Section 44: fig leaf or shield?
In a short but important judgment (Celestial Aviation Services Limited v Unicredit Bank AG, London Branch  EWHC 1071 (Comm)), the Commercial Court has, for the first time, considered the application of Section 44 of the Sanctions and Anti-Money Laundering Act 2018 (Section 44).
The sanctions imposed on Russia as a consequence of its invasion of Ukraine has given rise to a multitude of litigation. One such case is Celestial Aviation v Unicredit, where, in the principal judgment, Celestial was granted judgment against Unicredit on the basis that there was no prohibition on Unicredit making payment under its obligation to Celestial under a letter of credit arrangement (L/C) in circumstances where Unicredit was entitled to be reimbursed by a designated person, Sberbank, under the same L/C.
In the subsequent consequentials hearing, the Judge had to consider whether Unicredit was able to rely on the defence conferred by Section 44, namely that a person is not liable to civil proceedings where he / she has done or has omitted to do an act in the reasonable belief that it is in compliance with UK sanctions.
The Judge held that:
- Unicredit did hold a subjective belief that it would be acting contrary to sanctions were it to make payment; but
- that belief was not reasonably held.
The primary basis for his decision was the autonomy principle underpinning all documentary credits. Unicredit's obligation to make payment to Celestial under the L/C was separate and independent from its entitlement to be reimbursed by Sberbank under the same L/C. Unicredit was therefore liable to Celestial for interest and costs.
This case will be of significant interest to sanctions practitioners because it indicates that the Courts are likely to take a strict approach to the question of reasonableness under Section 44 of SAMLA. It suggests that the defence is only likely to work where the Courts are satisfied that there is a real and substantial objective doubt as to the legality of an act or omission under the relevant sanctions regime.
We anticipate a line of further cases on this issue before a settled position finally emerges.