Impact of Sanctions on Commercial Contracts in International Trade

THE IMPACT OF SANCTIONS ON COMMERCIAL CONTRACTS Rupert D Cruz KC Littleton Chambers rdc@littletonchambers.co.uk

Celestial Aviation v Unicredit [2023] EWHC 663 Facts Celestial (C) leased 7 aircraft to 2 Russian companies. Sberbank (S) issued irrevocable Letters of Credit (LOCs) behalf of Lessees. UniCredit (U) issued confirming LoCs in favour of C. War in Ukraine = Event of Default. S designated. C terminated aircraft leases - demanded payment under U s LoCs. Lessees continued to use aircraft without C s permission.

Us defence Prohibited from paying by Reg 28(3)(b) of UK Russia Sanctions Regs. A person must not directly or indirectly provide .. funds in pursuance of or in connection with an arrangement whose object or effect is the direct or indirect supply or delivery of restricted goods (including aircraft). LoCs issued in connection withleases. Payment = provision of funds that directly or indirectly has the effect of making aircraft available for use in Russia.

Decision (1) Purpose of Reg 28: ensure financial assistance not provided to Russian parties re supply of aircraft. Operated prospectively - not retrospectively. Issuing LoC to enable supply of aircraft to Russia after Reg 28 in force prohibited. U issued LoC of financial before Reg 28 in force lawful. Involved payment by non-sanctioned German Bank (U) to non-sanctioned Irish Co (C) afteraircraft supplied + leases terminated. Did not directly or indirectly result in supplying aircraft to Russia.

Decision (2) Payment by U under LoC entitled Uto claim against S - S would not benefit. Lessees would not benefit - remained liable to S. Payment under LoCs = obligation independent of primary LoC + leases. So, payment under the LoC did not undermine the purpose of Reg 28. Broad lesson: Permissible to satisfy LoC/Guarantee demand issued to non-sanctioned person on behalf of sanctioned person or re sanctioned purpose if LoC/Guarantee issued before debtor or purpose sanctioned.

S.44 SAMLA C claimed interest for delay in payment under LoC. U sdefence under s.44of SAMLA: (1) This section applies to an act done in the reasonable belief that the act is in compliance with regulations under section 1, (2) A person is not liable to any civil proceedings to which that person would, in the absence of this section, have been liable in respect of the act. (3) In this section act includes an omission. Rejected: No reasonable grounds to believe payment under LoC prohibited by Reg 28.

Mur Shipping v RTI Ltd [2022] EWCA Civ 1406 o Charterparty between MS (Dutch owner) + RTI (Jersey charterer) - subsidiary of Rusal. o Periodic carriage of goods + continuous flow of vessels provided by MS o RTI was required to pay for hire in USD. o Force Majeure clause identified as FM Event: restrictions on monetary transfers that could not be overcome by the reasonable endeavours of the Party Affected.

o US Treasury Office imposed asset freeze on Rusal. o MS sent FM Notice asserting this prevented USD payments - suspended performance. o MS Bank able to convert Euros into USD + RTI offered Euros + conversion costs. o CoA found: Obligation to exercise reasonable endeavours required accepting Euros, even though contract required USD. Purpose of payment cl. - provide MS USDs RTI s proposal achieved that.

EU Answers to Frequently Asked Questions on Asset Freezes: 15 May 2023 Paragraph 15 Shares qualify as funds and therefore must be frozen if belonging to, owned, held or controlled by a listed person. Accordingly, this means that it is prohibited for the listed person to exercise any voting rights which could lead to any change in relation to these shares (e.g. in their volume, amount, location, ownership, possession, character, destination etc.). Either way, since they can be used to obtain funds, goods or services, voting rights as such can be considered an intangible economic resource. This means they should be frozen, i.e. prevented from being used to obtain funds, goods or services in any way. Therefore under no circumstance nor for any purpose may listed shareholders exercise directly or indirectly their voting rights in a company or fund. Voting rights must be fully frozen.

Palladyne International Asset Management B.V. v Upper Brook (A) Ltd CICA Appeal No.5 of 2019 Sanctions Order froze assets of Libyan state. Libyan Investment Authority (LIA) held shares in 3 CI funds. Passed resolutions removing /appointing directors + changing Co. name. Was the exercise of voting rights to pass resolutions a dealing in the shares or the underlying assets of the funds in breach of the Sanctions Order?

No resolutions did not affect value or character of the shares as financial assets or value of underlying assets of the 3 CI funds.