Sanctions and contractual performance: section 44 of the Sanctions and Anti-Money Laundering Act

What happens if you have a contractual obligation, but think that performing it will put you in breach of sanctions? In the UK, section 44 of the Sanctions and Anti-Money Laundering Act 2018 (SAMLA) provides protection from civil liability for acts done in the reasonable belief that they are in compliance with UK sanctions.

Section 44 is inspired by protections found in EU legislation – applicable in the UK prior to Brexit. It is broadly drafted, and until now its application had not been considered by the English courts.

In a May 2023 judgment, the English High Court considered a party's defence to claims for payment of interest on the basis of section 44. Although the High Court did not take the opportunity to explore the proper interpretation of section 44, the judgment is useful in indicating how a court may consider a section 44 "defence". In particular, it emphasises the two requirements for reliance on section 44 – that a party believed its act or omission was in compliance with sanctions, and, crucially, that this belief was reasonable.

Summary

In March 2023, the High Court provided some clarity on the application of Russian sanctions to payment obligations under letters of credit. In its May judgment, it considered the section 44 defence.

The case relates to two Russian companies which entered into agreements in 2017 and 2020 to lease aircraft from an Irish aircraft leasing company (the Lessor). Those agreements were supported by letters of credit issued by Sberbank, a Russian bank, and confirmed by the London branch of a German bank (the Confirming Bank). In March 2022, the Confirming Bank refused the Lessor's demands for payment under the letters of credit on the basis that it was prevented from doing so by Russian sanctions.

The High Court ultimately rejected the Confirming Bank's arguments on various grounds (our briefing on the preliminary decision is available here) and has now handed down its judgment on consequential matters, including the ability of the Confirming Bank to rely on the defence in section 44 of SAMLA.

Reasonable Belief

Section 44 of SAMLA provides a defence from liability in civil proceedings in circumstances where a person acts in the reasonable belief that it is complying with sanctions. The Confirming Bank had paid the principal amounts under the letters of credit, so this argument was deployed in relation to its liability for interest.

The Confirming Bank argued that it was not liable to pay the Lessor interest in respect of its nine-month delay in meeting the demands for payment under the letters of credit on the basis that it reasonably believed it was prohibited from making payment in March 2022 as a result of Russian sanctions.

With regards to the application of section 44 of SAMLA, the Court had to decide:

• whether the Confirming Bank believed at the time the demands were made that it was prohibited from making payment as a result of Russian sanctions – a subjective question; and
• if so, whether that belief was reasonable – an objective question.

The Court concluded that: 

• the Confirming Bank had established (albeit not clearly) that it held the requisite subjective belief that its refusal to pay the Lessor was in compliance with Russian sanctions; but
• the Confirming Bank's belief was not a reasonable one and it was therefore prevented from relying on the section 44 defence.

In reaching this decision, the Court attached particular weight to the Lessor's argument that the Confirming Bank's obligation to pay the Lessor was (i) a wholly independent obligation owed to the Lessor, (ii) not conditional upon receipt of funds from Sberbank, and (iii) unaffected by Russian sanctions. The Lessor had submitted that as an international bank, the Confirming Bank must have been familiar with the principle of the autonomy of a letter of credit – a tenet of international trade law. The English courts have consistently upheld this principle, limiting the bases on which Confirming Banks can avoid paying on validly issued letters of credit.

In light of this decision, the scope of section 44 of SAMLA is still largely untested. It remains to be seen how the courts will apply it where both the subjective and objective elements are established. However the judgment does illustrate the need for parties who may wish to defend civil claims on the basis of section 44 to make contemporaneous records of their belief that a failure to perform was done in compliance with sanctions. They may have to justify that belief – and its reasonableness – to a court or tribunal.

Authors: Tom Cummins, Partner; Sophie Law, Senior Associate; Catherine Lillycrop, Associate