Freezing order applications: Court of Appeal clarifies the merits test and the timing of costs awards

In an important judgment, the Court of Appeal has clarified the test a court should apply when determining whether an applicant for a freezing injunction meets the threshold requirement of a "good arguable case" on their underlying substantive claim. Subject to any further appeal, the decision resolves uncertainty that had arisen from recent case law: Dos Santos v Unitel SA [2024] EWCA Civ 1109.

The Court of Appeal held that:

• the merits test in freezing applications remains the long-established "Niedersachsen test" - ie the substantive claim must be "more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success". It has not been replaced by the three-limb test that applies when determining whether there is a good arguable case that a claim falls within one of the jurisdictional gateways for service out of the jurisdiction (derived from Brownlie v Four Seasons Holdings Inc [2017] UKSC 80, as discussed here).That test would set the bar too high for applicants in freezing injunctions; and
   
• the Niedersachsen test is no different in substance to the merits threshold that applies in interlocutory injunctions generally – ie "a serious issue to be tried". Therefore, to avoid confusion, that expression should now similarly be used for the merits threshold in freezing applications, restricting "good arguable case" to the Brownlie jurisdictional gateway test (as distinct from the substantive merits threshold that is a separate requirement in applications to serve out of the jurisdiction, and which is also judged according to whether there is a "serious issue to be tried").

The court also clarified another issue on which there has been conflicting High Court authority recently – whether the costs of contested freezing applications should be reserved until the conclusion of the case. It disapproved recent authority suggesting a general rule to that effect. To the extent that there is a general rule, it is that a party who unsuccessfully contests an interlocutory application should be ordered to pay costs at the conclusion of the application. The courts do usually depart from that approach, and reserve costs for the trial judge, in the case of "American Cyanamid injunctions" granting interim relief on the substantive claim. But there is no basis to take a similar approach to freezing injunctions.

Background

The issue arose in the context of proceedings brought by an Angolan mobile telecoms company seeking repayment of loans made to a company controlled by one of its directors at the time, Ms dos Santos. 

The claimant applied, with notice, for a worldwide freezing order against Ms dos Santos. In the contested application before Mr Justice Bright, one of the key issues was the whether the claimant met the threshold requirement of having "a good arguable case" on its substantive claim. In particular, Bright J was required to consider a recent conflict in High Court authority as to the meaning of "good arguable case" in the context of a freezing order applications:

• The claimant relied on the traditional test stated by Mustill J in Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft GmbH ("The Niedersachsen") [1984] 1 All ER 398 ) –  namely, that the applicant's claim must be "more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success".
• Ms dos Santos argued that the Niedersachsen test had been replaced by the three-limb test laid down by Lord Sumption in Brownlie for establishing a good arguable case that one of the jurisdictional gateways applies, in the context of an application to serve proceedings out of the jurisdiction. As subsequently interpreted by the Court of Appeal, that is essentially a relative test, under which the court must try to form a view as to which party has "the better of the argument" on the disputed issue. Only if it is unable to assess that on the evidence can it fall back on there being “a plausible (albeit contested) evidential basis” for the applicant’s case (Kaefer Aislamientos SA de CV v AMS Drilling Mexico SA de CV [2019] EWCA Civ 10 – discussed here).
• In particular, Ms dos Santos relied on Haddon-Cave LJ's judgment in Lakatamia Shipping Co Ltd v Toshiko Morimoto [2019] EWCA Civ 2203, which had referred to Brownlie in its brief discussion of the good arguable case requirement in freezing order applications.
• Two High Court decisions had subsequently held that the effect of Haddon-Cave LJ's judgment was that the test for a good arguable case in the context of freezing applications is now the same as the Brownlie test (Harrington & Charles Trading Co Ltd v Mehta [2022] EWHC 2960 and Chowgule & Co Pte Ltd v Shire [2023] EWHC 2815).
• However, shortly after, Butcher J in Magomedov v TGP Group Holdings (SBS) LP [2023] EWHC 3134 reached the opposite conclusion. He held that, as a matter of both authority and principle, the merits test in the context of freezing orders remains as stated in The Niedersachsen.  

Bright J in the present proceedings agreed with Butcher J in Magomedov, for essentially the same reasons. However, he commented that "the law is in a confused state, which cries out for a definitive answer from the Court of Appeal".

He went on to find that the merits test was satisfied in this case (on both the Niedersachsen and Brownlie tests), as were the other limbs of the test for a freezing injunction (risk of dissipation and that the order was just and convenient). He granted the injunction and ordered Ms dos Santos to pay the claimant's costs of the application.

Ms dos Santos appealed, arguing that:

1. the judge should have applied the Brownlie / Kaefer test and concluded that she had “the better of the argument" on the substantive case, meaning that the claimant did not have a good arguable case; and
2. the judge was wrong to award the claimant its costs of the freezing application, because the ordinary costs order for an interim injunction is costs reserved.

Decision

The Court of Appeal dismissed the appeal on both grounds.

Sir Julian Flaux, Chancellor of the High Court, gave the lead judgment, with which Lord Justice Popplewell agreed in a separate judgment expanding upon the nature of the merits test.  Lady Justice Falk agreed with both judgments. 

The merits test: Niedersachsen or Brownlie?

Having outlined the competing arguments by reference to the authorities, the Chancellor's "clear and firm conclusion" was that the correct test as to what constitutes a good arguable case for the purposes of the merits threshold for the grant of a freezing injunction was the Niedersachsen test. It was not to be assessed by reference to the three-limb test derived from Brownlie. The decisions in Harrington and Chowgule were wrong to adopt that test.

His reasons for that conclusion included:

• Although early decisions on freezing injunctions had adopted the "good arguable case" test from the context of the jurisdictional gateways, the law in both of those areas had moved on. While the same phrase has been used in both contexts, there is no reason why an “inherently flexible concept” should have the same meaning in both.
• There are obvious differences between the two contexts. In the case of the merits test for freezing injunctions, the court will ultimately be determining the merits at trial. In contrast, it is usually only at the interlocutory stage that the court will determine whether the claim falls within a jurisdictional gateway. That gateway issue does not involve applying a "merits test" as such - within the test for permission to serve out of the jurisdiction, the merits of the substantive case are addressed separately in the first limb requirement that there is a "serious issue to be tried", ie the claim has a reasonable prospect of success.
• At the early stage at which a freezing injunction is usually sought, It is invidious for the court to have to determine which party has “the better of the argument” on the underlying case. The court endorsed comments by Butcher J in Medemedov that that would be liable to turn freezing applications into mini-trials, which is problematic in interlocutory applications, and would set the bar too high for applicants.
• The weight of authority supported the Niedersachsen test. It had up until recently been consistently applied by judges, and it had also been approved by the Court of Appeal - in The Niedersachsen itself and, on a proper analysis, in several cases since (including Kazakhstan Kagazy v Arip [2014] EWCA Civ 381 and Lakatamia Shipping v Nobu Su [2012] EWCA Civ 1195).
• An analysis of Haddon-Cave LJ's judgment in Morimoto did not support the suggestion that he was intending to change the law in the manner contended. Rather, he was approving the Niedersachsen test.
• Other Commonwealth jurisdictions where freezing injunctions have been granted (with the exception of Canada) have essentially applied the Niedersachsen test.

Having concluded that Niedersachsen test applies, the court was satisfied on the evidence that the claimant met that test (and  agreed with Bright J that the Brownlie test would also have been satisfied here).

The merits test:  Is it the same as "serious issue to be tried"?

In his separate judgment, Popplewell LJ stated:  

"the time has come, in my view, to recognise that the … merits test for a freezing order is and should be the same as that for interim injunctions generally, namely whether there is a serious issue to be tried".

He considered that to be so both as a matter of principle and because the "serious issue to be tried" test is no different in substance from the freezing order test of "good arguable case" in the sense defined in The Niedersachsen.

It was well established that the "serious issue to be tried" test applies:

1.  in interlocutory injunction applications other than for freezing injunctions (under American Cyanamid Co v Ethicon Ltd [1975] AC 396); and
2.  in jurisdiction applications, in respect of the merits test for the substantive claim (as distinct from the separate requirement that the claim falls within one of the jurisdictional gateways, governed by the Brownlie test).

In both contexts, "serious issue to be tried" has the same meaning as the merits test used in applications for summary judgment - namely whether a claim or defence has a real prospect of success / is not merely arguable but carries some degree of conviction (AC Ward & Sons Ltd v Catlin (Five) Ltd [2009] EWCA Civ 1098).  A claim meeting that description is no different from one that is more than barely capable of serious argument, which is the Niedersachsen test (Madoff Securities International Ltd v Raven [2011] EWHC 3102).

Popplewell LJ acknowledged obiter views expressed by Nugee J (as he then was) in Holyoake v Candy [2016] EWHC 970 to the effect that "good arguable case" should be a slightly more stringent test than "serious issue to be tried" given the invasive nature of freezing relief compared to interim injunctions generally. However, Popplewell LJ did not consider such a distinction to be justified by the nature of freezing order relief:

• There was no relevant distinction based on the nature of the interests being protected. For interim injunctions, that interest is a substantive legal right, on the assumption that it will ultimately be vindicated at trial by a judgment. For freezing orders (as made clear in Convoy Collateral v Broad Idea), what is being protected is an interest in a judgment being enforceable – which again assumes a substantive right that will be vindicated by a judgment. Therefore, the same prospect of establishing the substantive right at trial should stand as the merits threshold for both.
• While freezing orders may have once been described as one of the law's "nuclear weapons", the number now regularly granted in the Business and Property Courts suggests that this description is inapt. Also, other forms of interim injunction can operate just as invasively.
• The appropriate way to manage the invasive nature of freezing relief was not through a heightened merits test but through the other limbs of the test, the safeguards/exceptions built into freezing orders, and the cross-undertaking in damages.

In Popplewell LJ's view, there should therefore not be any distinction drawn between the "good arguable case" test for freezing orders (based on Niedersachsen) and the test of "serious issue to be tried" for other forms of interim injunctions. That being so, it would be preferable to use the latter expression in the context of freezing orders and to restrict "good arguable case" to the context of jurisdictional gateways, where it bears a different meaning.  

In the lead judgment, the Chancellor addressed this issue only briefly. He noted that he had initially been inclined to agree with Nugee J's view that “good arguable case” in the context of freezing orders is a slightly more stringent test than “serious issue to be tried”, given the invasive nature of freezing relief. However, having read Popplewell LJ's judgment in draft, he was persuaded that the two tests should be equated.

Timing of costs awards

Giving the sole judgment on this issue, the Chancellor was "very firmly" of the view that the court should not interfere with the judge’s order that Ms dos Santos should pay the costs of the freezing injunction application.

In so far as there was a general rule, it was that a party who unsuccessfully contests an interlocutory  or procedural application, causing the successful party to incur costs that would not otherwise be incurred, should be ordered to pay the successful party's costs at its conclusion.

The court can always exercise its discretion to make a different order, including reserving the costs to the trial, and one situation where it will usually do so is in the case of an American Cyanamid interim injunction. However, that is because such an injunction effectively allows a party, on the balance of convenience, to rely on a right or obligation whose existence has yet to be established – it holds the ring pending trial. If at trial the right or obligation is established then the injunction can be made final, but if the claimant’s case fails at trial, then it can generally be said that the interim injunction should not have been granted. Hence it is generally more appropriate for the costs of such applications to be reserved to the trial judge.

However, the position was different in the case of a freezing injunction. When granted, it was not "interim" and was not dependent on the balance of convenience. Even if the claim fails at trial, it does not follow that the freezing order should not have been granted if it satisfied the three limbs of the test for freezing injunctions.