In a unanimous decision, the Supreme Court confirmed in UniCredit Bank GmbH v Constitution Aircraft Leasing (Ireland) 3 Ltd and Anor [2026] UKSC 10 that sanctions regulations prohibited payment under standby letters of credit absent a licence, and that the bank was protected from liability until a licence was obtained. For policyholders, the decision could mean that sanctions regulations block insurers from making payments under their policies, and that remedies usually available to insureds will be unavailable as long as the insurer reasonably believes that non-payment is required to comply with the sanctions regulation.

Background

This appeal is part of the sprawling aviation litigation that has arisen out of the Russian invasion of Ukraine. Irish aircraft lessors (the Lessors) had leased aircraft to Russian airlines Aurora and Airbridge. The leases were secured by 12 standby letters of credit (SBLCs) issued by the Russian bank Sberbank and confirmed by the German bank UniCredit (the Bank).

On 24 February 2022, Russia invaded Ukraine. In response, the UK updated its sanctions regime to prohibit the provision of financial services “in pursuance of or in connection with … making [aircraft] available to a person connected with Russia, or for use in Russia…”.

As a result of the conflict, the Russian airlines defaulted on their obligations under the aircraft leases. The Lessors demanded payment from Sberbank and the Bank under the SBLCs. UniCredit declined to make the payments, claiming it was prohibited from doing so by regulation 28(3)(c) of the Russia (Sanctions) (EU Exit) Regulations 2019, as amended (the Regulation). UniCredit ultimately made the payments under the SBLCs, having applied for and obtained licences to do so.

The Lessors argued that on its true interpretation, the Regulation had never prohibited UniCredit from making the payments. They claimed, therefore, interest on the principal sum, which was over $69m, and their costs of pursuing the claim.

Issues and decision

The two issues before the court were as follows:

• in respect of the Lessors’ appeal, on a true interpretation of the Regulation, was the Bank prohibited from making payments under the SBLCs until it received licences to do so?
• under section 44 of the Sanctions and Money Laundering Act 2018 (SAMLA), was the Bank protected against an action to recover the debt, an award of interest on the amount of the debt and an award of associated costs while it held the reasonable belief that the omission to pay was in compliance with the Regulation?

The Supreme Court, Lord Stephens delivering the judgment, unanimously dismissed the Lessors’ appeal and allowed the Bank’s cross appeal.

In doing so, the Supreme Court:

• upheld the Court of Appeal’s expansive reading of the words “in connection with” in the Regulation, holding that it did not imply a legal test of causal connection between the provision of financial services and the prohibited supply,
• rejected the Lessors’ submission that aircraft leases were not relevant “arrangements” under the Regulation because there was no prohibition on making aircraft available at the time the leases had been entered into and the aircraft had been made available, and
• held that Section 44 of SAMLA provides a defence to any claim attempting to recover debt, interest or costs while (and in relation to the period that) the prohibition on payment remains in effect. In doing so, it overruled the Court of Appeal, which differentiated between new liabilities and pre-existing liabilities.

The Supreme Court also left untouched:

• the Court of Appeal’s finding that interest could not be resisted for the period after the licence was issued in reliance on US sanctions, because the Bank had failed to demonstrate that it had made reasonable efforts to obtain a licence from the US authorities, and
• the High Court’s finding on the facts that the Bank had the subjective belief that it was prohibited from making payments under the SBLCs under the Regulation.

Who is affected, and how?

The effects of this decision will reverberate beyond letters of credit, affecting:

• insureds whose claims may engage sanctions regimes, such as those with political risk, trade credit, aviation and marine, and cyber insurance policies (for example, where a cyberattack is followed by a demand for a ransom payment to a sanctioned jurisdiction), and
• reinsurance cedents, who may be required to pay under local policies but are blocked from recovering in turn under UK reinsurance contracts. Depending on the nature and size of an insurance event, this liability could be substantial.

The decision confirms that an insurer could be blocked from making a payment by a sanctions regime, even if at the time the insurance was taken out, the risk being insured and the act of taking out insurance were legal. Policyholders should note the Supreme Court’s characterisation of the Regulation as “casting a wide net” and willingness to give effect to it.

It also means that for as long as an insurer holds a reasonable belief that an omission to pay complies with the relevant regulation, the insurer will have a legal defence to a claim for debt, interest and/or costs. For interest and costs, the defence will apply for the period during which the belief was held.

Takeaways

A first essential step for (re)insureds is to identify insurance policies that potentially engage a sanctions regime. In this respect, it is no longer adequate to assume that an insurance policy will pay out as expected simply because an insured acted in compliance with relevant sanctions regimes when the insurance policy was taken out.

Insureds such as group companies with operations in multiple jurisdictions should be vigilant to ensure that all potentially applicable sanctions regimes are considered. This is because even if a payment is permitted under the UK sanctions regime, it could ultimately be blocked if making the payment would be prohibited under a different applicable sanctions regime. In such cases, the policyholder should ensure that its insurer has made reasonable efforts to avoid the effect of foreign sanctions, such as by obtaining a licence.

If an insured needs to make a claim that engages a sanctions regime, it should be aware of differences in the claims process. An insurer is permitted, under Section 44 of SAMLA, to withhold payments as long as it has a reasonable belief that the relevant sanction is engaged. In this case, the High Court commented that a simple statement by a witness from the Bank that they held this belief would have been sufficient.

Whether an insurer’s belief that a payment would be prohibited by a relevant sanctions regulation is “reasonable” is an objective question. In this case, the Court of Appeal found without hesitation that the Bank’s subjective belief was reasonable. While a belief will always be reasonable if it is correct, it can be reasonable even if it turns out to be wrong. The Court of Appeal said that the belief would have been found to be reasonable in any event because the literal words of the Regulation appear to catch payments under the SBLCs.

Claim management

Policyholders and their brokers should be aware that the cost of enforcing a claim could increase substantially. To avoid payment, it will be sufficient for an insurer to present an arguable case that a payment would be prohibited by a relevant sanctions regime. Policyholders may therefore be forced to take the additional step of resolving the sanctions position via proceedings before payment can be unlocked.

As this was not an insurance claim, the courts did not consider whether a claim under section 13A of the Insurance Act for failing to pay a claim within a reasonable time can be made in respect of non-payment or delayed payment due to sanctions. However, it is likely it cannot, because section 13A(3)(c) expressly lists compliance with regulatory rules as a factor in deciding what is a “reasonable time”.

The decision does provide some relief for policyholders pursuing claims that may be prohibited from payment by sanctions regimes. Where an insurer relies on a foreign sanctions regime to withhold a claim payment, the Court of Appeal confirmed that the insurer will not be able to avoid payment if they could have done something to avoid illegality in the place of performance. For example, in this case, the bank was required to prove that they had made reasonable efforts to obtain a licence from the US sanctions authority. Policyholders should therefore not merely accept a defence of foreign sanctions but ensure that insurers make reasonable efforts to obtain a licence from the sanctioning authority.

For our review of the High Court decision in this case, please see the Stewarts’ Policyholder Review 2024/25.