Court of Appeal upholds order for payment of US$70 million under cross-undertaking in damages

The Court of Appeal has confirmed the court's approach to issues of causation where a defendant applies to enforce a cross-undertaking in damages: SCF Tankers Ltd (formerly Fiona Trust & Holding Corp) v Privalov [2017] EWCA Civ 1877.

A party that obtains an interim injunction (including a freezing injunction) will typically be required to provide a cross-undertaking to the court to compensate the other party if the injunction is later found to have been wrongly granted. The present decision confirms that a party seeking to enforce a cross-undertaking in damages must establish a prima facie case that its loss would not have been suffered "but for"' the injunction. It is then for the party who gave the undertaking to rebut the case on causation. When considering such applications, the court should adopt a "common sense" approach to issues of causation, mitigation and remoteness.

The case shows that, in resisting an order to enforce a cross-undertaking, a claimant will not necessarily be able to rely on an argument that the defendant should have applied for a variation to permit transactions and avoid its losses. While each case will turn on its own facts, the decision recognises that there can often be real practical and commercial difficulties in applying for a variation to a freezing injunction.

The decision provides a stark reminder to claimants of the potential for very significant consequences if an injunction is later found to have been wrongly granted. In this case, claimants who were seeking damages of US$850 million ended up being ordered to pay over US$70 million to the parties they had sued.

Background

The claimants ("SCF Tankers") were various Russian ship-owning companies who had been involved in a very long-running dispute with the defendants (the "Standard Maritime Parties"). The dispute concerned allegations that the Standard Maritime Parties had bribed SCF Tankers' directors in order to obtain favourable charterparties of their ships.

As part of this dispute, in August 2005 SCF Tankers obtained a worldwide freezing order against the Standard Maritime Parties. This order contained a standard term that transactions by the Standard Maritime Parties in the ordinary course of business would be permitted. However the sale and purchase of vessels was specifically excluded from the "ordinary course of business".

In September 2005 the Standard Maritime Parties discharged the freezing order by paying security of over US$200 million into the account of their solicitors. As part of the discharge order, the Standard Maritime Parties were given the right to apply to the court to use the secured funds in the ordinary course of business (still excluding ship buying / selling activities) or to vary the terms of the discharge order.

These orders remained in place until judgment was given over five years later, in December 2010. In this judgment, nearly all of SCF Tankers' claims were dismissed (around 95% by value) and the earlier orders were discharged.

The Standard Maritime Parties subsequently sought to enforce SCF Tankers' cross-undertakings in damages, arguing that their inability to buy and sell new ships had caused them substantial losses. The claim was heard by Mr Justice Males. He found that the freezing and discharge orders had caused the Standard Maritime Parties not to invest in highly profitable new contracts. As a result, Males J ordered SCF Tankers to pay US$70 million in damages and interest.

SCF Tankers appealed against this decision. They argued that the freezing and discharge orders had not prevented the Standard Maritime Parties from investing in the construction of new ships, as they could have applied to the court for funds to be released.

Decision

The Court of Appeal dismissed the appeal. The central issue before the Court of Appeal was one of causation. Drawing on the earlier cases of Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2014] EWCA Civ 1295 (considered here), Tharros Shipping Co v Bias Shipping Ltd [1994] 1 Lloyd's Rep 577 and Financiera Avenida v Shiblaq (unreported), Lord Justice Beatson set out the approach that should be taken.

First, the party seeking to enforce the cross-undertaking must show, prima facie, that but for the order or injunction, the relevant loss would not have been suffered. Once this has been established then, absent any material to displace the prima facie case, the court can infer that the damage was caused by the order or injunction.

SCF Tankers argued that the freezing and discharge orders had not caused the Standard Maritime Parties' losses as the orders did not prevent them from entering into new shipping contracts, but only prevented them from using the frozen/secured funds for the purpose of entering into such contracts. This submission was rejected by the Court of Appeal as "it did not reflect the reality of financing such transactions".

SCF Tankers also suggested that the claim failed on grounds of causation as the Standard Maritime Parties could have applied to the court to use the secured funds for shipbuilding transactions. This was again rejected. The Standard Maritime Parties had established a prima facie case that the damage was caused by the order, as the order prohibited the use of the funds for the sale and purchase of vessels. They had also shown that it would have been difficult to obtain a variation of the order. At this point, it was not necessary for the Standard Maritime Parties to prove that any application would have failed (as was argued by SCF Tankers). Instead it was for SCF Tankers to displace this prima facie case by demonstrating that there was no causal link. This they had failed to do.

The Standard Maritime Parties' argument that it would have been difficult for them to obtain a variation of the order was supported by the fact that SCF Tankers had consistently asserted a proprietary claim to their assets. In various interim proceedings, SCF Tankers had used the proprietary nature of their claim to argue against any application to vary the orders. Given that the court was entitled to assume at the interlocutory stage that the claim was proprietary, and that SCF Tankers had consistently opposed any variations, it was clearly appropriate for the judge at first instance to find that the Standard Maritime Parties would have encountered difficulties in obtaining a variation of the orders.

Finally, the Court of Appeal upheld Males J's findings that the Standard Maritime Parties did not fail to mitigate by not applying for the release of the secured funds. Males J had rejected this argument at first instance on the basis that the Standard Maritime Parties would have encountered a "practical dilemma" in making such an application as they would not have been able to present themselves credibly to their counterparties whilst saying that they needed court permission for the transaction, and the court would likely have required a concrete proposal for the use of the funds before releasing any of the secured funds.