The English courts are tightening their enforcement of sanctions, fundamentally altering how commercial contracts and financial instruments engage with restrictions on Russia. Four recent judgments illustrate a shift toward expansive, policy-driven interpretations of sanctions rules, prioritizing public goals over strict legal formalities. Celestial Aviation demonstrates that even obligations ordinarily regarded as absolute in their independence-such as letters of credit-may lawfully be suspended, and that commercial expectations of certainty may yield when payment would, without a licence, breach a sanctions prohibition.
Supreme Court Rules on Letters of Credit
The Supreme Court’s decision in UniCredit Bank GmbH v Celestial Aviation Services Ltd establishes a critical precedent. At stake were 12 standby letters of credit issued by UniCredit’s London branch to secure aircraft leases for Russian airlines. When sanctions were imposed in March 2022, UniCredit blocked payments under Regulation 28(3)(c) of the UK Russian Sanctions Regulations, which prohibits financial services linked to restricted goods—such as aircraft—destined for Russia. Though authorities later approved the principal sums, disputes persisted over interest and associated costs.
The court rejected a narrow interpretation of the regulation. Instead, it adopted a purposive interpretation: payments were prohibited if they maintained any factual link to the underlying prohibited arrangement, even without a direct causal connection. The leases, though legally valid when signed, became “relevant arrangements” under sanctions once Russia’s invasion rendered their performance unlawful. This ruling means banks can now suspend payments under autonomous financial instruments, such as letters of credit, if doing so would violate sanctions, regardless of how detached the obligation appears in the contract.
The court also confirmed that section 44 of SAMLA would have protected UniCredit from liability where it reasonably believed that payment was prohibited. The decision sends a clear message: commercial predictability is secondary when sanctions enforcement is concerned.
EuroChem Bonds Void Under Sanctions
In EuroChem v Société Générale, sanctions nullified financial instruments even when no party was directly designated. The case involved six English-law bonds issued to EuroChem NW2, a Russian entity indirectly controlled by Andrey Melnichenko, the sanctioned founder of EuroChem Group. When the bonds matured, the banks refused payment, arguing that honoring them would violate EU sanctions against Melnichenko and other executives.
Judge Bright ruled in favor of the banks. The court determined that EuroChem NW2 remained effectively controlled by Melnichenko despite a trust structure intended to obscure that relationship. The bonds were unenforceable because paying them would contravene EU Regulation 269, which targets designated individuals. The decision emphasized substance over form: if a restructuring or trust fails to divest genuine control, sanctions will override it. Even when performance was scheduled outside the EU, the court applied the principle from Ralli Bros v Compania Naviera Sota y Aznar, which blocks contracts requiring illegal acts under the law of the place where performance is due.
These rulings reflect a broader trend: English courts are interpreting sanctions broadly, focusing on real-world control and intent rather than legal technicalities. The next challenge will be whether this approach extends to other areas, such as arbitration clauses or the scope of designation criteria, where commercial parties have historically sought to limit sanctions’ application.
Arbitration Clauses Survive Sanctions Scrutiny
The Supreme Court’s decision in UniCredit v RusChemAlliance presents a contrasting perspective. The dispute centered not on payment obligations but on the enforcement of arbitration agreements. RusChemAlliance, a Russian entity, demanded payment under EUR 440 million in on-demand bonds governed by English law and subject to Paris-seated ICC arbitration agreements. When UniCredit refused, RusChemAlliance initiated proceedings in Russia, disregarding the arbitration clause. The Supreme Court granted an anti-suit injunction, reaffirming that English courts will uphold arbitration agreements even in politically sensitive disputes.
The court dismissed RusChemAlliance’s claim that sanctions rendered arbitration “impossible.” It ruled that sanctions-related difficulties do not meet the strict standard for establishing impossibility, only objective unworkability qualifies. Foreign laws cannot override a party’s contractual choice to arbitrate abroad. This reinforces that while sanctions may disrupt payments, they cannot void arbitration clauses.
Family Ties Not Safe From Designations
The final judgment in this series, Ismailov v Secretary of State for Foreign, Commonwealth and Development Affairs, examines the limits of designation criteria. Sarvar Ismailov, a UK resident since age 13 with no political ties to Russia, was sanctioned in 2022 as a niece of Alisher Usmanov, a designated oligarch. Ismailov challenged the designation under section 38(1) of SAMLA, arguing it was disproportionate to target him solely due to family connections.
The High Court rejected the challenge. It upheld the government’s authority to expand designation rules to include immediate family members, even nieces and nephews. The court deferred to the executive’s assessment of foreign policy needs, confirming that judicial review will not lightly interfere with sanctions decisions, especially when the connection to policy objectives is plausible, even if indirect. This decision strengthens the principle that once the government designates an individual, courts will rarely question the reasoning behind it.
The judgment also shows the role of EU Regulation 833/2014, which imposes sectoral sanctions on Russia. Though the bonds in EuroChem were governed by English law, the court treated the EU’s restrictions as directly relevant to their enforceability. This suggests that even when contracts operate outside the EU, courts may still apply sanctions if the underlying transaction involves prohibited conduct within sanctioned regimes. The no-claims provision in Article 11 of Regulation 833, which bars satisfaction of claims linked to sanctioned transactions, further illustrates how financial obligations can be voided if they indirectly support prohibited activity, regardless of where the contract was executed.
