The International Banking Group UniCredit wrongfully withheld USD68.9 million (EUR63 million) in payment guarantees from subsidiaries of lessors AerCap and Aircastle for fear of violating Western sanctions against Russia, according to the London-based High Court of England and Wales.
The decision, delivered remotely on March 23, 2023, pertains to two cases heard concurrently. In both cases, the claimants – AerCap subsidiary Celestial Aviation Services (CATIL) and Aircastle subsidiary Constitution Aircraft Leasing – were attempting to obtain payment under standby letters of credit confirmed by the London branch of UniCredit – an international banking group headquartered in Milan that merged with HypoVereinsbank (HVB) in 2005 to become the fifth-largest of Germany’s financial institutions.
These letters of credit, in turn, verified irrevocable letters of credit issued by Russian majority-state-owned bank Sberbank (parent of Russian lessor Sberbank Leasing). The letters of credit are controlled by English law.
In the Celestial case, the AerCap subsidiary was the recipient of seven standby letters of credit confirmed by UniCredit. They were given between 2017 and 2020 to cover aircraft leases to two Russian airlines from 2005 to 2014. According to ch-aviation fleets advanced data, these comprised two B747-400ERFs leased to AirBridgeCargo (RU, Ulyanovsk Vostochny): VP-BIG (msn 35420) and VP-BIK (msn 35421). Aurora (HZ, Yuzhno-Sakhalinsk) leased two A319-100s, RA-73678 (msn 2222) and RA-73673 (msn 3838), while VP-BWL (msn 2243) was kept in Roswell in the United States.
During Russia’s invasion of Ukraine on February 24, 2022, the two Russian carriers defaulted on their lease obligations. Following the invasion, the European Union, the United States, and the United Kingdom levied sanctions against Russia. As a result, Celestial canceled the leases on March 3 and 4, 2022. Four of the five aircraft remained in Russia as of August 19, 2022. One was outside of Russia at the time of the lease end, and AerCap was able to recover it.
Payment demands
Due to the Russian cargo carrier’s failure to meet its lease commitments, Celestial submitted a written demand for USD44.5 million from UniCredit on March 2, 2022. Celestial followed up on March 4 with a written demand for USD1 million due to Aurora’s failure to meet its obligations. According to the contract, UniCredit was scheduled to pay by March 10 and March 14, 2022, respectively.
UniCredit informed Celestial on March 7 and 11, 2022, that it would be unable to pay the amounts due under the letters of credit due to EU sanctions against Russia. It later claimed that US sanctions were another reason it couldn’t pay US currency quantities under the letters of credit. As a result, Celestial filed legal accusations in London on March 15, that year.
The case concerning Constitution Aircraft Leasing involves two leases with AirBridgeCargo in 2008 and 2014, which defaulted following the war in Ukraine, resulting in the claimants terminating the leases on March 4 and 25, 2022. Constitution submitted requests for payment from UniCredit totaling USD 2.6 million, USD8.1 million, and USD12.7 million, all due on April 1, 2022. UniCredit once again refused to pay, citing laws under UK and EU sanctions, and later, US penalties. UniCredit’s defense presented issues identical to those raised in the Celestial case.
UniCredit applied for licenses to allow payment to Celestial and Constitution, assuming that payment would otherwise be barred by the relevant sanctions. The EU and UK granted these, but the US license was still pending at the time of the court judgement. The claimants stated that the licence applications were deceptive because they implied that issuing a licence to make payment to the claims should be contingent on Sberbank giving a licence to UniCredit.
UniBank paid the principal amounts due under three of the seven letters of credit to Celestial in US dollars after receiving authorisation from the UK’s Office of Financial Sanctions Implementation (OFSI), which administers financial sanctions, in October 2022. No interest was paid. The outstanding letters of credit were settled in sterling in November.
That left the payment of costs and interest, which needed the court to address underlying issues that remained in dispute. Celestial and Constitution contended that payment was never forbidden under UK and EU sanctions rules, which is important to interest and fees. Furthermore, the problem of US law was pertinent to the US currency claims in interest and charges.
Explanation of the decision
Given the UK sanctions legislation, Judge Christopher Hancock stated that it would be a “bizarre consequence” for the regulation to be interpreted as forbidding UniCredit from paying Celestial under the letters of credit. “It would not further the policy goal underpinning Regulation 28, which is to limit Russia’s access to aircraft and other restricted goods. It would simply serve to punish Celestial (while providing UniCredit with a bonanza), with no consequences felt in Russia or by Russian citizens. Such an interpretation would be counter to the regulations’ aim.”
“I have come to the unambiguous conclusion that UniCredit was not relieved of the responsibility to make payment to the claimants under the various letters of credit by reason of Regulation 28,” the judge added. He explained his decision by stating that the aircraft had been given long before the embargo went into effect. He stated that when making payments under the letters of credit, UniCredit was not dealing with Sberbank’s property. UniCredit was instead fulfilling its own independent contractual commitments.
“I also agree with the claimants that it is necessary to take a step back in this regard and consider whether the fulfillment of an independent obligation owed by a German bank to Irish companies can be said to be intended to benefit Russian entities that happen to be involved in other aspects of the overall transaction. In my opinion, the answer is unequivocal: it cannot “He came to an end.
