UniCredit v Constitution and Celestial – Supreme Court rules on scope of UK’s Russia sanctions regime and impact on aviation letters of credit

On 25 March 2026, the UK Supreme Court handed down judgment 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 “Judgment”). The Supreme Court held that UniCredit’s obligation to pay Constitution and Celestial under twelve standby letters of credit was suspended by the operation of UK’s Russian sanctions regime, even though the letters of credit were confirmed by UniCredit – a non-Russian bank – before the sanctions were imposed, and the relevant leases in connection with which the letters of credit had been confirmed had been terminated by the time payment fell due. 

The Judgment is likely to have far-reaching implications for parties involved in trade finance and aircraft leasing arrangements, given the reliance placed on letters of credit universally – particularly in transactions involving counterparties from or connected to countries carrying future sanctions risks.  More pressingly, however, financial institutions and aircraft lessors will need to consider carefully whether any payments made or received in respect of leasing arrangements with Russian counterparties, in the wake of Russia’s invasion of Ukraine, were made in breach of sanctions, and what their obligations are if so.

In this series of posts, we will consider the implications of the Judgment.  This first post summarises the Judgment itself and the Supreme Court’s conclusions, as well as its potential commercial consequences on the trade finance industry. Subsequent posts will address the potential criminal and civil exposure of financial institutions and lessors arising from the Judgment.

Quinn Emanuel acted (separately) for Constitution and Celestial at all levels of these proceedings.   

Background

Celestial Aviation Services Ltd (“Celestial”) and Constitution Aircraft Leasing (Ireland) 3 and 5 Ltd (together, “Constitution”) are Irish-incorporated entities involved in aircraft leasing. Between 2005 and 2014, they (separately) entered into several aircraft leases with two Russian airlines, AirBridge Cargo Airlines and JSC Aurora Airlines (the “Leases”).  Between 2017 and 2020, twelve irrevocable standby letters of credit were issued by Sberbank Povolzhky Head Office as security for various payment obligations owed under the leases, including in respect of maintenance reserves and certain rent obligations (the “LCs”).  The LCs, each of which was confirmed by UniCredit’s London Branch, were denominated in US dollars and governed by English law.

On 1 March 2022, following Russia’s invasion of Ukraine, the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Regulations”) were amended to designate civilian aircraft as “restricted goods” and subject to trade sanctions, including under Regulation 28(3):

(3) A person must not directly or indirectly provide financial services or funds in pursuance of or in connection with an arrangement whose object or effect is—

(a) the export of restricted goods to, or for use in, Russia;

(b) the direct or indirect supply or delivery of restricted goods to a place in Russia;

(c) directly or indirectly making restricted goods or restricted technology available—

(i) to a person connected with Russia, or

(ii) for use in Russia;

(d) the transfer of restricted technology—

(i) to a person connected with Russia, or

(ii) to a place in Russia; or

(e) the direct or indirect provision of technical assistance relating to restricted goods or restricted technology—

(i) to a person connected with Russia, or

(ii) for use in Russia.

Shortly thereafter, Constitution and Celestial terminated the leases and made conforming demands on UniCredit under the LCs. UniCredit refused to pay, taking the position that payment was prohibited by sanctions, including Regulations 11, 13 and 28(3), as well as by EU and US sanctions. 

Constitution and Celestial separately commenced proceedings against UniCredit following its refusal to pay, seeking payment of the debt owed under the LCs, together with interest and associated costs. 

In the meantime, UniCredit applied for licences from the relevant authorities to receive payment from Sberbank and make payment to Constitution and Celestial.  Thereafter, licences were received from the Bundesbank in respect of EU sanctions.

The Decisions Below

High Court

The High Court held at first instance that Regulation 28(3) was not engaged. This was on the basis that the aircraft had been supplied before the sanctions came into force and that the autonomy principle – under which a bank’s payment obligation under a letter of credit is independent of the underlying contract – meant payment could not be said to be “in connection with” the lease arrangements.  This was consistent with the purpose of the Regulations, which was “to ensure that financial assistance was not provided to Russian parties in relation to, inter alia, the supply of aircraft”.

The High Court further held that neither of Regulations 11, 13 and/or US sanctions prevented UniCredit from paying Constitution and Celestial under the LCs.  In a further decision on consequential matters, the High Court held that UniCredit’s belief that these sanctions prevented it from paying Constitution and Celestial was not objectively reasonable, such that it could not avail itself of Section 44 SAMLA, which (broadly) provides protection to persons in UniCredit’s position for acts or omissions in the reasonable belief that such conduct was in compliance with relevant sanctions.

Court of Appeal

UniCredit appealed the High Court’s decision in respect of Regulation 28(3), US sanctions and Section 44 SAMLA. 

1. The Court of Appeal reversed the High Court’s decision on the first of these points, finding that the LCs had as a matter of fact been issued “in connection with” the Leases, and that this was sufficient to engage the prohibition under Regulation 28(3).  This was consistent with the purpose of Regulation 28, which was a “relatively blunt instrument… intended to cast the net sufficiently wide to ensure that all objectionable arrangements are caught”.  The autonomy principle did not mean this factual reality could be ignored.
2. In respect of US sanctions, the Court of Appeal held that UniCredit did not make reasonable efforts to obtain a licence from the US authorities because it had sought to conflate its payment under the LCs with its reimbursement from Sberbank.  Accordingly, UniCredit was precluded under the Ralli Bros doctrine from relying on the alleged illegality under US law.
3. Finally, on SAMLA, the Court of Appeal overturned the High Court’s finding that UniCredit’s belief had not been reasonable. Nevertheless, the Court of Appeal disagreed with UniCredit as to its interpretation of Section 44, holding that it did not provide a defence to recover for a debt (being an amount which was owed “irrespective of any action or inaction in purported compliance with sanctions”), nor interest or costs – as they were aspects of the claim for recovery of debt. 

The Supreme Court’s Decision

Constitution and Celestial appealed the Court of Appeal’s decision on Regulation 28(3), and UniCredit cross-appealed on Section 44 SAMLA.

The Supreme Court held in UniCredit’s favour on both issues, concluding that:

1. Regulation 28(3) prohibited payment under the letters of credit, even though they pre-dated the sanctions and the relevant leases had been terminated by the time payment fell due under the letters of credit. This was because Regulation 28(3) required only a factual connection between the provision of funds and the existence of the relevant arrangement, not a causal one.
2. This was consistent with the “very broad” purpose of the Regulations, which was to put pressure on Russia by disrupting strategic industries such as aviation, and which could be achieved in different ways.  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, and any unintended consequences would be mitigated by the licensing regime in place.
3. The foregoing analysis was not affected by the fact that there had not been any such prohibition at the time that the Leases were entered into and/or the LCs were opened, nor by the fact that the Leases had been terminated by the time the LC payments fell due.  Regulation 28(3) was not temporally limited. 

The Judgment did not engage with or address Constitution and Celestial’s submissions regarding the scope and operation of the autonomy principle, or that the Court should, in construing Regulation 28(3), be concerned with the more proximate arrangement.

Finally, the Supreme Court held that while Section 44 SAMLA did not operate as a complete bar to civil proceedings, it operated as a defence therein, and UniCredit would have therefore been able to rely on it for protection against an action to recover a debt, an award of interest, and an award of associated costs.

Scope of sanctions regime: resolving uncertainty in favour of licensing

The Supreme Court’s approach to Regulation 28(3) reflects a recent trend by the higher courts of deference to the executive on the scope and impact of policy in relation to the Russian sanctions regime, and in particular the public authorities involved in the licensing process (i.e. the Office of Financial Sanctions Implementation (“OFSI”) and the Export Control Joint Unit (“ECJU”)). 

The Court of Appeal’s decision had negative ramifications on global trade financing and insurance markets because it created uncertainty as to the permissibility of any payments that have any degree of factual connection to trade in restricted or controlled goods.  In confirming the wide casting of the net, with the licensing regime operating as a safety valve, the Supreme Court has effectively clarified that all such payments are prohibited unless licensed.

This approach gives considerable latitude to financial institutions to not pay out or comply with existing obligations, so long as they have a reasonable belief that they are precluded from doing so. On the other hand, counterparties, including aircraft lessors, will need to consider their allocation of risk in light of the limited recourse available, and in cases where there is a meaningful risk of sanctions being imposed in the future, seek if possible to renegotiate lease terms to obtain security that falls outside UK jurisdiction.

It may also be observed that the Supreme Court’s approach, while ostensibly faithful to the text of Regulation 28(3), is commercially unrealistic.

1. The approach is at odds with OFSI and ECJU’s resources and guidance to date.  The prevailing sentiment in the market is that both regulatory authorities are beset with backlogs and delays, particularly in relation to licensing and requests for guidance arising out of the Russia sanctions regime.  On the facts of this case, for example, ECJU and OFSI took six and seven months respectively to issue their respective licences.
2. Further, ECJU and OFSI do not generally advise applicants on whether a transaction falls within the scope of the relevant sanctions regime. A licence is issued (if appropriate) without any determination of this underlying legal question.
3. Finally, the Supreme Court’s suggestion that the licensing authority is best placed to assess the underlying transaction overlooks the reality that, in practice, the applications are driven almost exclusively by information provided by applicants themselves. 

Commercial Consequences: Letters of credit and trade financing

Letters of credit occupy a foundational role in international trade finance.  They are generally regarded as equivalent to cash,[1] and on account of such reliability have been described as the “lifeblood of international trade”.[2]  In aircraft leasing arrangements, letters of credit are commonly used as alternatives to cash deposits for the purpose of guarantees or security.

The Supreme Court’s Judgment (like that of the Court of Appeal’s before it) casts doubt on the future role of letters of credit in serving these purposes, and aircraft lessors will need to consider their options carefully given letters of credit can no longer be said to be equivalent to cash, at least in the face of English law sanctions legislation. Similar considerations will need to be given to risk allocation and whether, following this decision, it remains desirable for letters of credit to be opened or confirmed by UK financial institutions – particularly in transactions involving counterparties from or connected to countries carrying future sanctions risks.

That reconsideration will not be straightforward.  The Supreme Court’s analysis leaves uncertain whether a cash deposit, which is the default alternative to letters of credit, would be treated any differently.  There is, in short, no obvious safe harbour.  

More broadly, aircraft leasing arrangements are long-term commitments, and lessees often come from jurisdictions whose sanctions status might change significantly over the life of a lease – raising wider questions for the industry about how security structures should be documented and what steps lessors and financiers should take to assess their existing portfolios.

Looking Ahead

For financial institutions and lessors with a UK connection that were involved in payments made after 1 March 2022 in respect of leasing arrangements with Russian counterparties, the Supreme Court’s Judgment raises serious questions.  Payments without a valid licence may potentially have been made in contravention of the Regulations, with potential civil and criminal consequences. We will consider these issues further in our subsequent posts.

If you have any questions about the issues addressed in this post, or would like advice in relation to potential exposure arising out of the Judgment, please do not hesitate to get in touch. 

Yasseen Gailani

Email: yasseengailani@quinnemanuel.com

Phone: +44 20 7653 2021

Jasdeep Gill

Email: jasdeepgill@quinnemanuel.com

Phone: +44 20 7653 2061