CL-2022-000216 |
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
KING'S BENCH DIVISION
COMMERCIAL COURT
Fetter Lane London EC1A 1NL |
||
B e f o r e :
Sitting as a High Court Judge
____________________
CELESTIAL AVIATION SERVICES LIMITED |
Claimant |
|
- and – |
||
UNICREDIT BANK AG (LONDON BRANCH) |
Defendant |
|
And Between : |
||
(1) CONSTITUTION AIRCRAFT LEASING (IRELAND) 3 LIMITED (2) CONSTITUTION AIRCRAFT LEASING (IRELAND) 5 LIMITED |
Part 8 Claimant |
|
- and – |
||
UNICREDIT BANK AG LONDON BRANCH |
Part 8 Defendant |
____________________
Akhil Shah KC and Leonora Sagan (instructed by Quinn Emanuel Urquhart & Sullivan) for the Constitution Claimants
Rachel Barnes KC, James Sheehan and Genevieve Woods (instructed by RPC) for the Defendant
Hearing dates: 28 and 29 September 2022
____________________
Crown Copyright ©
MR CHRISTOPHER HANCOCK KC
Sitting as a High Court Judge:
The Celestial leases.
(1) Two aircraft were leased to AirBridge Cargo Airlines LLC ("AAL"), which is a Russian company, under the following leases (the "AAL Leases"):
(a) Celestial Aviation Trading Ireland Limited ("CATIL"), a subsidiary of AerCap, and AAL were party to an Aircraft Specific Lease Agreement dated 21 December 2005 (as subsequently amended and novated). CATIL leased to AAL a Boeing 747-400ERF aircraft with serial number 35420 (the "35420 Lease").
(b) CATIL and AAL were party to another Aircraft Specific Lease Agreement dated 21 December 2005, by which CATIL leased to AAL a Boeing 747-400ERF aircraft with serial number 35421 (the "35421 Lease").
(2) Three aircraft were leased to JSC Aurora Airlines ("Aurora"), a Russian company, under the following leases (the "Aurora Leases"):
(a) Celestial Aviation Trading 33 Limited ("CAT33"), a subsidiary of AerCap, and Aurora entered into an Aircraft Specific Lease Agreement dated 21 October 2013, by which CAT33 leased to Aurora an Airbus A319-100 aircraft with serial number 2222 (the "2222 Lease").
(b) CAT33 and Aurora entered into an Aircraft Specific Lease Agreement dated 11 December 2013, by which CAT33 leased to Aurora an Airbus A319-100 aircraft with serial number 2243 (the "2243 Lease").
(c) Celestial Aviation Trading 32 Limited ("CAT32"), another subsidiary of AerCap, and Aurora entered into an Aircraft Specific Lease Agreement dated 15 August 2014, by which CAT32 leased to Aurora an Airbus A319-100 aircraft with serial number 3838 (as amended, the "3838 Lease").
(d) These leases are referred to, together, as the "Celestial Leases".
The Celestial Letters of Credit
(1) Celestial is the beneficiary under each letter of credit.
(2) Each of the Letters of credit is governed by English law.
(3) In relation to each of the Letters of credit, Celestial was entitled to draw on the letter of credit by making a demand in the required form as specified in the letter of credit. In summary, this required Celestial to state that it was drawing upon the letter of credit due to the failure of the lessee (i.e. AAL or Aurora) to comply with its obligations under the relevant lease.
(4) The making of a demand in the specified form crystallised the relevant payment obligation under each of the Letters of credit and UniCredit was required to make payment within four business days (in the case of the AAL Letters of credit) or five banking days (in relation to the Aurora Letters of credit) following receipt of a conforming demand.
(5) Each of the Letters of credit (i) stated that it created primary obligations which were independent from the underlying lease and (ii) was subject to and incorporated the Uniform Customs and Practice for Documentary Credits (2007 Revision, International Chamber of Commerce Publication no. 600) ("UCP").
The Celestial Demands for Payment
Termination of the leasing of the aircraft
UniCredit's refusal to pay under the Letters of credit
Constitution's claims.
UniCredit's licence applications
(1) UK sanctions. UniCredit applied to OFSI (Office of Financial Sanctions Implementation, which administers financial sanctions) and the ECJU (Export Control Joint Unit, which administers licence applications for trade sanctions) on 24 March 2022. UniCredit applied to OFSI for a licence under Regulations 11 and 13 on 11 April 2022. On 22 September 2022, the ECJU granted a licence subject to OFSI doing likewise. On 13 October 2022, after the date of the hearing before me, OFSI granted a licence under Regulations 11 and 13. It was the Claimants' case that the application was misleading, in that it suggested that the grant of a licence to make payment to the Claimants should be dependent on the grant of a licence for payment by Sberbank to UniCredit.
(2) EU sanctions. UniCredit applied to the Bundesbank for a licence on 14 April 2022. A licence was granted on 12 May 2022.
(3) US sanctions. On 29 April 2022, UniCredit submitted an application to OFAC (Office of Foreign Assets Control). As at the date of the hearing before me, a response was awaited. As I understand it, a response is still awaited as at today's date. Again, it was the Claimants' case that the applications were misleading, in that it suggested that the grant of a licence to make payment to the Claimant should be dependent on the grant of a licence for payment by Sberbank to UniCredit.
(1) As noted above, on 13 October 2022, OFSI granted a licence under Regulations 11 and 13 authorising payment under all Letters of credit. As a result, the ECJU licence under Regulation 28 which had been granted on 22 September 2022 in respect of all the Letters of credit came into effect.
(2) Shortly thereafter, on 14 October 2022, UniCredit made payment to Celestial in USD under three of the seven Celestial Letters of credit.
(3) On 9 November 2022, UniCredit offered (on an open basis) to make voluntary payment to both Constitution and Celestial in settlement of liabilities arising from all remaining Letters of credit (excluding interest and costs) by way of payments of equivalent sterling amounts in London to accounts held at non-US banks.
(4) On 12 November 2022, Constitution accepted UniCredit's offer, without prejudice to its position on interest and costs. Payment was made on 21 November 2022 to Constitution's solicitors' account.
(5) On 18 November 2022, Celestial also accepted UniCredit's offer, without prejudice to its position on interest and costs, provided payment was made by 25 November 2022 to an affiliate's account in London. As I understand it, payment was so made.
Summary of the present position on payment.
(1) Following the receipt of the OFSI licence on 13 October 2022, UniCredit made payment of the principal amounts due under three of the seven Letters of credit. These are three of the four AAL Letters of credit, numbered 2-4 in schedule 3 to Celestial's skeleton argument. These payments were made in USD in accordance with the demands served under the relevant Letters of credit to the bank account in London specified in the demands. No interest was paid in respect of those Letters of credit.
(2) The remaining AAL LC and the three Aurora Letters of credit (namely, those numbered 1, 5, 6 and 7 in schedule 3 to Celestial's skeleton argument) remained unpaid. However, as noted above, on 18 November 2022, Celestial accepted UniCredit's offer to settle liabilities arising from the four outstanding Letters of credit (excluding interest and costs) by way of payment of an equivalent sterling amount to an account held in London at a non-US bank. Payments were made on 25 November 2022.
What remains to be resolved.
(1) Did the UK Regulations prohibit payment under the Letters of credit in the period prior to 13 October 2022 (as UniCredit alleges)? Following the OFSI licence granted on 13 October 2022, it is common ground that payment was permitted under the UK Regulations in the period from 13 October 2022 onwards. However, the position of Celestial and Constitution is that payment has never been prohibited by the UK Regulations. The issue whether the UK Regulations prohibited payment in the period prior to 13 October 2022 remains relevant to questions of interest and costs (which will be matters for a consequentials hearing). This Court's decision on that question is also likely (I am told) to be of more general assistance to market participants and practitioners. I am therefore invited to determine that question at this stage, notwithstanding the grant of the OFSI licence on 13 October 2022.
(2) If the answer to issue (1) is "no", did UniCredit nevertheless have a reasonable belief that the UK Regulations prohibited payment in the period prior to 13 October 2022? This is relevant to the application of the Sanctions and Anti Money-Laundering Act 2018 ("SAMLA") s.44. UniCredit submits that SAMLA s.44 is relevant to the question of interest and costs. I am told that the parties intend to make submissions in relation to interest and costs and the relevance (if any) of SAMLA s.44 in this regard, as part of addressing consequential matters in the light of the Court's judgment.
(3) Does US law have the effect of suspending or otherwise excusing non-performance of UniCredit's obligation to pay in USD under the Letters of credit? This involves the following sub-issues:
(a) Is US law relevant to the enforceability of the English law-governed payment obligations under the Letters of credit? This is the threshold Ralli Bros point, addressed below.
(b) Does US law provide a defence in circumstances where the relevant US sanctions applied after the payment obligations crystallised under the Letters of credit?
(c) Did UniCredit make reasonable efforts to obtain a US licence? If not, can UniCredit rely on foreign law illegality?
(d) As a matter of US law, does US law prohibit payment in USD under the Letters of credit?
(1) UK law. From (i) 1 March 2022, i.e., prior to the accrual of payment obligations under the Letters of credit[1] until (ii) the grant of the OFSI licence on 13 October 2022, payment was prohibited under Regulation 28 of the UK Regulations. Separately from (i) 6 April 2022 until (ii) the grant of the OFSI licence on 13 October 2022 payment was prohibited under Regulations 11 and 13 of the UK Regulations.
(2) US law.
(a) In the period from 26 March 2022 onwards, US sanctions have prohibited, and continue to prohibit, payment in USD under the Letters of credit other than the three which were paid on 14 October 2022 by reason of the CAPTA sanctions under Directive 2 of E.O. 14024, because payment under those Letters of credit would be deemed to "involve" Sberbank.
(b) In the period from 13 April 2022 onwards, US sanctions have prohibited, and continue to prohibit, payment in USD by reason of the Blocking Sanctions imposed on Sberbank because payment under the Letters of credit other than the three paid on 14 October would be deemed to be "dealing in" Sberbank's "property or interests in property" (defined in the Russian Harmful Activities Sanctions Regulations 31 CFR §587.311).
(c) The voluntary offer made by UniCredit to settle liabilities (excluding interest and costs) arising under the Letters of credit by way of a payment in sterling in London to an account at a non-US bank was designed (i) to remove any US nexus and therefore the application of US sanctions; and (ii) to limit activity to the UK, where the OFSI and ECJU Licences apply.
(3) EU law. EU sanctions came into effect on 26 March 2022, and a licence was granted by the Bundesbank on 12 May 2022. In the period between 29 March and 12 May 2022, EU sanctions prohibited payment under the Letters of credit.
(1) UK law. The Regulations have at no time prohibited payment under the Letters of credit.
(2) US law.
(a) US law is irrelevant since the place of performance of the payment obligations is England or Ireland. This is the Ralli Bros point.
(b) In any event, US law sanctions took effect after the payment obligations arose under the Letters of credit (albeit before the deadline for payment under four of the five Constitution Letters of credit). On any view, therefore, UniCredit acted in breach of contract by failing to pay under those Letters of credit before US sanctions were engaged.
(c) In any event, UniCredit failed to make reasonable efforts to apply for a licence from OFAC and cannot therefore rely on foreign law illegality.
(d) In any event, US law does not prohibit payment under the Letters of credit.
(3) EU law. The EU law analysis is materially the same as under the UK Regulations.
The most important elements of the chronology.
The issues in outline.
(1) UK law.
(a) What are the relevant principles of statutory interpretation?
(b) What is the proper construction of Regulation 28 and how does it apply here?
(c) What is the proper construction of Regulation 11 and how does it apply here?
(d) What is the proper construction of Regulation 13 and how does it apply here?
(2) US law.
(a) Did any US sanctions arise after the payment obligations fell due, and if so, what is the effect of this fact?
(b) Is US law relevant to the issues in this case?
(c) Did UniCredit make reasonable efforts to obtain US licences?
(d) Does US law (if applicable) prohibit payment under the Letters of credit?
UK law.
Principles of statutory interpretation.
The Claimants' contentions.
(1) In interpreting legislation, the starting-point is to identify its purpose. The central importance of a purposive approach to statutory interpretation is firmly established: see the citations referred to by Lord Briggs and Lord Leggatt in Rossendale Borough Council v Hurstwood Properties [2022] AC 690 at [10]. According to Lord Burrows writing extra-judicially: "there is only one correct modern approach [to statutory interpretation] – that one must ascertain the meaning of the words in the light of their context and the purpose of the provision".[3]
(2) A purposive approach is particularly apt in construing the language "in pursuance of or in connection with". The phrase 'in connection with' is a "protean one which tends to draw its meaning from the words which surround it": Coventry and Solihull Waste Disposal v Russell [1999] 1 WLR 2093 at 2013 per Lord Hope. The same is equally true of the phrase 'in pursuance of'. These are not phrases which can be said to have a fixed or natural meaning divorced from their surrounding context. One can only answer whether X is connected with Y once one understands the purpose for which the question is being asked.
(3) The purpose of the Regulations as a whole is to encourage Russia to cease its invasion of Ukraine. Put at its most basic, the sanctions are intended to have some adverse impact on the Russian state, Russian industry or Russian persons – whether that is in the form of freezing assets, cutting off financing or removing market access. It is axiomatic that the Russian state, Russian industry or Russian persons are the targets on whom the consequences of any sanctions are intended to be felt – otherwise the sanction could have no conceivable dissuasive effect on Russia's actions.
(4) More specifically, the key purpose of the trade sanctions in Chapter 2 of Part 5 is to stop the supply of restricted goods, including aircraft, to Russia. That is one of the tools used to exert pressure on Russia and degrade its industrial and military capability.
(5) Focusing in still further, the purpose of Regulation 28 is to cut off the supply of financing by means of which to obtain restricted goods. This is ancillary to, and in service of, the central purpose of Chapter 2 of Part 5, namely to stop the supply of restricted goods to Russia. The rationale is straightforward: the purpose of cutting off financing is a means to the end of restricting Russia's access to restricted goods.
(6) Therefore, the purpose of Regulation 28(3) is to prevent a person from providing financing which is capable of enabling the supply of restricted goods (including aircraft) to Russia.
(1) The relevant prohibition under Regulation 28(3) came into force on 1 March 2022. The prohibition is by its nature prospective: it is designed to stop any access to restricted goods from that time on. The five aircraft were provided to Russian companies (AAL and Aurora ) under leases long before March 2022. The Letters of credit were similarly issued long before March 2022. Therefore, as of March 2022, the aircraft had long since been provided to Russian companies for use in Russia.
(2) The payment obligation under the Letters of credit requires UniCredit (a German company, acting by its London branch) to pay Celestial (an Irish company) and Constitution (an Irish company). Performance of that obligation will not in any way enable or facilitate the supply of aircraft to Russia or to Russian persons. By the time that the payment obligation under the Letters of credit had accrued, the aircraft had long since been supplied to Russian companies. There is no relevant causal link between payment under the Letters of credit and supply of aircraft to Russia.
(3) The position is a fortiori in circumstances where leasing of aircraft has now terminated. The performance or non-performance of UniCredit's payment obligations under the Letters of credit will have no effect – whether contractually or in fact – on whether aircraft are supplied (or will continue to be supplied) to Russian companies or for use in Russia.[4]
(4) In those circumstances, it would be a bizarre result for Regulation 28(3) to be read as prohibiting UniCredit from paying Celestial under the Letters of credit. That would in no way further the policy objective underlying Regulation 28, which is to restrict Russia's access to aircraft and other restricted goods. It would serve only to penalise Celestial (and give UniCredit a corresponding windfall) – and absolutely no consequences would be felt in Russia or by Russian persons.[5]
(5) Such an interpretation would be contrary to the purpose of the Regulations. The correct analysis is that payment by UniCredit under the Letters of credit cannot be regarded as being "in pursuance of or in connection with" the supply of aircraft under the Leases.
"The committee's opinion is that this intrusive regime is not required by art 2(2) of the 2002 Regulation. First, it is not required to give effect to the purpose of the Security Council resolution, which was obviously to prevent funds from being used for terrorist activities. Indeed, the licence tells Mrs M that the licence conditions are 'to provide safeguards against the risk of these funds being diverted to terrorism'. It is however hard to see how the expenditure of money on domestic expenses, such as buying household food, from which Mr M derives a benefit in kind, can create any risk that he may divert funds to terrorism."
UniCredit's contentions.
(1) General principles of interpretation that apply to Acts apply equally to delegated legislation with the additional consideration that since delegated legislation derives its authority from the enabling Act it must be interpreted in light of that Act.[6]
(2) The starting point for statutory interpretation is thus the words of the provision in their statutory context, since the words used are the ones chosen by the legislator as an expression of the purpose of the legislation and are therefore the primary source by which meaning is ascribed.[7] Context means the entire statutory scheme within which the particular provision is contained.[8]
(3) Where Parliament or delegated legislation has used broad terms, these should generally be construed broadly. The governing legal maxim is generalia verba sunt generaliter intelligenda: general words are to be understood generally.[9]
(4) Statutory provisions are presumed not to be otiose or redundant[10].
(5) Words or phrases used in legislation are presumed to have the same meaning throughout the legislation.[11]
(6) There are differences of approach to statutory interpretation in EU and English law. In EU statutory interpretation the teleological or purposive methodology commands greater emphasis, while the English approach places relatively more weight on language.[12] English doctrine is more literalist and "permits a strained construction only in comparatively rare cases".[13]
My conclusions.
The principle of autonomy and its relevance.
The Claimants' contentions.
"A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary."
UniCredit's contentions.
(1) It is well established that a payment by the issuing bank under a letter of credit has the effect of discharging the applicant's debt to the extent of the payment.[18]
(2) By the same token, a payment by the confirming bank discharges the corresponding obligation of the issuing bank, the two obligations being joint and several.[19]
(3) Once a compliant demand is made on a confirming bank, that bank is obliged to forward the documents to the issuing bank: UCP , Article 15(b). This enables the issuing bank to assess for itself whether liability under the letter of credit has been triggered, and reflects the ministerial or agency role played by the confirming bank in assessing whether documents comply, a role succinctly expressed by Sir Christopher Staughton in Credit Agricole Indosuez v Muslim Commercial Bank Ltd [2000] 1 All ER (Comm) 172 at 180a.[20]
(4) This also reflects the well-established principle of strict compliance. This means not just that a demand must conform precisely to the requirements set out in the letter of credit in order for it to be valid, but also that the confirming bank is not authorised to accept a demand which does not strictly comply.[21]
(5) Although the confirming bank's obligation is independent from the obligations of the issuing bank, the terms of the former's obligation may not be amended without the consent of the latter: UCP , Article 10(a). In this way, the issuing bank has a direct interest in the terms of the arrangement between confirming bank and beneficiary.
My conclusions.
Regulation 28.
The Claimants' contentions.
"The regulations contained in this instrument that are made under section 1 of [SAMLA] are for the purposes of encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine."
"The intention is to apply pressure in order that the Government of Russia changes its behaviour, and to send a strong message that actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine will not be tolerated. Applying these restrictions to individuals involved in this destabilising activity is intended to both directly and indirectly bring about behaviour change in the Government of Russia."
"Financial services and funds relating to restricted goods and restricted technology
(1) A person must not directly or indirectly provide, to a person connected with Russia[22], financial services in pursuance of or in connection with an arrangement whose object or effect is—
(a) the export of restricted goods,
(b) the direct or indirect supply or delivery of restricted goods,
(c) directly or indirectly making restricted goods or restricted technology available to a person,
(d) the transfer of restricted technology, or
(e) the direct or indirect provision of technical assistance relating to restricted goods or restricted technology.
(2) A person must not directly or indirectly make funds available to a person connected with Russia in pursuance of or in connection with an arrangement mentioned in paragraph (1).
(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.
…
(6) Paragraphs (1) to (3) are subject to Part 7 (Exceptions and licences).
…"
(1) a person provides financial services of funds
(2) in pursuance of or in connection with
(3) an arrangement whose object or effect is the supply of restricted goods to, or for use in, Russia, or to a Russian person.
UniCredit's contentions.
"make provision enabling sanctions to be imposed where appropriate for the purposes of compliance with United Nations obligations or other international obligations or for the purposes of furthering the prevention of terrorism or for the purposes of national security or international peace and security or for the purposes of furthering foreign policy objectives".
(1) First, the words "in connection with" "are broad. They are ordinary words of the English language and have no technical or restricted meaning".[34] Indeed, it is difficult to think of a broader statutory formulation for linking A with B, as observed by David Richards J in HMRC v Barclays Bank plc [2006] EWHC 2118 (Ch) at [38], who continued: "[i]t is a question of fact whether a connection exists within the meaning of the statutory provision in question". As a matter of fact, the Letters of credit are plainly "in connection with" the underlying Leases; were it not for the Leases they would not have come into existence. Further, all bar 3 of the Letters of credit state on their face that they are "in connection with" the relevant lease; and similarly they all identify the aircraft to which they relate. These facts are not altered by the legal nature of the obligations established under the Letters of credit. Similarly, payments under the Letters of credit are in connection with arrangements, the Leases and the Letters of credit themselves, that directly or indirectly operate to make aircraft available to persons connected with Russia and/or for use in Russia.
(2) Secondly, the statutory context does not justify a reading down of the words "in connection with" to a narrow legalistic formulation based on the operation of the autonomy principle. Rather, the context of the statutory scheme as a whole, which includes the licensing provisions, supports the broad, ordinary meaning of the words "in connection with" since it allows the competent licencing authorities the opportunity to scrutinise the detail of the transaction and disapply the sanctions where appropriate. There is no indication that the legislator intended to reduce the scope of the provision; to the contrary, the use of the broad phrase "in connection with" shows that the legislator has cast the net widely, and then drawn it in by establishing the licensing regime.[35]
(3) Thirdly, a construction of Regulation 28(3) which captures only payments with a causal connection (rather than simply a connection) with the underlying arrangement would render redundant the phrase "in connection with" and leave the provision limited to financial services or funds "in pursuance of´ the arrangement. This is contrary to the presumption that legislation does not contain otiose words.
(4) Fourthly, the words of Regulation 28(3) and its statutory context do not support Constitution's argument that the Leases ceased to be relevant "arrangements" upon termination. "Arrangement" is broadly defined in Regulation 2 to include "any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable". The object or effect of the Leases and the Letters of credit was the direct or indirect supply or delivery of restricted goods[36] to a place in Russia and thereafter to make restricted goods or technology available, directly or indirectly, to a person connected with Russia or for use in Russia. That is still the case notwithstanding the termination of the Leases. The applicants under the Letters of credit, to whom the aircraft and related parts were delivered and in whose control all but two of the aircraft remain, are persons connected with Russia, being various Russian companies. The aircraft were leased for use in Russia. Five of the aircraft remain in Russia.
(5) Fifthly, the Claimants' construction relied on an overly narrow view(s) of the purpose of Regulation 28(3) and the trade sanctions within the UK Regulations. The trade sanctions are not only concerned to stop the supply of restricted goods (here, aircraft) to Russia or persons connected with Russia. UK trade sanctions also seek to exert control over restricted goods outside the UK.[37]. Regulation 28 therefore includes a prohibition relating to the "making available" of aircraft in addition to a prohibition on export and supply. Whether in this particular instance that purpose is furthered or not is, as the ECJU identifies in the Russia Guidance[38], a matter for them to consider when exercising their licensing powers.
"For some prohibitions there are some specific activities that DIT considers are likely to be consistent with the aims of the sanctions. These are set out in the table below. If you think that your proposed activity falls within one of these specific descriptions you should make this clear and explain why you believe this to be the case in your application for a licence.
You should not assume that a licence will be granted or engage in any activities prohibited by trade sanctions until your licence has been granted."
"A licence may be granted for the provision of technical assistance, brokering services, financial services or funds related to aviation and space goods and technology if the Secretary of State is satisfied that the technical assistance, brokering services, financial services or funds are necessary for the execution of obligations arising from contracts concluded before 8 March 2022, or ancillary contracts necessary for the execution of such contracts, provided that the activity is completed before 28 March 2022. This licensing ground will no longer be available for use from 28 March 2022."
My conclusions.
(1) I accept the Claimants' contention that the starting point is to identify the purpose of the regulation. Here that purpose is clear. Plainly, the intention of the legislature was to ensure that financial assistance was not provided to Russian parties in relation to, inter alia, the supply of aircraft.
(2) That regulation, as would normally be expected, operated prospectively and not retrospectively. It therefore looked to the time at which financial assistance was provided to the relevant party. Here, the issuance of a letter of credit to enable the supply of aircraft to a Russian party after the date on which the Regulation came into force would plainly come within the prohibition, as both parties accepted.
(3) That is not, however, this case. Here, the aircraft had been supplied long before the prohibition came into effect, at a time when it was perfectly lawful to make such a supply. Likewise, the provision by UniCredit of financial services to the Russian lessees was made when they issued the Letters of credit which served as a mechanism for the satisfaction of the payment obligations of the lessees; and again, at the time of the provision of the services, that provision was perfectly lawful.
(4) All that remained to be done, as at the time that the prohibition in Regulation 28 came into effect, was for the obligation undertaken long before to be fulfilled. The fulfilment of that obligation benefitted the Claimants. Although this fulfilment may also have had the collateral result of discharging the independent obligations of the lessees and Sberbank towards the Claimants, that was a wholly collateral matter. Moreover, because UniCredit remained able to claim against Sberbank, Sberbank were not benefitted; and nor were the lessees, since they remained liable to Sberbank.
(5) Finally, in this regard, I do regard the autonomy principle as of importance. The claim on the Letters of credit was a claim by the Claimants against UniCredit, pursuant to an obligation which had been undertaken by UniCredit wholly independently from any of the other elements of the transaction. Whilst a letter of credit transaction involves various interconnected strands, those strands all involve independent contractual obligations.
Regulation 11
The Claimants' contentions.
"11.—(1) A person ("P") must not deal with funds or economic resources owned, held or controlled by a designated person if P knows, or has reasonable cause to suspect, that P is dealing with such funds or economic resources. …
…(4) For the purposes of paragraph (1) a person "deals with" funds if the person—
(a)uses, alters, moves, transfers or allows access to the funds,
(b)deals with the funds in any other way that would result in any change in volume, amount, location, ownership, possession, character or destination, or
(c)makes any other change, including portfolio management, that would enable use of the funds.
(5) For the purposes of paragraph (1) a person "deals with" economic resources if the person—
(a)exchanges the economic resources for funds, goods or services, or
(b)uses the economic resources in exchange for funds, goods or services (whether by pledging them as security or otherwise).
(6) The reference in paragraph (1) to funds or economic resources that are "owned, held or controlled" by a person includes, in particular, a reference to—
(a)funds or economic resources in which the person has any legal or equitable interest, regardless of whether the interest is held jointly with any other person and regardless of whether any other person holds an interest in the funds or economic resources;
(b)any tangible property (other than real property), or bearer security, that is comprised in funds or economic resources and is in the possession of the person.
(7) For the purposes of paragraph (1) funds or economic resources are to be treated as owned, held or controlled by a designated person if they are owned, held or controlled by a person who is owned or controlled directly or indirectly (within the meaning of regulation 7) by the designated person".
UniCredit's contentions.
"58.—(1) The prohibition in regulation (asset-freeze in relation to designated persons) is not contravened by an independent person ("P") transferring to another person a legal or equitable interest in funds or economic resources where, immediately before the transfer, the interest—
(a)is held by P, and
(b)is not held jointly with the designated person."
My conclusions.
(1) First, it was common ground that UniCredit's obligations matured on 14 or 15 March 2022 (at the latest) in relation to the Celestial Letters of credit and 31 March or 1 April 2022 in relation to the Constitution Letters of credit. Sberbank was only designated under Regulation 11 on 6 April 2022. Hence, since any sanction imposed under Regulation 11 did not come into force until after the date on which the obligation to make payment under the Letters of credit matured, that sanction cannot have impacted on the relevant obligation.
(2) Secondly, I accept the Claimants' arguments that the sanction in Regulation 11 did not in any event prohibit payment under the letter of credit under which UniCredit owed obligations to the Claimants. That is essentially because UniCredit was not dealing with Sberbank's property when making payment under the Letters of credit. UniCredit was instead satisfying its own independent contractual obligations. Sberbank's property was not in any way interfered with. In this connection, UniCredit's argument was, in essence, that because UniCredit could not unilaterally vary the letter of credit obligations, but had to have Sberbank's consent to a variation, that in turn gave Sberbank a proprietary interest in the contractual obligation owed by UniCredit to the Claimants. This is, in my judgment, a non-sequitur. The correct analysis under the UCP is that any variation of the obligations by the confirming bank relieves the issuing bank of its obligations; that does not give the issuing bank a proprietary interest in the obligation owed by the confirming bank.
Regulation 13
The Claimants' contentions.
"13.—(1) A person ("P") must not make funds available to any person for the benefit of a designated person if P knows, or has reasonable cause to suspect, that P is making the funds so available. …
… (4) For the purposes of this regulation—
(a)funds are made available for the benefit of a designated person only if that person thereby obtains, or is able to obtain, a significant financial benefit, and
(b)"financial benefit" includes the discharge (or partial discharge) of a financial obligation for which the designated person is wholly or partly responsible."
UniCredit's contentions.
(1) Funds are made available for the benefit of a designated person if that person thereby obtains or is able to obtain a significant financial benefit.[47]
(2) The term "financial benefit" is defined in Regulation 13(4(b) as including "the discharge (or partial discharge) of a financial obligation for which the designated person is wholly or partly responsible".
(3) Making the payment would discharge the contingent liability which Sberbank owes to the Claimants under the Letters of credit. This would amount to a significant financial benefit for Sberbank. This is the case regardless of whether Sberbank remains liable to reimburse UniCredit for the payment. The argument that Sberbank would not obtain a significant financial benefit because there would be simply a change in the identity of its creditor ignores the terms of the definition, as well as the fact that in this situation Sberbank may realise significant benefit vis-à-vis UniCredit by way of access to capital for the period prior to discharging its liability to UniCredit.
(4) By way of analogy, if a respondent to a freezing order which prevents any dealing with a certain asset proposes to sell the asset for full value with the proceeds remaining frozen, the court would likely grant a variation to the order to permit the sale. But that is not to say that the sale would be permitted in any event.
(5) The Claimants' reliance on R (M) v HM Treasury [2008] All ER 1097 is misplaced. First, the House of Lords was concerned with the interpretation of EU legislation, not English domestic law. The exercise of statutory interpretation therefore started from a different point, namely a strictly teleological one. Secondly, in the Committee's analysis (given by Lord Bingham), social security payments to the designated person's wife, which were exclusively spent on maintaining their household, did not fall within article 2(2) of the EU legislation because the purpose of the asset freezing measures in the UN's Taliban and al-Qaida sanctions regime, as expressed in the relevant UN Security Council resolution which the EU legislation sought to implement, was to prevent listed persons having access to funds which could be used for terrorist purposes.[48] The social security payments to M would not result in funds being made available to the designated person but only benefits in kind (such as accommodation and meals).[49] Thirdly, HM Treasury's construction to the contrary required effectively changing the words "made available … for the benefit of" to "applied" or "expended for the benefit of"[50], and so was inconsistent with the plain meaning of those words. The decision cannot be applied to the present, very different, situation.
My conclusions.
(1) Again, since Regulation 13 did not come into force until 6 April 2022, it can have had no impact on UniCredit's obligations, which had matured before that date.
(2) Whilst the question in relation to Regulation 13 is not the same as in relation to Regulation 11, since one deals with dealing with funds owned or controlled by a sanctioned entity and the other deals with making funds (including financial benefits) available to a sanctioned entity, the legal issues which arise are substantially similar. Thus, I accept again that here the payment by UniCredit does not lead to the discharge, in whole or in part, of Sberbank's obligations. Whilst Sberbank's independent obligation to make payment to the Claimants may now have been satisfied, it remains under an equal obligation to reimburse UniCredit. There is no reduction in its overall liability; it is simply now obliged to one party and not two.
Section 44 of SAMLA
US law.
The timing of the US sanctions.
The Claimants' contentions.
UniCredit's contentions.
My conclusions.
(1) In my judgment, at the moment that the payment obligations accrued, there was no relevant prohibition under US law, as regards Celestial. At the moment the first obligation to make payment to Constitution matured, there was no relevant prohibition. There was, however, a potentially relevant prohibition (namely the 26 March prohibition) which might affect the later payment obligations. That would depend on whether that earlier prohibition in fact made payment in the US unlawful, and whether any such unlawfulness is relevant.
(2) Whether s.44 applies so as to mean that the payment obligations of UniCredit were somehow deferred, and, if so, whether UniCredit would be entitled to rely on changes in US law coming into effect during the period of such deferral are questions that the parties do not wish me to rule upon at this stage, preferring that such matters should be addressed as part of any consequentials hearing.
(3) Accordingly, I say nothing further on this topic at this stage.
(1) Is the question of lawfulness under US law of any relevance to this claim?
The Claimants' contentions.
"This decision demonstrates the importance of identifying the due place of payment because, as has been shown, the law of that place may have an impact the enforceability of the bank's repayment obligation. This will, however, usually be the place where the account is held. In the Libyan Arab case, New York may be described as the place of settlement but, given the analysis adopted above, illegality in that place does not detract from the validity and enforceability of the bank's obligation to repay the deposit. London was the due place of payment."
UniCredit's contentions.
(1) The currency of each of the Letters of credit is USD. This is the currency of account and the currency of payment. The majority of the Letters of credit authorise the beneficiary to draw on UniCredit "an amount or amounts not exceeding a total of US Dollars [amount]". The remainder use different wording but similarly specify USD as their currency in express terms.
(2) UniCredit's payment obligation arises – only – in the event of a demand precisely in the format set out in the relevant letter of credit. In each case and without exception, this requires the beneficiary to demand payment in USD into a specified account. The doctrine of strict compliance, which is also expressly reflected in the terms of the Letters of credit and UniCredit's confirmation of them, is such that the beneficiary has no right to demand payment (and UniCredit has no authority to pay) in any other currency.
(3) Thus payment must be made by UniCredit in USD, into the account specified in the demand. Each of the demands identified a USD beneficiary account – four in London, eight in Dublin. In addition, those demands which specified a Dublin beneficiary account also specifically identified a correspondent account in the US through which payment was required to be made.
(4) The unchallenged evidence is that payment could not be made in accordance with these demands except via a correspondent bank in the US. This is in any event well known as a matter of banking practice, and underpins the decision of Staughton J in LAFB, in which the relevant payment systems were analysed in detail.
"the withdrawal or transfer of funds from an account governed by English law can be blocked by the law of any foreign state through whose jurisdiction the funds must necessarily pass. As has already been noted above, even an offshore transfer of funds may necessitate those funds passing through the country of the currency of the transfer so that the transaction is partly performed in that country."
My conclusions.
"The plaintiffs, a Libyan bank, had a call account with the London branch of the defendants, an American bank. They also had a demand account with the defendants' New York branch. The arrangement was that the plaintiffs maintained a peg balance of U.S.$500,000 in the New York account. Each morning, in the light of the balance of the New York account at the end of the previous day's trading, funds were transferred to or from London so that the peg balance was maintained. At 2 p.m. each day the balance of the New York account was again determined and similar transfers made between the two accounts. At 2 p.m. on 7 January 1986 a sum of U.S.$165.2m. was available for transfer to London and at 2 p.m. on 8 January there was a sum of U.S.$161.4m. available. Neither sum was transferred. At 4 p.m. on 8 January 1986 the President of the United States of America signed an executive order freezing all Libyan property in the United States or in the possession or control of United States persons including overseas branches of United States persons. The plaintiffs demanded payment of U.S.$131m., the balance standing to the credit of the London account at the close of business on 8 January 1986 and a further U.S.$161m. on the basis that that sum should have been transferred from the New York to the London account on 8 January. Payment was demanded by banker's draft, in cash or by any other commercially recognised method of transferring funds. The defendants refused to pay contending that it would be impossible for them to make any payment to the plaintiffs without committing an illegal act in the United States. The plaintiffs commenced proceedings, claiming the sums in debt or damages or, alternatively, on the ground that the contract had been frustrated:-
Held, giving judgment for the plaintiffs,
(1) that the defendants would be excused from complying with the plaintiffs' demands for payment if the payment was illegal by the proper law of the contract or it involved doing an act which was unlawful in the place in which it was to be performed; that there was only one contract between the parties in respect of the New York and London branches of the defendants but the contract was governed by both English and New York law; and that, applying the general rule that the contract between a bank and its customer was governed by the law of the place where the account was kept, the rights and obligations of the parties in respect of the London account were governed by English law.
(2) That the plaintiffs had to show that they had made a demand for payment with which the defendants were obliged to comply; that, in respect of their credit balances with the London branch the plaintiffs had a personal right to demand cash or an account transfer; that, since by making a demand for payment the plaintiffs had exercised their right unilaterally to determine the management account arrangement, it was no longer a term of the contract that all transactions should pass through New York; that no such term could be implied from the usage of the international market in Eurodollars, and that, therefore, the London branch had obligations to make transfers from that account on the instructions of the plaintiffs which did not involve infringement of United States law in the United States.
(3) That, although the plaintiffs demanded a banker's draft on the defendants' London office, a draft for the sums demanded would not have been eligible in the circumstances for London dollar clearing and, therefore, the defendants were not obliged to comply with the demand for a banker's draft; but that a demand for cash was an assertion of a customer's fundamental right and delivery by the defendants of cash in London of the sums claimed would not have involved illegal action in New York, and that, therefore, since the plaintiffs had made a demand for cash, they were entitled to receive payment in dollars or, if payment in dollars was impossible, in sterling and, accordingly, the defendants were liable to the plaintiffs for breach of their obligation to provide cash on the plaintiffs' demand.
(4) That the defendants were in breach of contract in failing to transfer U.S.$165.2m. to the London account at 2 p.m. on 7 January and in not transferring U.S.$161.4m. to London at 2 p.m. on 8 January as a result of which there had been a net loss to the London account of U.S.$161.4m.; that, but for the breaches of contract that sum would have been recoverable by the plaintiffs from the London account; and that therefore, the plaintiffs were entitled to recover a further U.S.$161.4m.
(5) That the effect of the Presidential order was to suspend the defendants' contractual obligation; that the parties had not been altogether discharged from further performance of the contract; and that, accordingly, the contract had not been frustrated."
"(ix) Cash - dollar bills
Of course it is highly unlikely that anyone would want to receive a sum as large as U.S. $131m. in dollar bills, at all events unless they were engaged in laundering the proceeds of crime. Mr. Osbourne said in his report:
"As to the demand for payment in cash, I regard this simply as the assertion of a customer's inalienable right. In practice, of course, where such a large sum is demanded in this manner, fulfilment of the theoretical right is unlikely, in my experience, to be achieved. A sensible banker will seek to persuade his customer to accept payment in some more convenient form, and I have yet to encounter an incident of this nature where an acceptable compromise was not reached, even where the sum was demanded in sterling."
I would substitute "fundamental" for "inalienable"; but in all other respects that passage accords with what, in my judgment, is the law. One can compare operations in futures in the commodity markets: everybody knows that contracts will be settled by the payment of differences, and not by the delivery of copper, wheat or sugar as the case may be; but an obligation to deliver and accept the appropriate commodity, in the absence of settlement by some other means, remains the legal basis of these transactions. So in my view every obligation in monetary terms is to be fulfilled, either by the delivery of cash, or by some other operation which the creditor demands and which the debtor is either obliged to, or is content to, perform. There may be a term agreed that the customer is not entitled to demand cash; but I have rejected the argument that there was any subsisting express term, or any implied term, to that effect. Mr. Sumption argued that an obligation to pay on demand leaves very little time for performance, and that U.S. $131m. could not be expected to be obtainable in that interval. The answer is that either a somewhat longer period must be allowed to obtain so large a sum, or that Bankers Trust would be in breach because, like any other banker they choose, for their own purposes, not to have it readily available in London.
Demand was in fact made for cash in this case, and it was not complied with. It has not been argued that the delivery of such a sum in cash in London would involve any illegal action in New York. Accordingly I would hold Bankers Trust liable on that ground."
The contents of US law.
CAPTA sanctions
The Claimants' contentions.
(1) In Mr Fleming's view, the USD payments under the Letters of credit were prohibited from 26 March 2022 by virtue of the CAPTA sanctions under Directive 2 of E.O. 14024, because payment under the Lettera of Credit would be deemed to "involve" Sberbank.
(2) Mr Wall disagrees with Mr Fleming's conclusions on the CAPTA sanctions because those sanctions did not prohibit payment under the Letters of credit because such payments cannot be said to "involve" Sberbank. To read CAPTA Sanctions as prohibiting payment under the Letters of credit, it was contended, would give them the effect that only more extreme Blocking Sanctions could possibly have. The CAPTA Sanctions were intended only to sever direct links between US financial institutions and sanctioned entities, thereby cutting Russia off from the US financial system.
(3) Irrespective of OFAC's approach to the construction of the relevant US Sanctions, UniCredit could have engaged proactively with OFAC ahead of time in order to obtain the agency's consent to the payments being made.
(1) Mr Fleming's analysis (which suggests that CAPTA Sanctions prevented transactions in which Sberbank was connected in any way) effectively collapses CAPTA Sanctions into Blocking Sanctions. Mr Wall however explains that while the purpose of the CAPTA Sanctions was to cut off Sberbank's direct access to the US financial system by preventing US institutions from opening or maintaining a correspondent account with it, they were not intended to prevent transactions between non-sanctioned foreign parties.
(2) FAQs on the topic reveal that the involvement of US institutions in indirect payments (i.e. payments where a sanctioned entity is the ultimate beneficiary) were expressly envisaged and permitted so long as any direct transaction with a sanctioned entity took place between non-US third-party intermediary institutions. The position where no sanctioned entity is either the payor or beneficiary (as under the Letters of credit) must, therefore, be a fortiori.
(3) Mr Fleming relies for his contrary conclusion almost entirely on the previous OFAC enforcement case against Union de Banques Arabes et Francaises ("UBAF") although elsewhere he acknowledges that "while OFAC guidance and enforcement decisions provide useful insight into how OFAC typically interprets and applies its economic sanctions regulations, they do not establish a binding precedent for OFAC's future enforcement decisions".
(4) However, the UBAF case arose in circumstances where the bank was transacting directly with fully blocked Syrian entities and does not address the narrower set of CAPTA Sanctions. Further, the sanctioned bank in the UBAF case had operated US dollar accounts on behalf of the sanctioned entities themselves.[58] In the present case, there is no engagement with Sberbank whatsoever. For the letter of credit violations, the enforcement release notes that "a sanctioned Syrian entity was the beneficiary…or the applicant" or that UBAF issued or confirmed the letter of credit on behalf of a party who had already been sanctioned. None of these facts apply in the present case.
(5) Finally, US substantive law recognises the independence of payment obligations created under Letters of credit. The fact that the confirming bank would pay with its own funds effectively means that Sberbank is not "involved" in payment under the Constitution Letters of Credit.
UniCredit's contentions.
(1) This is a question on which OFAC's view on the application of the sanctions provisions is essentially determinative of US law. It bears emphasis that the primary focus here is on OFAC's likely position as to whether its own sanctions regulations are engaged in any particular scenario. OFAC not only enforces the sanctions, but also administers and implements them.
(2) The correct approach was set out by the United States Court of Appeals in Consarc Corporation v Iraqi Ministry Consarc Corp. v. Iraqi Ministry, 27 F.3d 695, 701-2 (D.C.Cir.1994). The US Court pays particular deference to OFAC's construction and application of its regulation, which "must prevail unless plainly inconsistent with the regulation". The Court "thus [has] warrant only to inquire whether OFAC's construction of the regulatory terms so far departed from common usage as to be plainly wrong."
(3) UniCredit's expert, Mr Fleming, explains that OFAC would view the processing of USD payments under the Letters of credit as a prohibited service provided, at least in part, for the benefit of Sberbank. He refers to OFAC's previous enforcement action against UBAF, a French bank which in 2021 entered into a USD 8.5 million settlement with OFAC, which considered UBAF to have violated blocking sanctions by, among other things, paying out as confirming bank under Letters of credit issued by sanctioned parties through USD-cleared transactions.
(4) In any event, as a matter of analysis, UniCredit submitted that it is clear that payment out under a letter of credit "involves" Sberbank or its property or interests in property.
(a) The reasons for this are not difficult to identify when the text of the sanctions regulations is considered. The terms "property" and "property interest" are very broadly defined, to include (for example) indebtedness, obligations, Letters of credit and any documents relating to any rights or obligations thereunder, accounts payable, services of any nature whatsoever, contracts of any nature whatsoever, and any present, future or contingent interests. The definitions thus include many things (not least, obligations) that might not be considered to fall within them as a matter of ordinary language.
(b) Here, payment by UniCredit to the beneficiaries would result in "dealing in" a number of Sberbank's rights and obligations falling squarely within this expansive definition of property and property interests. For example:
1. It has payment obligations which are joint and several with UniCredit's obligations under the same Letters of credit. Those obligations are independent (i.e. they are several), but the discharge of one entails the discharge of the other (i.e. they are joint).
2. Payment by UniCredit triggers a reimbursement obligation on the part of Sberbank. This point and the previous point cannot be regarded as cancelling each other out for these purposes, as the Claimants appear to suggest. That may or may not be the economic effect of the transactions, depending on the facts; but the sanctions are not concerned with economic effect but the very different question of whether there is a dealing in property or a property interest, as defined.
3. The presentation of a demand on UniCredit triggers a right on the part of Sberbank to be provided with the demand documents, reflecting UniCredit's ministerial role in the transaction as Sberbank's agent in fact, if not in law.
4. Sberbank also has a direct interest in the limb of the Letters of credit involving UniCredit as confirming bank. It has ultimate control over the terms of the arrangement between UniCredit and the beneficiaries, which may not be amended without its consent.
(c) Mr Wall seems to suggest that this is because of OFAC's tendency to adopt a broad interpretation, and holds on to the possibility that it is "by no means certain" that a US Court would agree. This is unconvincing, and does nothing to detract from the obvious conclusion that it is more likely than not that OFAC's interpretation would be upheld by the Courts:
1. It is not simply OFAC's interpretative approach which is broad, but the definitions themselves.
2. Mr Wall suggests that this is ultimately a question of law. However, OFAC has a wide discretion in the interpretation of its regulations, and even more so when it comes to their application to the facts. It is very rare that OFAC's interpretation is even challenged.
3. It is therefore clearly wrong to suggest that the Court would start with its own analysis. It may be right, so far as it goes, that the Court would not allow OFAC to 'create' a property interest where there is none. But nothing of the sort would be involved here. The question of whether there is a property interest involves applying the expansive definition to the facts. It is not difficult from the above analysis to see how this question would be answered in the affirmative.
(d) The seeds of doubt which Mr Wall seeks to sow rest on the Semetex case.[59] There, the US Court considered that the confirming bank was able to make payment to the beneficiary notwithstanding that the issuing bank was a sanctioned entity. However, the critically important fact in Semetex was that OFAC had granted a licence to allow payment. Without such a licence, the Court stated, it might have accepted the confirming bank's argument that payment was prohibited.
(e) Both Mr Wall and Constitution rely on the Centrifugal case, but without addressing the facts or the basis for the decision, which was that the applicant under a letter of credit did not have a property interest in monies received by the beneficiary based merely on a potential claim for breach of the underlying contract. It is not clear why the case is said to have any relevance here.
(5) Mr Wall's reasoning is unconvincing:
(a) He suggests that Directive 2 "simply prevents U.S. financial institutions from maintaining correspondent accounts with Sberbank" but that a transaction involving Sberbank only indirectly would be permitted. The first limb of the Directive refers to correspondent accounts, but Mr Wall has ignored the second limb, which prohibits transactions "involving" foreign sanctioned parties (or their property or interests in property) and has no carve-out for 'indirect' involvement.
(b) Mr Wall seeks to support his interpretation by referring to various general licences. Whilst none of the licences applies on these facts, they each essentially permitted transactions indirectly involving foreign sanctioned entities, as long as such entities had no direct involvement. The licences were necessary precisely because such indirect transactions would otherwise have been prohibited.
(c) Mr Wall also attempts to downplay the parallels between this case and UBAF's case on two bases, neither of which is justified:
1. First, that UBAF was a blocking sanctions case and CAPTA sanctions are different: this is a distinction without a difference. The importance of UBAF's case lies not in the nature of the sanctions but in the question of whether a payment by the confirming bank in any way "involves" the issuing bank. OFAC answered "yes" to that question in UBAF's case and would do the same here.
2. Secondly, that UBAF dealt more closely with sanctioned entities than UniCredit would do by paying out as confirming bank on the Letters of credit issued by Sberbank: this is correct so far as it goes, but does not change the fact that OFAC considered such a payment itself to be prohibited. Again, it would do the same in this case.
My conclusions.
(1) I accept that the views of OFAC are entitled to great weight. However, I also take the view that those views are subject to judicial control, at least where the issues in question involve questions of law. Put another way, whilst I accept that the US Courts will treat the views of OFAC with great deference, in the final analysis the question for those Courts, and for me, is what US law in fact provides.
(2) Here, there is no learning to which I have been referred dealing with CAPTA. Instead, the views of Mr Fleming are really based almost entirely on his interpretation of the UBAF case, a case dealing with Syrian sanctions and not CAPTA.
(3) I have heard no evidence as to principles of statutory interpretation under US law. I therefore approach the matter on the basis that the US Courts would approach such questions in a similar way to the Courts of this country.
(4) On this basis, I consider that the UBAF case is clearly distinguishable from the current case. In that case, UBAF was doing business directly with the sanctioned entities. Thus, as the report with which I was provided states:
"In total, UBAF engaged in 127 Apparent Violations. This includes UBAF's processing of 114 internal transfers on behalf of Syrian entities totalling $1,297,651,825.61 that were followed by approximately 114 corresponding funds transfers through a US bank. For 45 of the 114 internal transfers, UBAF processed a USD transfer between two of its clients – one sanctioned Syrian entity and one non-sanctioned client – on UBAF's own books. UBAF then processed one or more USD transfers on behalf of the non-sanctioned client that cleared through a US bank and whose transaction dates and amounts correlated closely to the related internal transfers reflected on UBAF's books. For the remaining 69 of 114 internal transfers, UBAF conducted a foreign exchange (FX) transaction with a sanctioned Syrian customer on UBAF's books, debiting an account in one currency and crediting the same sanctioned customer's account in another currency. UBAF then conducted a US cleared FX transaction with a non-sanctioned third party that correlated closely with the original FX transaction involving the sanctioned customer.
The remaining 13 Apparent Violations were either "back to back" letter of credit transactions or other trade finance transactions involving sanctioned Syrian parties, all of which were processed through a US bank. For the back-to-back letter of credit transactions, a sanctioned Syrian entity was the beneficiary of export Letters of credit or the applicant for import Letters of credit that did not involve USD clearing, but the intermediary entered into or received one or more corresponding USD Letters of credit to purchase or sell the same goods. For the other trade finance transactions, UBAF either issued a USD denominated letter of credit on behalf of a sanctioned party or confirmed a USD denominated letter of credit issued by a sanctioned bank and paid on the letter of credit through a US cleared transaction."
(5) Looking at this report, I would conclude that UBAF were held to be in breach of the sanctions legislation because they were clearly dealing directly with the sanctioned entities, whether the buyer, seller or intermediary bank. That is clearly to be contrasted with the current case, where UniCredit were not dealing directly with the sanctioned entity in making payment under the confirmed standby letter of credit, but were instead dealing only with a non-sanctioned entity, namely Constitution.
(1) The final arbiter as to what US law is is the US Court. Whilst it will give deference to the views of OFAC, in the final analysis the decision maker must be the Court itself, particularly in relation to issues of law.
(2) Here, the issue would be whether, as a matter of US law, the Court was satisfied that payment under the confirmed standby letter of credit would breach the terms of CAPTA.
(3) I am not satisfied that UniCredit has satisfied the burden of showing this. That burden, as a matter of law, is clearly on UniCredit.
(4) As a matter of the expert evidence, I have concluded that Mr Fleming's reliance on the UBAF case as a governing "precedent" is misplaced. I conclude that that case is clearly distinguishable.
Reasonable efforts.
EU law
Final conclusion.
Note 1 It is common ground that the payment obligations accrued before proceedings were issued, but the precise date may need to be a matter addressed at the consequentials hearing. [Back] Note 2 Mr Shah, on behalf of Constitution, largely confined his oral submissions to the issue of whether payment in USD would in fact constitute a breach of US law. . [Back] Note 3 Sir Christopher Staughton Memorial Lecture 2022, ‘Statutory Interpretation in the Courts Today’ (24 March 2022). [Back] Note 4 By way of analogy, regulation 29A of the Regulations provides that a person must not provide insurance services relating to aviation to a person connected with Russia or for use in Russia. The guidance on Russian sanctions states at p.19 that this prohibition does not apply“where the items either remain in Russia as the result of the termination of a lease and against the lessor’s will; or are being flown out of Russia in the process of returning them to their owner”. This is fully consistent with Celestial’s submission that the Regulation 28 cannot be read as having any effect once the leasing of aircraft has terminated. [Back] Note 5 Save that if UniCredit is not required to pay, Sberbank would in turn not be required to reimburse UniCredit. Therefore, UniCredit’s construction would have the wholly perverse consequence of benefiting Sberbank (a Russian designated person). [Back] Note 6 Bennion, Bailey and Norbury, Bennion on Statutory Interpretation, 8th ed.Ed. (2020), p114, s3s.3.17. [Back] Note 7 R (PRCBC) v Home Secretary [2022] 2 WLR 343, 353D-F [29] per Lord Hodge. See also Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436 at [463], [465] and [473]: “Hence, to arrive at the true meaning of any particular phrase in a statute, that particular phrase is not to be viewed, detached from its context in the statute: it is to be viewed in connexion with its whole context…” [Back] Note 8 See e.g. Rossendale BC v Hurstwood Properties (A) Ltd [2022] AC 690, 704F-G [16] per Lord Briggs and Lord Leggatt warning against “tunnel vision” in statutory interpretation. [Back] Note 9 Bennion, p1168, s.356. [Back] Note 10 Bennion, p18 at s. 1.53, referring to s. 21.2: “every word in an enactment is to be given meaning”. [Back] Note 11 Bennion, p18 at s. 1.53, referring to s. 21.3. [Back] Note 12 Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v International Military Services Limited [2019] EWHC 1994, [2019] 1 WLR 6409 at [37] [Back] Note 13 R (on the application of Certain Underwriters of Lloyd’s London), v HM Treasury [2021] 1 WLR 387, 400F , at [34]. [Back] Note 14 See, e.g., Power Curber v National Bank of Kuwait [1981] 1 WLR 1233 at 1241 per Lord Denning; Salam Air v Latam Airlines [2020] EWHC 2414 per Foxton J at [25]. [Back] Note 15 See e.g. Hong Kong and Shanghai Banking Corp v Kloeckner [1990] 2 QB 514 at 525. As explained in Jack at 1.34:“The principle [of autonomy] is fundamental to credit transactions, and it is essential to the continuance of the documentary credit system as the primary means of payment in international trade that it should be scrupulously observed”. [Back] Note 16 See further Brindle & Cox at 7-001 and 7-002. [Back] Note 17 See Salam Air [26]. [Back] Note 18 Ibrahim v Barclays Bank plc [2013] Ch 400 per Lewison LJ at [59]; Shamsher Jute Mills Ltd v Sethia (London) Ltd [1987] 1 Lloyd’s Rep 388 per Bingham J at 392. [Back] Note 19 Ellinger, Law and Practice of Documentary Letters of credit (2010) at p113. This underpins the rule that the confirming bank may claim reimbursement from the issuing bank once, and only once, the confirming bank has actually paid out under the letter of credit: Deutsche Bank AG London v CIMB Bank Berhad [2017] Bus LR 1671 [Back] Note 20 Also reflected in the US jurisprudence: see e.g. Nassar v Florida Fleet Sales, Inc., 79 F.Supp.2d 284 (S.D.N.Y. 1999) at [7]. [Back] Note 21 As Viscount Sumner held in Equitable Trust Co of New York v Dawson Partners Ltd (1926) 27 Lloyd’s Rep 49 at 52, “the accepting bank can only claim indemnity if the conditions on which it is authorised to accept are in the matter of the accompanying documents strictly observed. There is no room for documents which are almost the same, or which will do just as well. Business could not proceed securely on any other lines. The bank's branch abroad, which knows nothing officially of the details of the transaction thus financed, cannot take upon itself to decide what will do well enough and what will not. If it does as it is told, it is safe; if it declines to do anything else, it is safe; if it departs from the conditions laid down, it acts at its own risk.” [Back] Note 22 “A person connected with Russia” is defined in Regulation 21(2). In summary, it refers to an individual resident or located in Russia, or an entity incorporated or domiciled in Russia. [Back] Note 23 SAMLA Explanatory Notes paras 2, 7, 9, 12 [Back] Note 24 The relevant retained EU law is set out in Regulation 98, namely Council Regulation (EU) No 269/2014 of 17 March 2014 (concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine), Council Regulation (EU) No 692/2014 of 23 June 2014 (concerning restrictive measures in response to the illegal annexation of Crimea and Sevastopol) and Council Regulation (EU) No 833/2014 of 31 July 2014 (concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine). [Back] Note 25 Cf.R (Certain Underwriters at Lloyd’s London). [2021] 1 WLR 387 [Back] Note 26 The Report similarly acknowledges the scope for negative or counter-productive impacts of the asset freezing measures and the role of the licensing regime in mitigating these. [Back] Note 27 SAMLA s60(1)(f). [Back] Note 28 SAMLA s60(1)(e). [Back] Note 29 On 10 February 2022, Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022/123. [Back] Note 30 Regulation 80(2)(d) [Back] Note 31 Policing and Crime Act 2017, s.146 [Back] Note 34 R v Smith (Andrew) [2020] 1 WLR 4921 at [30] (in the context of s.6(1) of the Fraud Act which criminalises the possession of any article for use in the course of or in connection with any fraud). [Back] Note 35 Barclays Bank v HMRC [2007] EWCA Civ 442 per Arden LJ at [30]. [Back] Note 36 The Claimants do not contest that the aircraft fall within the Regulations’ definition of “restricted goods”, which includes “aviation and space goods” and “aviation and space technology”, as specified in Schedule 2C of the UK Regulations. [Back] Note 37 See SAMLA sched. 1. [Back] Note 38 Russia sanctions: Government Guidance (21 July 2022) s.3.3 [Back] Note 39 Regulation 28(6). [Back] Note 40 Cf. R (Certain Underwriters of Lloyd’s London)supra. [Back] Note 41 This use of the licensing regime is in contrast to the construction of EU Regulation 833/2014, as amended by EU Regulation 2022/328, which provided that the prohibitions related to aviation goods did not apply to the performance of contracts entered into before 26.02.22, until 28.03.22. [Back] Note 42 See Brindle & Cox on the Law of Bank Payments at 7-014. [Back] Note 43 Sberbank has a separate obligation to UniCredit to reimburse UniCredit in respect of UniCredit’s payment under the Letters of credit. Regulation 11 may therefore have the effect of preventing UniCredit from receiving funds from Sberbank. But that is irrelevant to whether UniCredit is required to pay Celestial. UniCredit’s payment obligation to Celestial is in no way dependent upon performance by Sberbank of its payment obligation to UniCredit. Thus, the UniCredit ( Celestial payment obligation is entirely distinct from the Sberbank ( UniCredit payment obligation. [Back] Note 44 Separately, the receipt of funds from Sberbank would require assets owned by Sberbank to be transferred, in breach of Regulation 11, and thus the amended licence application addressed this as well. [Back] Note 45 SAMLA s. 60(1)(f). [Back] Note 46 Regulation 11(6)(a). [Back] Note 47 Regulation 13(4)(a). [Back] Note 48 R (M) v HM Treasury [2008] 2 All ER 1097, 1101c-d [12]. [Back] Note 50 Ibid p1097f-g [14]. [Back] Note 51 See Banco San Juan at [57] [Back] Note 52 A similar analysis was adopted in Toprak Mahsulleri Ofisi v. Finagrain Compagnie Commercial Agricole et Financiere S.A. [1979] 2 Lloyd's Rep. 98. [Back] Note 53 See Cargill International Trading v Uttam Galva Steels [2019] EWHC 476 (Comm) at [124] per Bryan J. [Back] Note 54 See the Judge’s discussion of impossibility and unlawfulness at [78]. [Back] Note 55 See Magdeev v Tsvetkov [2020] EWHC 887 (Comm) per Cockerill J at [321]–[332]; Ryder Industries Limited v Chan Sui Woo [2016] 1 HKC 323 per Lord Collins of Mapesbury at [39] and [56]–[59]. [Back] Note 56 Sberbank is a foreign financial institution falling within the scope of Directive 2: see Annex 1. [Back] Note 57 The experts were agreed that a court will set aside an agency’s actions, findings and conclusions when they are “arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law.” [Back] Note 58 “Between August 2011 and April 2013, UBAF operated US dollar accounts on behalf of sanctioned Syrian financial institutions.”; “For 45 of the 114 internal transfers, UBAF processed a USD transfer between two of its clients – one sanctioned Syrian entity and one non-sanctioned client…”
[Back] Note 59 Semetex Corp. v UBAF American Bank, 853 F.Supp. 759, 768 (S.D.N.Y. 1994). [Back]