Do UK sanctions excuse a confirming bank from making payment? The final instalment

On 25 March 2026, the UK Supreme Court handed down its judgment in the final instalment of the Celestial Aviation dispute concerning the impact of sanctions on obligations under letters of credit. The Supreme Court upheld the Court of Appeal's finding that the UK's Russia sanctions regime prohibited a confirming bank from paying out under letters of credit, but overturned the Court of Appeal's conclusion on the scope of the statutory protection available under section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA).

The facts

Before Russia's invasion of Ukraine, several Irish aircraft leasing companies (the Lessors) entered into agreements to lease multiple aircraft to two Russian airline companies (the Lessees). The agreements were supported by irrevocable standby letters of credit (the LCs) issued by Sberbank and confirmed by the London branch of a German bank (the Confirming Bank).

Following Russia's invasion of Ukraine in February 2022, the Lessees defaulted on their obligations under the leases. The Lessors terminated the leases in March 2022 and made compliant demands on the Confirming Bank for payment under the LCs. The Confirming Bank refused to pay, asserting that it was prohibited from doing so by regulation 28(3)(c) (Regulation 28(3)(c)) of the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia Regulations).

From 1 March 2022, Regulation 28(3)(c) prohibited the direct or indirect provision of financial services or funds "in pursuance of or in connection with an arrangement whose object or effect is… directly or indirectly making restricted goods … available to a person connected with Russia, or for use in Russia". From that date, 'restricted goods' included aircraft.

The Confirming Bank applied for and obtained licences from the UK’s financial and trade sanctions authorities¹  to make the payments. The principal amounts under the LCs were then paid, but the Lessors contended that the Russia Regulations had never prohibited the Confirming Bank from paying. The remaining matters in dispute were interest on the principal amounts and the costs of the proceedings.

The previous court decisions

At first instance, the High Court found in favour of the Lessors, concluding that Regulation 28(3)(c) did not prohibit the Confirming Bank from making payments under the LCs - read our briefing. In a separate decision on section 44 of SAMLA, the High Court found that the Confirming Bank's belief that Regulation 28(3)(c) applied was not reasonable, so the statutory protection was not engaged - read our briefing.

The Court of Appeal overturned the High Court's decision on Regulation 28(3)(c), finding that Regulation 28(3)(c) did prohibit the Confirming Bank from making payments under the LCs. On section 44 of SAMLA, the Court of Appeal overturned the High Court's finding on the reasonableness of the Confirming Bank's belief, but held that the statutory protection did not extend to debt claims, interest or associated costs. Read our briefing.

The Supreme Court judgment

The Supreme Court was asked to determine two issues.

Issue 1: Was payment under the LCs prohibited by Regulation 28(3)(c)?

The Supreme Court upheld the Court of Appeal's conclusion that the Confirming Bank was prohibited under Regulation 28(3)(c) from making payments under the LCs until licences to do so were obtained.

• The Supreme Court found that there did not need to be a causal connection between the provision of funds and the prohibited supply of aircraft. Regulation 28(3)(c) requires a connection between the provision of funds and the "arrangement" not the prohibited supply itself. Further, the words "in connection with" required only a factual connection, not a causative link. This interpretation cast a wide net, but this served the purpose of Regulation 28(3)(c) and was mitigated by the existence of a licensing system which could deal with any unintended consequences (as occurred in this case, where licences were granted). This conclusion meant that the fact that payment under the LCs would have benefited the Lessors, but not the Russian airlines, was irrelevant.
• The Supreme Court rejected an argument that the aircraft leases were not "arrangements" within the meaning of Regulation 28(3)(c) because there was no prohibition in respect of making aircraft available when the leases were entered into and the aircraft were supplied. There was no support in the wording of the regulation for the proposition that arrangements which were not prohibited when made or performed fell outside its scope.
• The Supreme Court also rejected an argument that the aircraft leases ceased to be relevant arrangements once they had been terminated. The Supreme Court held that the "object" of the aircraft leases was objectively determined when they were made and was not altered by their subsequent termination. The Supreme Court stated that accepting this argument would lead to the absurdity that the regulation could be circumvented by drafting leases so that payment followed on after termination.

Issue 2: Does section 44 SAMLA protect against a debt claim, interest and costs?

Although the resolution of Issue 1 made it unnecessary to resolve the section 44 issue, the Supreme Court considered it appropriate to do so given the significance of the point to other cases. It dealt with the point briefly.

Section 44 of SAMLA applies to "an act done in the reasonable belief that the act is in compliance with" UK sanctions regulations. Section 44(2) provides that "[a] person is not liable to any civil proceedings to which that person would, in the absence of [section 44], have been liable in respect of the act". Section 44(3) provides that in section 44 "act" includes an omission.

The Supreme Court held that the purpose of section 44 is to provide protection for a person who acts or omits to act in the reasonable belief that the act or omission is in compliance with a sanctions regulation. Such protection furthers the public purpose of the sanctions regime. Section 44 does not act as a bar to civil proceedings, rather it provides a defence if civil proceedings are brought. Civil proceedings to recover a debt are only brought if the person fails to pay the debt. As the Confirming Bank's liability was "in respect of" its omission to pay upon receipt of a compliant demand under the LCs, the Supreme Court held that this fell squarely within the language of section 44(2). A failure to pay a claim for interest or costs was also an omission "in respect of" the debtor's failure to pay the debt.

The Supreme Court therefore held that section 44 would have provided the Confirming Bank with protection against an action to recover a debt, interest, and associated costs as long as the Confirming Bank's belief its omission to pay was in compliance with Regulation 28(3)(c) was reasonable.

(It was not in dispute that if the Confirming Bank succeeded on Issue 1, then its payment obligation under the LCs was suspended until the licences were granted and, therefore, that statutory interest should also not accrue for that period. For the same reason, it was common ground that statutory interest did accrue between the grant of the licence and when payment of the principal amounts were made by the Confirming Bank.)

Impact of the decision

The Supreme Court's judgment provides clarity on two important points.

• On the scope of Regulation 28(3)(c), the judgment confirms that the prohibition is deliberately broad. The phrase "in connection with" requires only a factual connection between the provision of funds and the relevant arrangement — no causal link is needed. This decision will be primarily relevant to arrangements involving letters of credit where the underlying supply concerns 'restricted goods' under the Russia Regulations, regardless of whether the goods were exported to Russia before the imposition of sanctions.
• However, the decision on this point is likely to have a wider impact. First, Regulation 28(3)(c) concerns the provision of all "financial services or funds", not just letters of credit. These concepts are wide in scope: "financial services" includes insurance and a wide range of banking and other financial services, and "funds" includes financial assets and benefits of every kind. Second, the prohibition in Regulation 28(3)(c) is replicated elsewhere in the Russia Regulations (and many other sanctions regulations) in respect of other categories of sanctioned goods and technology.
• On section 44 of SAMLA, the Supreme Court's reversal of the Court of Appeal is significant. Parties who reasonably believe they are prohibited from making payment by a sanctions regulation can now rely on section 44 as a defence not only to consequential loss claims, but also to the underlying debt claim itself, as well as any associated interest and costs. This is likely to provide considerable comfort to institutions navigating the difficult position of being caught between their contractual obligations and the restrictions imposed by sanctions.
• However, section 44 of SAMLA will not offer protection in every case - it will be critical for the party seeking to rely on it to show that its belief is reasonable. Whether this is the case will be fact-specific (and indeed, the High Court and Court of Appeal in this case disagreed on the reasonableness of the Confirming Bank's belief). Although the Supreme Court did not need to express a view, this issue has been considered in other cases. For example, in Chanana the High Court found it was arguable that a belief was reasonable because there were "at least some grounds [for the belief] which were not unreasonable"² .