3 | Financial Sanctions: When (not) to pay

Financial sanctions retain a significant role in international foreign and security policy – with the UK and EU expanding their sanctions regimes in 2025 in response to the ongoing Russia-Ukraine conflict.

We continue to advise clients on disputes regarding payment obligations under financial instruments affected by financial sanctions. Whilst the underlying principle in Ralli Brothers[1] – that a party may be relieved from a contractual obligation where its performance becomes illegal in the relevant jurisdiction – has been established for over 100 years, the extent to which it applies in each given case is frequently far from clear-cut. Often involving international counterparties, these disputes are highly fact-sensitive, frequently engage issues of foreign law and are further complicated by the different sanctions regimes across the UK, US and EU.

In December, the Supreme Court heard the cross-appeals from the Court of Appeal’s decision in Celestial Aviation Services Limited v Unicredit Bank GmbH.[2] The primary question for the Supreme Court is whether the Court of Appeal was right to find that letters of credit provided as security for pre-March 2022 aircraft leases were “obviously” “in connection with” arrangements whose object or effect was the supply or making available of aircraft to Russian persons or for use in Russia, such that payment without a licence was prohibited under Article 28 of the Russia (Sanctions) (EU Exit) Regulations 2019. The Supreme Court will also consider whether parties can avail themselves of the protection provided under section 44 of the Sanctions and Anti-Money Laundering Act 2018 in relation to discretionary interest and legal costs flowing from a party’s decision not to pay as a result of a genuine and reasonable belief that such payment was prohibited by sanctions.

Disputes continue to arise regarding the legal “place of performance” of payment obligations – particularly in the context of cross-border finance arrangements, which frequently involve steps in different jurisdictions. Courts continue to grapple with the related question of which steps constitute “performance” of a contractual obligation (falling within the Ralli Brothers exception) and which amount only to “preparatory steps” – with judgments at times difficult to reconcile.

Whilst not a sanctions case, in Litasco SA v Banque El Amana SA[3], the court held that the place of performance for payment under a standby letter of credit was the place of receipt by the beneficiary (in this case, its bank account in Switzerland), with any steps taken to effect the payment in Mauritania only constituting preparatory steps.

Conversely, in LLC Eurochem North-West-2 v Societe Generale SA[4], the court determined that the place for performance under on-demand bonds was the place in which the demands for payment were served (in this case, Italy or France), not the location of the receiving account in Russia. In a robust judgment, the court went on to state that:

• even if legal performance was in Russia, the making of and response to the demand for payment to both constituted an “element of performance” to engage the Ralli Brothers exception or
• even if these actions fell outside the scope of Ralli Brothers, the court would have found in favour of the paying bank under public policy grounds given (i) the seriousness of the purpose of financial sanctions, (ii) the care and strictness with which they are enforced by relevant national authorities, (iii) the severity of punishments for breach, and (iv) the alignment with UK public policy.

Recent decisions in Celestial Aviation[5] and Beneathco[6] suggest that Ralli Brothers may also be engaged where a transfer would require the involvement of a third-party that is prevented from processing the payment under an applicable sanctions regime – for example, where USD-denominated transactions require the involvement of a US correspondent bank. However, the courts have carefully considered the nature and limits of the relevant contractual obligation when determining this question in each case.

Recent cases have underscored the importance of counterparties making prompt and appropriate applications to sanctions authorities for permission to process payments under financial instruments affected by sanctions. The courts have also demonstrated a willingness to scrutinise applications where permission has been refused by sanctions authorities, and deny relief if it considers them to be deficient.