Court of Appeal confirms test for fortification of cross-undertaking in damages

The Court of Appeal has upheld an order requiring the claimant to fortify its cross-undertaking in damages after it obtained a worldwide freezing order against the defendant: Energy Ventures Partners Ltd v Malabu Oil & Gas Ltd [2014] EWCA Civ 1295.

This is the first time that the appropriate test to be applied by the court when deciding whether to order fortification has been considered at appellate level. The Court of Appeal identified three requirements which a defendant must satisfy to be granted an order of fortification:

1. the court must be able to make an intelligent estimate of the likely amount of any loss which might result from the injunction;
2. the applicant must show a sufficient level of risk of loss to require fortification; and
3. the court must be satisfied that the loss has been or is likely to be caused by the grant of the injunction.

The relevant standard is to show a good arguable case; the court will not require proof on the balance of probabilities.

Although this decision does not change the law, it provides helpful confirmation of the applicable test. A party thinking of applying for an interim order which will deprive the opponent of the use of significant sums of money should think carefully about the level of damage the opponent might suffer as a result, whether the applicant can show it would be able to pay that amount if called upon to do so, and accordingly whether fortification is likely to be required. Frances Furnivall considers the decision further below.

	Frances Furnivall  Associate  +44 20 7466 2405

Background

Where the court grants an interim injunction, including a freezing order, it will normally require the claimant to provide an undertaking to the court to pay any damages which the defendant sustains as a result of the injunction and which the court considers the claimant should pay. This is known as a cross-undertaking in damages. In some circumstances, the court may require the claimant to "fortify", or provide security for, the cross-undertaking, for example by providing a bank guarantee.

In this case, Energy Ventures Partners Ltd (EVP) obtained a worldwide freezing order in respect of the assets of Malabu Oil & Gas Ltd (Malabu) up to the value of US$215 million. EVP provided a cross-undertaking in damages, which it was required to fortify through a written guarantee in favour of Malabu for US$150,000 – a level which reflected the fact that the US$215 million had not yet been paid into court.

Following this decision, US$215 million was paid into court out of funds frozen by the freezing order. Malabu applied for further fortification of EVP's cross-undertaking based on the losses it claimed it would suffer by being unable to use the money paid into court. EVP was ordered to provide further fortification, assessed on the basis of the US Prime Rate of 3.25% per annum. EVP appealed.

Decision

Dismissing EVP's appeal, the Court of Appeal approved the three-stage test applied by Hamblen J at first instance, which was derived from previous first instance decisions, and found that the test was satisfied on the facts of this case. The Court of Appeal dealt with the three requirements in turn, while recognising that they are inextricably linked.

1. Intelligent estimate of the likely amount of loss

The Court of Appeal accepted that it will sometimes be difficult to assess the likely amount of loss at the interlocutory stage but stated that the court should be able to make an informed and realistic estimate.

In this case Malabu based its application on the likely cost of borrowing the US$215 million from a US bank, which could not be less than the US Prime Rate (3.25%), while noting that the cost of borrowing in Nigeria was far higher as were deposit interest rates had it deposited the US$215 million in a Nigerian bank.

The Court of Appeal noted that, where commercial parties are involved, the normal level of compensation for loss of use of money is simply an interest claim based on the usual cost of borrowing an equivalent sum. Although that rule could be displaced in some cases, that question did not arise here because, if the appropriate rate was a deposit rate, the judge had found that the deposit rates available to Malabu in Nigeria would have been considerably higher than 3.25%. Ordering fortification based on the US Prime Rate was therefore appropriate in this instance.

2. Sufficient level of risk of loss

Since EVP had obtained a freezing order on the basis that it had a good arguable case, the Court of Appeal said it was only right that if Malabu could show that it had a good arguable case that the grant of the freezing order would cause it to suffer loss then it too should be protected. It emphasised that requiring proof of risk of loss on the balance of probabilities in such an application was contrary to principle, and to do so would encourage wasteful satellite litigation.

On the facts of the case it was clear that if EVP lost its claim and was ordered to pay out under the cross-undertaking, the amount of such a payment could run into millions of dollars. There was no evidence before the court that EVP could meet that figure if required.

EVP presented various arguments to suggest that Malabu would not need to borrow US$215 million and would therefore suffer no actual loss. However, the Court of Appeal said it was not correct to suggest that a rich entity could not recover interest for the use of its money. There was no need to provide evidence that Malabu actually needed to borrow US$215 million, simply that it would be deprived from using the money paid into court as it chose.

3. Loss caused or likely to be caused by interim order

The Court of Appeal said it is sufficient for the court to be satisfied that the grant of the injunction is a cause without which the relevant loss would not be or would not have been suffered. Again, the Court of Appeal noted that while it was open to a respondent to demonstrate that there is no such causal link, if to do so required extensive contentious evidence and argument then this should not be attempted at the interlocutory stage.

Comment

Although the Court of Appeal did not refer to the decision in its judgment, the recent case of Hone and others v Abbey Forwarding Ltd and another [2014] EWCA Civ 711 is also relevant in this context. In that case the Court of Appeal confirmed that the usual contractual rules, including as to remoteness of damage, apply by analogy to any assessment of compensation under a cross-undertaking in damages in a freezing order, subject to exceptions given that there is in fact no contract. See our post on the decision here.