The International Banking Group UniCredit wrongfully withheld USD68.9 million (EUR63 million) in payment guarantees from subsidiaries of lessors AerCap and Aircastle in order to avoid violating Western sanctions against Russia, according to the London-based High Court of England and Wales.
The decision, issued remotely on March 23, 2023, refers 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 Germany’s fifth-largest financial institution.
These letters of credit, in turn, verified irrevocable letters of credit given by Sberbank, Russia’s majority-owned bank (parent of Russian lessor Sberbank Leasing). English law governs the letters of credit.
In the Celestial case, the AerCap subsidiary received seven standby letters of credit that were confirmed by UniCredit. They were given in 2017 and 2020 to cover aircraft leases to two Russian airlines between 2005 and 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), both kept at Moscow Sheremetyevo.
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.
The two Russian carriers defaulted on their lease obligations following Russia’s invasion of Ukraine on February 24, 2022. Following the invasion, the European Union, the United States, and the United Kingdom placed sanctions on Russia. As a result, on March 3 and 4, 2022, Celestial canceled the leases. Four of the five aircraft were still in Russia on August 19, 2022. One was outside of Russia when the lease expired, and AerCap was able to reclaim it.
Payment requests
Celestial submitted a formal claim for USD44.5 million from UniCredit about the AirBridgeCargo letters of credit on March 2, 2022, due to the Russian cargo carrier’s failure to meet its leasing commitments. Due to Aurora’s failure to meet its obligations, Celestial issued a written demand for USD1 million on March 4. UniCredit was scheduled to pay by March 10 and March 14, 2022, according to the contract.
UniCredit told Celestial on March 7 and 11, 2022, that it would refuse to pay the amounts due under the letters of credit, stating that it was barred by EU sanctions on Russia. It later claimed that US sanctions were another reason it couldn’t pay the letters of credit in US dollars. As a result, Celestial filed legal accusations in London on March 15, that same year.
Constitution Aircraft Leasing is involved in a litigation concerning two leases with AirBridgeCargo that went into default following the Ukrainian crisis, resulting in the claimants terminating the leases on March 4 and 25, 2022. Constitution issued UniCredit payment claims totaling USD 2.6 million, USD8.1 million, and USD12.7 million, all due by April 1, 2022. UniCredit declined to pay once more, citing laws under UK and EU sanctions, and later, US penalties. UniCredit’s defense addressed issues identical to those stated in the Celestial lawsuit.
UniCredit applied for licenses to allow payment to Celestial and Constitution, assuming that payment would otherwise be illegal under the applicable sanctions. These were given by the EU and the UK, 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 pay the claimants should be contingent on Sberbank granting a licence to pay UniCredit.
UniBank paid the principal amounts due under three of Celestial’s seven letters of credit in US dollars after receiving authorisation from the UK’s Office of Financial Sanctions Implementation (OFSI), which administers financial sanctions, in October 2022. There was no interest paid. The remaining letters of credit were settled in sterling in November.
That left the payment of charges and interest, which necessitated the court resolving fundamental issues that remained unresolved. The UK and EU sanctions legislation, according to Celestial and Constitution, never barred payment, which is important to interest and charges. Equally pertinent to the US dollar claims in interest and charges was the problem of American law.
Explaining the decision
Given the UK sanctions legislation, Judge Christopher Hancock stated that reading the regulation as banning UniCredit from paying Celestial under the letters of credit would be a “bizarre consequence.” “It would not advance the policy goal of 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 commensurate windfall), with no consequences felt in Russia or by Russian citizens. Such an interpretation would be counter to the regulations’ intent.”
“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 due to Regulation 28,” the judge wrote. He explained his judgment by stating that the planes were delivered long before the embargo went into place. He emphasized that when making payments under the letters of credit, UniCredit was not dealing with Sberbank’s property. Instead, UniCredit was fulfilling its own independent contractual duties.
“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 involved in other aspects of the overall transaction. In my opinion, the answer to this issue is unequivocal: it cannot “He came to a conclusion.
