Written by Bibek Mukherjee of Essex Court Chambers.
Applicants seeking an interim injunction, such as worldwide freezing orders (“WFOs”), are conventionally required, as part of the ‘price’ of obtaining such orders, to furnish a cross-undertaking in damages to the Court. If the Court later finds that the order has caused loss to the respondent to the injunction or to any other third parties, and the Court decides that such parties should be compensated for that loss, the applicant undertakes to comply with any order the Court might make, such as being required to compensate those parties for losses caused by the injunction.
These losses may often be substantial: see e.g. SCF Tankers Ltd v Privalov & ors [2018] 1 WLR 5623, where the Court of Appeal upheld an order that the appellants pay in excess of US$70m in damages on cross-undertakings they had given in respect of a WFO obtained against the respondents.
Although the cross-undertaking itself is normally not subject to a financial limit, if an applicant for an interim injunction is not able to show evidence of sufficient assets within the jurisdiction to provide substance to the undertakings given, it may be required to reinforce (‘fortify’) its undertakings by providing security[1]. Usually, the level of fortification is fixed by reference to a reasonable estimate of what losses might be suffered at a return date, but this is necessarily a rough and ready exercise. As the litigation proceeds, it may be possible to generate more precise estimates or ascertain that the risk of loss was greater than initially anticipated.
Respondents and other parties to a WFO may therefore seek to protect their position by making applications for further fortification. In recent weeks, the Commercial Court has handed down three judgments in respect of applications seeking further fortification: Various Claimants v Spence [2021] EWHC 925 (Comm) (“Various Claimants”); PJSC National Bank Trust & anor v Boris Mints & ors [2021] EWHC 1089 (Comm) (“National Bank Trust”) and Alta Trading UK Limited & ors v Bosworth & ors [2021] EWHC 1126 (Comm) (“Alta Trading”).
In all three cases, although the applicants managed to satisfy the Court that there was a good arguable case of some risk of loss, nevertheless, none of the applicants were wholly successful in their applications. In Various Claimants, the applicant sought £2m in further fortification, but only obtained £800,000. In PJSC National Bank Trust and Alta Trading, the applicants sought further fortification US$20m and US$8m respectively, but both applications were dismissed in their entirety.
This note considers how the principles governing the provision of (additional) fortification have caused applicants trouble and that obtaining additional fortification may be harder than some applicants appear to anticipate. The principles themselves are easily stated and were summarised by Popplewell J (as he then was) in Phoenix Group Foundation v Cochrane [2018] EWHC 2179 (Comm) at [14] as follows:
(a) Can the applicant show a sufficient level of risk of loss to require (further) fortification, which involves showing a good arguable case to that effect
(b) Can the applicant show, to the standard of a good arguable case, that the loss has been or is likely to be caused by the granting of the injunction?
(c) Is there sufficient evidence to allow an intelligent estimate of the quantum of the losses to be made?
If the above requirements are met, the Court has a discretion in whether to order (additional) fortification.
Various Claimants
In Various Claimants, the applicant (“Mr Spence”) had borrowed approximately US$9.3m from Coutts, a bank, secured against £8m of sterling deposits held at the bank. Mr Spence asserted that the purpose of this arrangement was because he had moved to the United States at a time when the rate of sterling against the dollar was historically low, and the arrangement allowed him to hold and spend dollars, but without having to exchange his sterling deposits at an adverse exchange rate. Mr Spence asserted that he intended to exchange his sterling deposits for dollars when the rate reached £:$ 1.55.
Mr Spence argued that as a result of the WFO, there was a substantial risk that Coutts would call in the lending or enforce the charge, and if they did so, his sterling deposits would be forcibly exchanged at the prevailing rate (plus fees), which would therefore crystallise a loss as compared to the rate at which Mr Spence wished to exchange his sterling for dollars. Mr Spence asserted that there was a potential loss in excess of £2m (being the difference between a rate of £:$ of 1.55 with the lowest exchange rate in the 12 months prior to the Freezing Order (£:$ 1.15).
Rather generously, the Judge (Moulder J) accepted that this constituted a good arguable case of a risk of loss, despite the fact that (a) Coutts had not indicated that they intended to terminate the loan despite being aware of the freezing order and (b) there was no evidence to support Mr Spence’s assertion that he intended to keep the facility outstanding until rates recovered to a level of £:$ 1.55. Indeed, it might be said that this appears inconsistent with the fact that (on his own evidence) he was spending US dollars at a much lower notional exchange rate.
The Judge eventually settled on a figure of £800,000 for further fortification, being the estimate that Mr Spence had set out in correspondence (which reflects roughly the difference between the prevailing exchange rate and £:$ 1.55).
With respect to the Judge, it is difficult to see the underlying rationale for accepting that Mr Spence had shown a good arguable case of a risk of loss. The mere assertion of risk is insufficient; there must be some real evidence, which objectively establishes the risk, described by Calver J in National Trust Bank as a “solid, credible evidential foundation that the claimed loss has been or will be suffered.”[2]
But in Various Claimants, there was no evidence that Mr Spence was waiting to exchange his pounds into dollars at a rate of £:$ 1.55 (or indeed, any apparent case that that rate would be reached in the medium term, despite being far above the prevailing exchange rate for more than 6 years). This figure was a fundamental and necessary part of establishing that he had a risk of loss. Without this assertion, in respect of which the Judge accepted there was “an absence of any evidence” (at [34]), there is no basis for identifying a loss at all.
Moreover, as to causation, the Judge appeared to accept the proposition that even if it was difficult to disentangle any damage which may arise from the mere existence or continuation of the litigation from that which may be caused by the making of the order, it could nevertheless be said that there was a good arguable case that the freezing order was causing the risk of loss. A rather cryptic passage at [27] summarised the Judge’s conclusion in this regard:
“Although it was submitted for the Claimants that the Events of Default had not been triggered in this case, it seems to me that there is a good arguable case that the grant of the Freezing Order is litigation which might adversely affect the reputation of Coutts or the First Defendant.”
It is not clear why the reputation of Coutts (the bank) would be adversely affected (or why that is relevant), and in circumstances where the freezing order had already been in place for over 2 months and Coutts had taken no action, it is not clear on what basis the Judge sought to disentangle reputational consequences arising from the litigation itself as from the WFO itself.
It does not appear that the Judge was taken to authorities which would have made clear that if one cannot disentangle losses arising from the commencement of litigation itself, as opposed to a restraint arising from the freezing injunction, fortification should not be ordered: see Saville J in Financiera Avenida v Shiblaq (unrep., but cited in Tharros Shipping v Bias [1994] 1 Lloyd’s Rep 577 at 581-2 by Waller J):
“The object of the undertaking is to protect a party, normally the defendant, in respect of such damage as he may sustain by reason of the grant of the interim relief. It is no part of the undertaking to protect the defendant against loss or damage which he would have sustained otherwise, as for example, detriment which flows from the commencement of the litigation itself. That is loss or damage which the defendant must bear himself, as he does when no interim injunction is sought or granted. Consequently, it is for the party seeking to enforce the undertaking to show that the damage he has sustained would not have been sustained but for the injunction.”[3]
Indeed, Mr Spence’s application was strikingly similar to the facts in Tharros Shipping v Bias [1994] 1 Lloyd’s Rep 577, save that Tharros Shipping was not an interlocutory application and the party seeking damages had not been injuncted itself. In Tharros Shipping, a company known as “Services” was seeking to enforce the undertaking. It was not a party to the main action, and indeed, Phillips J (as he then was) acceded to an application of Services to make clear that the freezing injunction did not apply to its accounts at Midland Bank (although the money was alleged by the claimants in the main action to belong to injuncted defendants).. Services’ claim was that on being notified of the injunction, Midland Bank exercised its right of set-off forcing Services to sell the dollars standing to the credit of the dollar account so as to reduce the overdraft on Services’ sterling account (which it would not otherwise have done). This forced sale caused it to suffer an exchange rate loss.
There was no dispute that the trigger for the bank’s decision was being notified of the freezing injunction. Nevertheless, Services’ claim failed. Since the accounts of Services were not in fact frozen as the freezing injunction was not effective as against it, the loss caused to Services as a third party was not caused by the freezing injunction but rather by reason of the reaction of the bank to the freezing injunction granted against one of the defendants. Services could not therefore demonstrate that it would not have suffered the loss it claimed but for the grant of the freezing injunction, despite the fact that the decision of the bank to seek the sale of dollars was triggered by the notification to it of the freezing injunction against another party.
National Bank Trust
Tharros Shipping was front and centre in National Bank Trust, where the applicant largely failed on issues of causation and remoteness. Similarly to Tharros Shipping, the applicant did not allege that he himself (as a party to the Return Date Undertakings, which were in substantially similar form to the terms of the original freezing order) had or would suffer any loss. Rather, the applicant made an application on the basis that the WFO/Return Date Undertakings had and were causing losses to entities in which the applicant had an interest, either as a shareholder or a discretionary beneficiary. The applicant alleged that after having been notified of the WFO, JP Morgan and Credit Suisse demanded early repayment of loans to some of the entities. Crucially, these entities were themselves not subject to the WFO/Return Date Undertakings and their ordinary business activities are not restricted.
In effect, the applicant sought an increase in fortification on behalf of various third party entities who essentially were asserting that their reputation had been tarnished by the grant of a WFO against someone associated with them. The familiar problem of disentangling the reputational consequences from being associated with someone subject to a WFO from the litigation itself arose, especially in light of the fact that the applicant had accepted, and it had been subsequently held, that there was a good arguable case of fraud on the merits of the case against him.
Drawing on Tharros Shipping and Harley Street Capital Limited v Tchigirinski [2005] EWHC 2471 (Ch), the Judge (Calver J) held that the losses in respect of which fortification sought were too remote, but also did not meet the causation test: i.e., there was no good arguable case that the preventative or coercive effect of the WFO/ Return Date Undertakings is or was a cause without which the losses would not be or would not have been suffered. The third parties were not themselves subject to any restraint due to the WFO, and their ordinary business activities were not restricted. The causative link was too tenuous and remote: these were alleged losses arising from reputational consequences of being associated with someone subject to a WFO tarnishing the third parties and thereby said to have caused banks to demand repayment (or seek voluntary early repayment) of loans extended to them. This echoed the conclusion in Harley Street Capital at [34]:
“Neither I nor counsel were aware of any case in which the purely reputational consequences of being the subject of a freezing order have formed a part of an award of damages under the cross-undertaking, wholly divorced from the consequences of the restraint which the freezing order imposed on the applicant for damages or upon anyone else. In this case, the reputational loss is not even that of the defendants against whom the freezing order was made, but of the fourth defendant. That makes the supposed causative link even more tenuous.”
Accordingly, where the alleged reputational loss is that of a third party not subject to the restraint of a freezing injunction, the causative link is likely to be tenuous and any alleged losses “very unlikely” to be recoverable: National Bank Trust at [52].
Alta Trading
Finally, in Alta Trading, the applicants did manage meet each of the criteria identified in Phoenix Group above. The Deputy Judge (Peter MacDonald Eggers QC) held that the applicant did have a good arguable case that he would suffer losses caused by the grant of the interim injunction. But he failed demonstrate that there was a good arguable case that there was a risk that any award of damages pursuant to the undertaking given by the Claimants would not be satisfied. Absent a real risk of non-satisfaction, further fortification was not ordered (at [56]). That depended on the Claimant’s net assets in the jurisdiction, which were held to be sufficient, despite a risk that the assets available would be depleted by ongoing litigation and that other parties might claim compensation. The point did not arise in National Bank Trust, as the Claimants, domiciled in Russia, accepted for the purposes of the application that there was a real risk that the third parties would not be able to enforce an English judgment under the cross-undertaking in damages against the Claimants in Russia.
Conclusion
These recent cases show that despite only needing to meet the relatively low threshold of a good arguable case of showing a risk of loss caused by the granting of an injunction, it is not sufficient simply to assert a risk of loss and glide over causation issues. Doing so is likely to result in a fruitless and expensive day out in the Commercial Court. A claim to have suffered loss caused by the granting of an injunction “ought ordinarily to be supported by some underlying material and ought not to be speculative. Without documentary evidence, a mere generalised assertion of loss will be scrutinised carefully by the Court and is unlikely to be sufficient.”[4] Causation, especially when the loss or risk of loss claimed is that of third parties not subject to the injunction, may be difficult to show. Even if those thresholds are met, parties need to also consider whether fortification is likely to be ordered if the relevant party has sufficient assets within the jurisdiction.
Written by Bibek Mukherjee, Essex Court Chambers
This note is provided free of charge as a matter of information only. It is not intended to constitute, nor should it be relied upon as constituting, legal advice, and no responsibility is assumed in relation to the accuracy of the contents of the same as regards anyone choosing to rely upon it.
[1] As reflected, for instance, at F15.4 of the Commercial Court Guide.
[2] National Bank Trust at [27(i)].
[3] See also to similar effect Harley Street Capital Limited v Tchigirinski [2005] EWHC 2471 (Ch) at [35]; and Bloomsbury International v Holyoake [2010] EWHC 1150 (Ch) at [18] per Floyd J.
[4] National Bank Trust at [27(iii)].
