​The enforcement of a cross-undertaking in damages, provided by a claimant in order to obtain a freezing injunction against a defendant, can mean a substantial liability for a claimant. This ruling illustrates that damages under a cross-undertaking are assessed on a broadly contractual basis but with added flexibility. The court will apply a liberal assessment of damages, meaning that it recognises the difficulty of establishing loss caused by injunctions and will not over-scrutinise a defendant’s evidence.  Potential losses made as a result of not being able to make a risky investment can be claimed if the defendant can establish there was a real chance of making a profit.  However, the court will make a deduction from the estimated profit to reflect the risk. When assessing damages over periods of market turmoil, evidence as to the timing of proposed investments is critical. The decision is useful both for claimants in terms of evaluating size of exposure under a cross-undertaking, and any defendant seeking to recover under such an undertaking: Fiona Trust & Holding Corporation v Yuri Privalov & ors [2016] EWHC 2163 (Comm).

In August 2005, the claimants sued the defendants for bribery, corruption and diversion of assets, claiming in excess of USD 577 million. During the litigation, the claimants obtained two English court worldwide freezing injunctions: in 2005 over USD 225 million and in 2007 over an additional USD 377 million. The injunctions prevented, inter alia, certain trading activities unless the defendants first made an application to court.  At trial, the claimants succeeded but only to a very limited extent – the value of the frozen assets far outweighed what the claimants were awarded. As a result the defendants applied to enforce the cross- undertakings in damages which the claimants had been required to provide as a condition of the freezing injunctions being granted. 

Defendants’ questionable character did not preclude enforcement of undertaking

In previous hearings, Andrew Smith J had been critical about the honesty and credibility of both sides to the dispute. Males J however found that the defendants had not sought to mislead the court and approved Smith J’s decision to permit enforcement of the cross-undertaking, noting that “even serious and well-founded criticisms of a defendant’s character do not mean that claimants can be less scrupulous in complying with their duties when applying for a freezing order. Nor do they provide a reason not to enforce an undertaking”.¹

Did the defendants really miss out on making money or were they making it up?

The defendants gave evidence that, but for the freezing injunctions, they would have used the funds for the purchase and resale of some ships (the newbuilding project), and that remaining funds would have been invested.  The claimants responded that these claims were a “dishonest fiction invented with hindsight to produce the maximum possible claim, which bears no relationship to what would actually have happened in the absence of the freezing orders”.

While unable to provide evidence or documents relating to a specific planned purchase, the defendants relied on the following; (i) this was their primary business activity, (ii) a recently concluded similar transaction which had been very profitable and (iii) a hypothetical strategy.  In relation to the assets subject to the freezing order, to the extent the funds were not also needed for the newbuilding project contemplated above (the invested funds), the defendants argued that they would have pursued a “moderate” as opposed to low-risk investment strategy. In total the defendants claimed USD 387 million in losses.

Absolute proof of loss not required - court adopts a liberal assessment

Males J confirmed that the contractual basis for assessing damages should be used, although applied with some flexibility.²   While the burden of proof rests with the defendant to demonstrate the loss suffered, the fact that the defendants could not prove that they would have purchased any particular ship, or would have made a specific profit, was not fatal to their case. The concept of “liberal assessment” applies (see Les Laboratoires Servier v Apotex Inc [2008] EWHC 2347 (Ch)).  This means that the defendant is not treated generously, in the sense of being awarded damages it has not suffered, but the court must recognise that the assessment of damages suffered as a result of a freezing order (or other type of interim injunction) will often be inherently imprecise.  Overeager scrutiny and criticism of the defendant’s evidence as to how they would have used the funds is not appropriate. Although Males J added that this in no way absolves the defendant from having to prove damages.

Damages can be awarded if there was a real chance for profit, even if loss also a possibility

The claimants argued that damages cannot be awarded if the defendant would have used the funds in a way which might have resulted in a loss,³  and the purchase and resale of ships is an inherently risky business. However Males J held that the correct test was whether or not there was a real or substantial chance of making a profit. If so, the court will make the best assessment of damages that it can, applying a discount if necessary to reflect whatever uncertainty exists.  Where several uncertainties are involved, the appropriate assessment is to look at the “overall chance” of the defendants making the profits in question.⁴

Applying this test, Males J found that there was a real chance the defendants would both have invested in the newbuilding project and made a profit. However, he applied a 50% discount to the estimated profit figure to reflect the uncertainty and risk.

Evidence of timing is critical when calculating damages over periods of market turmoil

The freezing orders spanned the financial crisis and a considerable crash in the shipping market.  Consequently, the timing of the defendants’ proposed investments was critical. Males J accepted the suggested timeline for the newbuilding project, but rejected that the invested funds would have been invested in a way that avoided the impact of the financial crisis. As a result the judge found that the defendants suffered no losses in respect of the invested funds.

Comment

In the absence of the freezing injunction, the claimants could have walked away with over USD 16 million in damages. Instead they are faced with paying having to pay out at least the same under the cross-undertaking. While freezing orders are undoubtedly powerful tools, this case highlights the very real risk claimants open themselves to on the cross-undertaking, particularly when a defendant’s trading activities are affected. In principle, a defendant may be entitled to recover (a) general damages for loss of business, the adverse effects caused by the inappropriate policing of the injunction, upset, stress and loss of reputation; (b) special damages, eg special damages for loss of future trade (especially where the claimant is made aware of the potential for this type of loss); and (c) aggravated damages, if a claimant deliberately conceals matters from the court at the original injunction hearing. 

There are clearly tactical decisions to be made on both sides.  A claimant will need to consider how much to freeze, and what type of transactions may still be allowed. A balance needs to be struck between protecting its position whilst at the same time not giving disproportionate exposure under the cross-undertaking. A defendant will need to consider putting the claimant on notice of the type of loss it could suffer as a result of its assets being frozen.

Footnotes:

1 Para [143]
2 Following Hone v Abbey Forwarding Ltd [2014] EWCA Civ 711).
3 Relying on The Anselma de Larrinaga (1913) 29 TLR 587, E. Bailey & Co Ltd v Balholm Securities Ltd [1973] 2 Lloyd’s Rep 404 and Alta v American Express Bank Ltd (Court of Appeal, 17 June 1988).
4 By reference to Tom Hoskins Plc v EMW Law [2010] EWHC 479 (Ch) at [133] to [135].