An asset placed abroad is rarely protected by the insurance policy alone. The lessor of an aircraft, the seller of a turnkey plant, the lessor of heavy equipment also obtain bank security: a standby letter of credit, issued by a bank in their counterparty's country and confirmed by a bank in their own financial center. The mechanism is known for its robustness. The confirming bank's undertaking is autonomous: it pays on presentation of the stipulated documents, without being able to raise disputes under the underlying contract. That autonomy is precisely what gives the security its value, and it is what a sanction from one's own side can break.
The case that showed it arose from the aircraft leased in Russia. Lessors held letters of credit issued by a Russian bank and confirmed by the London branch of a European bank, securing rent and other sums owed by Russian airlines. After March 2022, the airlines stopped paying and the lessors called on the letters of credit with the confirming bank in London. The bank did not pay, citing UK sanctions. At first instance, the High Court ruled against it: the security was autonomous, and the aircraft had been delivered well before the sanctions.
On June 11, 2024, the Court of Appeal reversed that decision on the point that matters ([2024] EWCA Civ 628, Celestial Aviation Services v UniCredit). The UK's 2019 Russia sanctions regulations prohibit providing funds or financial assistance in connection with the supply of certain goods, including aircraft, to Russia or for use in Russia. For the court, paying the letter of credit would have been a payment made in pursuance of or in connection with such an arrangement, and the text also reaches supply made lawfully before it came into force. The sanction therefore reaches back in time: an asset delivered when everything was allowed can make the payment that was its consideration prohibited after the fact.
It is worth measuring what the decision changes for anyone holding an asset abroad. Bank security was the line meant to hold when insurance and the counterparty failed, because it rested on a bank from one's own side, solvent and subject to one's own law. That very connection is what neutralized it: the confirming bank, British through its branch, was bound by the UK regime, and its obligation was suspended. The lessor did not lose its claim, but it lost what made the claim payable at once, which was the only reason it had paid for a confirmation.
The words that carry the decision are "in connection with". Sanctions regimes strike not only the transactions they name but also the payments linked to them, and that link is read broadly. An asset that falls within a category of targeted goods thus contaminates the whole financial chain around it: rent, guarantees, termination sums, and sometimes the insurance indemnity itself. For political risk insurance this is the same difficulty as in the previous lessons, seen from another side: the act that paralyzes the security is an act of the insured's home country, not of the host state, and the policy's sanctions clause suspends cover in the same terms as the text suspends the bank.
A way out exists and it is administrative. Regimes provide for licenses, general or specific, authorizing a defined payment, and the UK authority has issued some to settle certain older transactions. The practical rule is therefore that of the previous lessons, applied to a bank: apply for the license rather than wait for a court's decision, and apply at the first refusal to pay, because the claim is not extinguished but interest, costs and time keep running. A confirming bank that refuses to pay is not necessarily acting in bad faith: it may be prevented, and Celestial showed it could be right to be.
Three steps close this lesson. Before taking bank security on an asset abroad, check which sanctions regimes the confirming bank is subject to, because it is its law, not the host country's, that will decide whether it can pay. Read the list of goods those regimes target and ask whether the asset falls within it, since a payment connected with targeted goods can become prohibited even if the goods were delivered before. Finally, at the first refusal, document the date, the reason given and the license application: as with the frozen dividend in the first lesson, it is the chronology that will show, once the measure is lifted, what was owed and since when.
A French aircraft engine lessor leased two engines in 2020 to an airline from a third country, which operates them on aircraft based in Russia. The rent is secured by a 6 million dollar standby letter of credit, issued by a bank in the airline's country and confirmed by the London branch of a European bank. In 2022, the airline stops paying. The lessor presents the documents to the confirming bank, which refuses to pay, citing the UK's Russia sanctions regime. The lessor, which also has a political risk policy, argues that the bank has no grounds, since the engines were delivered two years before the sanctions.
The lessor's argument was the first-instance view in Celestial, and it is the one the Court of Appeal rejected in 2024. The engines are aviation goods targeted by the UK regime, and they are used in Russia: paying the letter of credit would be a payment in connection with their supply, and the text reaches supply made before it came into force. The confirming bank, bound by UK law through its branch, is therefore prevented, and its obligation is suspended rather than extinguished. The lessor has not lost its 6 million dollars: it has lost the right to collect them now. The political risk policy does not respond either. No act of the airline's state is involved, and the only act blocking payment is an act of the lessor's own side; the policy's sanctions clause would in any case suspend a payment connected with the same goods. The useful work therefore lies elsewhere: apply to the UK authority for a license for this specific payment, date the refusal and the application, and track the interest running. If the airline's state then banned the engines from leaving, as Russia did with the aircraft, the file would change in nature and join that of the previous lesson: that act would then cause the loss.
- 01A letter of credit's autonomy does not protect against a sanction that binds the confirming bank: its law, not the host country's, decides whether it can pay.
- 02Since Celestial (2024), a payment connected with targeted goods can be prohibited even if the goods were delivered before the sanctions.
- 03The prevented bank's obligation is suspended, not extinguished: the claim remains, what disappears is its enforceability.
- 04The license is applied for at the first refusal to pay, because interest, costs and time keep running while one waits.
- 05A payment connected with targeted goods contaminates the whole chain: rent, guarantees, termination sums, and sometimes the insurance indemnity.