If a Claimant with a good arguable case shows that the Defendant will probably move his assets beyond reach, the courts in England and Wales will sometimes prevent that. The old Mareva injunction is now a Freezing Order, often with wide financial provisions, and a recent hot topic is the damages that a Defendant can recover if he suffers loss because of it.

The Claimant’s application is usually urgent. The Defendant does not know about it beforehand (as it is made without notice) and the claim may later fail. So the Claimant must first promise to meet any losses that the Defendant incurs as a result of the Freezing Order.

The cross-undertaking

This is called a cross-undertaking in damages. Its usual form is:

"If the court later finds that this order has caused loss to the [Defendant], and decides that the [Defendant] should be compensated for that loss, the [Claimant] will comply with any order the court may make".

Claimants used to make this promise without thinking much about what might happen later, but a High Court and then Court of Appeal decision have highlighted real dangers here.

The recent case

In Fiona Trust v Privalov [2016] EWHC 2163 (Comm) the Claimant sought over $575 million for alleged bribery and corruption and obtained orders that tied up over $480 million of the Defendant’s assets for many years. However, after a huge trial the claim largely failed and Claimant recovered only $16 million.

The Defendant’s claim

The Defendant then said that if the Freezing Orders had not been made he would have traded in newbuildings and achieved good returns by investing the profit. He claimed over $387 million, almost 25 times the Claimant’s damages award.

Nobody credibly plans and records in advance what they would have done if y amount had not been tied up for z years, so a Defendant has to try to recreate the past.

The court’s approach

The Judge ruled as follows:

1. Depending on how the Defendant has behaved, the court might consider it unfair or unjust to award damages; however, if it does:
2. The court will say that the Claimant had breached a contract - that the Defendant would not be restricted as per the terms of the Freezing Order; so
3. The Defendant gets damages under ordinary contract principles, including causation, mitigation and remoteness; however
4. Some flexibility is necessary, as of course the parties did not really enter into the contract being considered; also
5. A “liberal assessment” is used. This does not mean that a Defendant gets damages for losses that he has not suffered. However, it acknowledges that he might not be able to say precisely how the frozen funds would have been used. So the court will not scrutinise the evidence or claim structure as it otherwise would, because it is hard for the Defendant to be exact; thus
6. If the claim is proved - either on balance of probability or by showing a real and substantial chance of profit - the court will make the best assessment possible, applying percentage discounts to reflect uncertainties.

The result

The Judge held that the Defendant had a 50% chance overall of achieving the claimed profit. Damages calculated accordingly were nearly $60 million, approaching four times that recovered by the Claimant.

This was despite the Claimant’s detailed challenges that (a) the Defendant was a proven habitual liar (b) his claim did not match what he had said at the time (c) he would not have concluded any of the various contracts and (d) the vagaries of the shipping market and the worldwide economy meant there were too many uncertainties.

What this means

A cross-undertaking in damages is not a formality that a Claimant can forget about once he gets the Freezing Order. It can involve liability for large damages later on, when a “liberal assessment” will give a Defendant the advantage.

What should a Claimant do?

First, focus early on the size of the claim. Examine this carefully and restrict the Defendant’s use of assets only as far as needed - the smaller the amount involved the less the Defendant will later be able to claim.

Second, keep a continuous record of the evidence, especially as to significant changes, either within material filed by the Defendant or in his market, and note anything that might need investigating later. Perhaps many years afterwards, the key issue will be what the Defendant says he would have done at the time. Keep a close eye on his business activities and any trends in relevant markets.

Third, as far as possible capture and test the evidence of what happened at the time - what the Defendant said and did.

Court of Appeal

Here the Claimant argued that, by failing further to challenge the wording of the Freezing Order, the Defendant had either broken the causation link between the Order and the claim or had failed to mitigate loss.

However, by its decision on 21 November the court rejected that. As a defence to a claim under a cross-undertaking, a Claimant will probably not often succeed in saying that the Defendant could and should have done more, at the time, to attack the specific terms of the Freezing Order.

Conclusions

Defendants claiming under cross-undertakings need to prove loss, but the courts will allow them much leeway. So Claimants seeking Freezing Orders must be:

(a) careful and realistic about claim size;

(b) aware of the Defendant’s market and his activity within it; and

(c) alert to obtain and also test the crucial evidence at all stages.

Lastly, note that these principles are not confined to Freezing Orders, but apply equally to other types of injunction.

If you would like to discuss any point or topic in this article please contact Maryam Taher and Paris Pantelis.