There has been considerable judicial guidance in this particular area over the past two years following two Supreme Court judgments and two major Court of Appeal judgments. We bring together the lessons derived from these cases.

The basics

Cross undertakings are provided by applicants seeking freezing orders. Typically, the cross undertaking will require the applicant to agree to compensate the respondent and third parties for loss if it is found that the freezing order was wrongly granted. Sometimes, the applicant may be required to make a payment into court to “fortify” the undertaking.

The court has no power to compel an applicant to give an undertaking. It can only refuse to grant the freezing injunction if the applicant declines to do so. The undertaking is given to the court not the defendant. Non-performance is therefore a contempt of court.

The court will enforce the undertaking for the defendant’s benefit but retains the discretion not to enforce if it considers that it would be inequitable. If enforced, an inquiry into damages will follow. This was the main issue in the first case discussed below, how should damages be assessed?

What loss has been suffered?

In the case of Hone & others v Abbey Forwarding (in Liquidation) & HMRC [2014] EWCA Civ 711, the principal issue before the Court of Appeal was what was the appropriate measure of damages under a cross undertaking? Despite assertions from the appellants that they should be compensated for any loss shown to have been caused in a material way by the order, irrespective of the foresight which the respondent liquidator had or should have had, the Court of Appeal affirmed the position as set out by Lord Diplock in Hoffman La Roche v Secretary of State [1975] 1 AC 295 – that whilst non-performance of a cross undertaking did not amount to a breach of contract, contractual principles apply by analogy – but with one major caveat; logical and sensible adjustments may well be required because in truth a cross undertaking is not a contract and hence there must be room for exceptions.

In essence, a defendant who is 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 could have foreseen at the time.

Contractual principles of remoteness and foreseeability are fact sensitive and therefore how the parties conducted themselves during the tenure of the freezing order was extremely relevant to the inquiry of damages. For instance, did the appellants notify the liquidator that they wished to invest in various ventures for which they were now claiming loss of opportunity? Should the liquidator have realised that her way of “policing” the order was likely to inhibit proper transactions which the appellants may have pursued in the natural order of things? Should the appellants have done more to mitigate their losses? For instance, even if a specific business activity did not fall within the “ordinary course of business” exception should they have sought a variation?

The clear message emerging from the judgment was that it is very important for the defendant to keep the claimant informed about the scope of damages which it is likely to suffer as a result of the injunction.

Separately, whilst the sums awarded were modest, the Court of Appeal recognised that an inappropriately granted freezing order may attract damages for upset, stress, loss of reputation and other similar intrusions into personal liberty. However, such damage needs to be caused by the injunction and not the stigma of the underlying claim in fraud instead.

To fortify or not to fortify?

A cross undertaking provided by a party which does not have the means to fulfil it is of little value. Accordingly, where there are concerns in this regard, the party may be required to fortify the cross undertaking. The three requirements to satisfy an order for fortification were affirmed in the Court of Appeal decision handed down in Energy Ventures Partners Ltd v Malabu Oil and Gas Ltd [2014] EWCA Civ 1295:

  • The court should be able to make an “intelligent estimate” of the likely amount of loss which might result from the injunction if wrongly granted. Not easily done at the interim stage.
  • The party requiring fortification must show sufficient risk of loss. This does not mean proof on a balance of probabilities but rather mirrors the need on the other side for a “good arguable case” as the threshold for a freezing order.
  • Causation – the court must be satisfied that the loss has been or is likely to be caused by the grant of the injunction. The difficulty here is distinguishing between loss likely to be caused by the injunction and loss caused by a claim in fraud.

Third parties v public authorities

In FSA v Sinoloa & Others and Barclays Bank [2013] UKSC 11, the bank sought guidance from the Supreme Court on whether the FSA should as a condition of obtaining a freezing injunction be required to give a cross undertaking in damages in favour of third parties affected by the injunction. It was not suggested that a cross undertaking ought to be given to the respondents and the FSA accepted that it would be liable for costs incurred by third parties as a result of the order. But what of losses incurred by “innocent” third parties who played no part in the alleged wrongdoing giving rise to the injunction?

As the starting point, the Supreme Court ruled that there is no general rule that an authority like the FSA should be required to give a cross undertaking and there were no particular circumstances in this case as to why it should do so.

The court affirmed the distinction made in Hoffman La Roche between a public authority acting in the public interest and a private applicant. To make the former provide a cross undertaking, as a matter of course or without considering what is fair in particular circumstances, might inhibit the public body from properly carrying out its function. Further, there was no general duty under English public law to indemnify those affected by action undertaken under legislative authority. The FSA has express powers pursuant to FSMA 380(3) to seek injunctive relief.

Illegality as a bar to enforcement

In the case of Les Laboratoires Servier v Apotex Inc [2014] UKSC 55, the Supreme Court considered whether illegality was a bar to enforcement of an undertaking. In that case, an injunction based on a UK patent failed and the defendant sought to enforce the undertaking seeking damages for loss of profits. In response, the claimant argued that the loss of profits depended on manufacture in Canada, which would cause the infringement of the Canadian patent (found to be valid). Did such infringement invalidate the defendant’s ability to enforce the undertaking?

In short, the Supreme Court said no. Civil wrongs not involving dishonesty such as patent infringement did not fall within the meaning of “turpitude” (which in the main was limited to acts of a criminal nature) to engage the illegality defence. It affirmed the Court of Appeal decision but firmly rejected the manner in which it had been reached; by making subjective judgments about the conduct of the party seeking to enforce the undertaking and its impact. Such factors were largely irrelevant. Illegality was a principle of law, based in public policy, and not a mere discretionary power which took into account the perceived balance of merits between the parties.

Conclusion

The cross undertaking is not a mere formality. It is the “price” which the applicant may end up paying for the benefit of the injunction. The more onerous the freezing order, the greater the losses are likely to be on the other side. Hone in particular indicates a heightened degree of judicial sympathy for those whose lives are turned upside down by a wrongly granted freezing order.

As the respondent to a freezing order, it is important to proactively inform the other side of all losses and missed opportunities caused by the order. Such notice will be vital if it ever comes to enforcing the cross undertaking. Consider whether fortification is appropriate. The other side’s inability to fortify may well tip the scales in your favour causing the court to reconsider whether an injunction is in fact appropriate.

If faced with the enforcement of a cross undertaking in the context of a fraud case, consider whether there has been any dishonesty (e.g. does the other side’s business involve any dishonesty, proceeds of crime etc.). Such conduct may act as a bar to enforcement.