Damages for Worldwide Freezing Injunction

Background

We have already issued a number of publications on the remedies available to parties to convert an arbitration award or judgment (where the English Court has jurisdiction) into cash payment. A Freezing Order is a valuable tactical device designed to exert pressure on the opposing party which may be forced to disclose the value and location of assets when there is evidence of dissipation. Worldwide Freezing Orders have been described as the “nuclear weapon” of the law and this is because of their draconian nature and the consequences that follow from failure to comply with them. There is a downside however in that in order to obtain a Freezing Order an applicant will be required to provide certain undertakings to the Court and this is likely to include a cross-undertaking in damages. This is required to ensure that the judgment debtor is compensated if it is subsequently determined by the Court that the applicant was not entitled to obtain the Freezing Order.

The Court of Appeal (CA) case of SCF Tankers Limited (formerly Fiona Trust & Holding Corporation) and Others v Yuri Privalov and Others (2017) provides useful clarification with regards to the principles governing the award of damages against a party who has provided a cross-undertaking in damages to obtain an injunction, where the said party’s claim is eventually unsuccessful in Court.

The Facts

The Claimant was granted a Worldwide Freezing Order against the Defendant which permitted transactions in the ordinary course of business with the exclusion of the sale and purchase of vessels, the sale and purchase of shares in any company or corporation, and the grant of security over any vessels or shares. The Claimant in turn had to provide a cross-undertaking to cover damages if it was subsequently determined by the Court that the applicant was not entitled to obtain the Freezing Order.

Payment of USD 208.5 million was made by the Defendant into court as security. The Defendant was authorised to use the secured funds in the ordinary course of business (save by selling or purchasing vessels). The Defendant was given liberty to apply to the Court for the release of the secured funds for such excluded transactions, but did not do so.

The High Court decision

In first instance the High Court dismissed most of the claims brought by the Claimant, and the Claimant was asked to execute the cross-undertaking and pay the Defendant USD 59.8 million in damages and USD 11.04 million in interest as compensation for the loss caused by the Worldwide Freezing Order. The Claimant appealed against this decision.

The Court of Appeal decision

The Claimant argued that the Defendant’s failure to make an application to the Court for the release of the secured moneys broke the legal chain of causation between the Worldwide Freezing Order and the loss. The CoA said that it was for the party seeking to enforce the cross-undertaking to show that the damage they have sustained would not have been sustained but for the injunction. It further stated that the Defendant had to show that the Worldwide Freezing Order and the USD 208.5 million security provided were an effective cause of their loss.

The Court stressed that establishing that the Worldwide Freezing Order was a cause without which the loss would not have been suffered was sufficient to prove causation. Referring to previous authorities the Court held that a party seeking to enforce an undertaking did not need to deal with every “conceivable or theoretical cause” and a prima facie case would suffice. It was therefore only necessary to show that the Worldwide Freezing Order prevented the Defendant from entering into contracts to build ships and the difficulties associated with making a court application to have the funds released to enable them to enter into such contracts.

The Defendant did not need to show that such application to the court would fail.

The CoA found that the World Freezing Order prevented the Defendant from entering into the contracts in question, and the liberty to apply to the court for the release of funds did not affect the nature or effect of the prohibition. Even if the Defendant had made an application to the court to allow it to engage in the sale and purchase of vessels, the Claimant was likely to have strongly resisted any such application. Consequently, the chain of causation between the Worldwide Freezing Order and the loss was not broken.

The CoA agreed with the High Court that the failure of the Defendant to make an application for the release of funds was not an unreasonable failure to mitigate their losses. It was held that the Defendant would have faced a “practical dilemma” in attempting to get a quote from the Korean shipyards on the basis that, although they were keen to conclude some shipbuilding contracts, they would need to make an application to the court in order to find out whether they were allowed to do so.

In terms of remoteness, the CoA found that the loss sustained by the Defendant was not unusual but uncertain. The Court held that, in light of the facts known to the Claimant, the loss fell within the first limb of the rule in Hadley v Baxendale, i.e. that the losses incurred by the Defendant due to the Worldwide Freezing Order were direct losses that were reasonably in the contemplation of the parties.
The appeal was therefore dismissed.

Conclusion

Whilst a Worldwide Freezing Order is a valuable strategic tool in the hands of a wronged party, this case highlights the painful consequences for the applicant if it is subsequently determined by the Court that he had no right to obtain the Injunction. Proper legal advice needs to be obtained in advance of any application to obtain relief from the Court covering aspects such as the provision of undertakings, enforcement in certain jurisdictions and disclosure duties evidencing dissipation.