegality under US law. The Ralli Bros rule was not applicable becauseUniCredit had not taken reasonable steps to obtain a licence from the US authorities. - helpfully rejected (albeit in obiter) any suggestion that payment obligations should be performed through payment in cash or alternative currencies with a view to avoiding violations of US sanctions.
We consider the judgment and key takeaways in more detail below.
Background
The dispute initially arose out of a series of letters of credit that were issued by Sberbank Povolzhsky Head Office (
There were 12 letters of credit in total:
In
First instance decision
At first instance, the Court found in favour of Celestial and
The Court made the following findings (amongst other matters):
-
obligations arising under letters of credit should be considered by reference to the principle of autonomy;
- when interpreting sanctions legislation, a purposive approach should be adopted and sanctions are intended to operate prospectively as opposed to retrospectively; and
- where the fundamental obligation is to make a payment, and where it is possible to make a payment by other means, even if in cash so as not to be processed by a bank targeted by sanctions, payment should be made.
- Whether payment under the letters of credit by
UniCredit was prohibited by Regulation 28(3) of theUK Regulations? - If it was not prohibited, did
UniCredit have a defence under section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) on the basis that its belief it was complying withUK sanctions was reasonable? - Did the Ralli Bros principle apply in circumstances where effecting payment in US dollars required the involvement of a correspondent bank in the US?
- If US sanctions were engaged, would payment have been illegal under that regime?
- Although made in obiter, the
Court of Appeal's unanimous view that payment in cash is not contemplated in this context signifies an important shift in approach, namely that financial institutions should not feel compelled to make payment in cash where the agreement clearly does not contemplate it, and where doing so may give rise to a wide range of other compliance issues. - In seeking to rely on the Ralli Bros principle in a sanctions context, it will likely be important not only to show that a licence has been applied for, but also that it has been applied for on appropriate terms.
The issues at appeal
Four issues were the subject of the appeal (broadly summarised):
Issue 1: Letters of Credit/the provision of funds or financial services can fall afoul of sanctions, even if the underlying arrangements have been terminated
Regulation 28(3)(c) of the
The Court of Appeal determined that the judge did not engage properly with the wording of Regulation 28(3)(c) and erred in his assessment of the purpose of the
In contrast to the approach taken by the
The Court of Appeal considered that the licensing regime under the
Issue 2: Whether a subjective belief is reasonably held is a question to be determined objectively
Section 44 of SAMLA provides that a person is not liable to any civil proceedings for an act done in the reasonable belief that the act is in compliance with regulations made under SAMLA (which include the
Given the Court's finding on the first issue, it was not necessary to make a determination on the second. Notwithstanding this, given the issue was fully argued, the Court provided its view given the broader significance of the provision. The Court of Appeal did not disturb the judge's conclusion that
The Court of Appeal found that the purpose of this provision is "to ensure that a person is not pressurised into doing something that risks breaching sanctions by a fear of being exposed to civil claims" but that it does not prevent an award of interest on a claim for debt.
Issue 3: Cash-payments and payments in other currencies precluded by the terms of the contract.
Pursuant to the rule in
As the other issues had been determined in such a way as to make this point less significant, the
After the trial, the parties made submissions following the release of the Supreme Court judgment in MUR Shipping (our previous article is here). The Court of Appeal considered that although the case was of limited relevance, it reinforced the importance of the freedom to contract, including as to the "manner of performance".
The Court of Appeal did not endorse the judges' decision that cash could be paid, or the alternative argument that payment could be made in a different currency in circumstances where no demand for payment in cash or a different currency was made, and neither option is contemplated in the relevant contracts. The Court of Appeal found that the letters of credit expressly required that the demand would be for the transfer of US dollars to a specified bank account. The Court found that the term "transfer" does not naturally connote a payment in cash and referred to the principle of "strict compliance" when making a complying presentation, referring to Article 2 of the UCP.
Issue 4: Reasonable efforts to obtain a licence include drafting the licence application in appropriate terms
Notwithstanding the above, the
Key Takeaways
-
Notwithstanding that the underlying transactions may have completed prior to the imposition of sanctions, corporates and financial institutions should consider the extent to which their activities and future payments may be caught by applicable sanctions prohibitions. For example, staggered or delayed payments concerning a historic transaction may be relevant to consider in this regard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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