Court of Appeal confirms contractual rules apply by analogy to assessment of compensation under cross-undertaking in damages

A recent Court of Appeal decision has confirmed that the usual contractual rules, including as to remoteness of damage, apply by analogy to the assessment of compensation under a cross-undertaking in damages in a freezing order. However, there is also room for exceptions, given that there is in fact no contract: Hone and others v Abbey Forwarding Ltd and another [2014] EWCA Civ 711.

The judgment provides helpful clarification in the light of a number of recent first instance decisions which had cast doubt on the application of contractual principles to the assessment of compensation in cases of this sort.

Adam Johnson and Sophie Jones from our Advocacy Group consider the decision below.

	Adam Johnson Partner +44 20 7466 2064
	Sophie Jones Associate +44 20 7466 7572

Background

Abbey Forwarding Ltd ("Abbey") was a freight forwarding and warehousing business, owned by the appellants. Following unpaid tax assessments by HMRC, Abbey entered into provisional liquidation and the provisional liquidator applied (in Abbey's name) for a worldwide freezing order against the appellants. Abbey alleged that the appellants had dishonestly or negligently broken their duties to Abbey in permitting it to become the subject of the HMRC assessments.

The freezing order contained a cross-undertaking in damages from Abbey, as well as an undertaking from HMRC to provide an indemnity to Abbey in respect of the cross-undertaking, on the basis that Abbey was insolvent.

Abbey's claims against the appellants were dismissed and the freezing order was discharged. The appellants were given permission to proceed to an inquiry as to what, if any, damages were caused by the freezing order. They claimed damages, inter alia, for lost profits and missed business opportunities, which they contended were payable by Abbey pursuant to the cross-undertaking.

The judge at first instance rejected the majority of the appellants' claims, including on causation and remoteness grounds.

The appellants appealed, contending that contractual rules as to foreseeability of damage and remoteness should not apply and that they should be compensated for any loss shown to have been caused in a material way by the order, irrespective of whether this was foreseen (or ought reasonably to have been foreseen) by the liquidator.

Decision

The Court of Appeal allowed the appeal in part. McCombe LJ (with whom Vos and Arden LJJ agreed) held that the judge at first instance had been right to apply by analogy contractual rules for the assessment of damages, including rules of remoteness. The respondents were to be liable only for losses which were reasonably foreseeable at the time that the injunction was granted.

McCombe LJ confirmed that the law as to the recoverability of losses suffered by reason of a cross-undertaking is as stated by Lord Diplock in Hoffmann-La Roche & Co. AG v Secretary of State [1975] 1 AC 295, 361, namely that damages are to be assessed on the same basis as damages for breach of contract would be assessed "if the undertaking had been a contract between the plaintiff and the defendant that the plaintiff would not prevent the defendant from doing that which he was restrained from doing by the terms of the injunction: see Smith v. Day (1882) 21 Ch.D. 421 per Brett L.J., at p.427."

However, it was subject to the caveat that "logical and sensible adjustments" may be required, because the court is not actually awarding damages for breach of contract. The court will usually order compensation by applying the rules as to remoteness derived from the law of contract but, as there is in truth no contract, "contract rules are to be applied by analogy, where appropriate, and not purely automatically" and there has to be room for exceptions.

In McCombe LJ's judgment, the law provides for justice between the parties: a defendant wrongly injuncted should be compensated for losses that he should not have suffered, but a claimant should not be saddled with losses that no reasonable person would have foreseen at the time when the order was made, unless the claimant knew or ought to have known of other circumstances that were likely to give rise to the particular type of loss that occurred in the case at hand. However, a claimant might still find himself liable for losses which would not usually be foreseen in particular cases, for example, if a loss, not usually foreseeable, arises before a defendant has had any real opportunity to notify the claimant of the likely loss or sensibly to apply to the court for a variation.

Comment

Lord Diplock's dictum in Hoffmann-La Roche had been the well-established starting point for most judges and practitioners in approaching questions of compensation for loss in cases of this sort. However, recent High Court cases, including Lilly Icos LLC & ors v 8PM Chemists Ltd. & ors. [2009] EWHC 1905 (Ch), had raised questions as to whether the "contract approach" truly represented the law. Hone confirms that the Lily Icos decision was wrongly decided, and provides helpful clarification from an appellate court as to the proper principles to be applied for the assessment of compensation under a cross-undertaking in damages in a freezing order.

The case should provide greater certainty for those involved in seeking or responding to freezing orders. Would-be applicants in particular would do well to remind themselves of the comment of Vos LJ in his supporting judgment that "[t]hose who inappropriately seek, obtain and enforce freezing orders should be aware of the kinds of damage they may cause, and of the fact that the courts will be astute to hold them to account by making such awards for their breaches of their notional contracts."