In Energy Venture Partners Ltd v Malabu Oil and Gas Ltd1 , the Court of Appeal endorsed, for the first time, the accepted criteria that must be satisfied before the court can order an application for fortification of a cross-undertaking in damages.
In summary, the court must make an intelligent estimate of the likely amount of loss which might result to a respondent by reason of the injunction. The applicant must show that there is a sufficient risk of loss so as to require fortification and that the grant of the injunction has caused or is likely to cause such loss.
What is fortification?
An applicant seeking a freezing order is often required to give a cross-undertaking in damages to compensate the respondent in case it is subsequently determined that the applicant should not have been granted the relief sought.
In certain circumstances, the court may also consider it appropriate for the applicant to provide security for the cross-undertaking, for example, by providing a bank guarantee. This provision of security in support of a cross-undertaking in damages is known as fortification.
Energy Venture Partners Ltd (EVP) (a company incorporated in the BVI) obtained a worldwide freezing order up to the value of $215m against the assets of Malabu Oil and Gas Ltd (Malabu) (a company incorporated in Nigeria) in connection with a claim brought by EVP in the English court in respect of commission allegedly owed to it by Malabu. Specifically, the underlying claim arose out of services provided by EVP to Malabu, designed to assist Malabu in finding a buyer for an oil field that it owned in Nigeria.
In April 2011, the oil field was apparently surrendered to the Federal Government of Nigeria by Malabu. The government, however, then agreed to allocate the oil field to two other companies in return for payment (the Transaction). EVP’s case was that it was a result of its efforts that the Transaction went ahead; this was denied by Malabu.
EVP had been granted a worldwide freezing order which Malabu applied to discharge. This application was denied and the freezing order was upheld subject to various modifications. In particular:
- EVP was required to fortify its crossundertaking in damages by means of a written guarantee in favour of Malabu in the sum of $150m; and
- Malabu was required to pay $215m into court by way of security out of the frozen funds.
The order to provide a guarantee in the sum of $150m was made prior to the $215m being paid into court. Once the $215m was paid into court, however, Malabu applied for further fortification of the cross-undertaking on the basis that it would suffer substantial losses since the cost of borrowing was far higher than the interest rate of 0.15% that the sum of $215m would earn from the funds in court. In particular, Malabu noted that the US Prime Rate was 3.25% and the cost of borrowing in Nigeria was even higher.
Malabu’s application was successful and EVP was required to provide further fortification of the cross-undertaking such that interest on the $215m was to be assessed on the basis of the US Prime Rate of 3.25%. EVP appealed.
The Court of Appeal dismissed EVP’s appeal, affirming the decision of the first instance judge.
The judge had outlined a three stage test for fortification, pursuant to the principles set out in Harley Street Capital v Tchigirinski2, which derived from the judgments in Re: DPR Futures Limited3 and Sinclair Investment Holdings v Cushnie4. These principles are considered in turn below:
- The court must make an intelligent estimate of the likely amount of loss which might result by reason of the injunction. The judge noted that this part of the test was easily satisfied. He confirmed:
“This is not a complex damages claim involving intricate issues of causation and remoteness. It is a straightforward claim by the defendant for the time value of money as a consequence of being kept from the use of the sum of $215m which has been paid into court”.
It was noted that the appropriate rate for an international company operating in US dollars would be the US Prime Rate. The Court of Appeal accepted that an order for fortification based on 3.25% (representing the US Prime Rate) was an appropriate order for the judge to have made.
- The applicant for fortification had shown a sufficient level of risk of loss to require fortification.
In this connection, the judge found that Malabu had lost the use of the $215m and therefore would be entitled to make a claim for compensation in respect of that sum. The judge rejected EVP’s argument that Malabu had sufficient funds such that it did not need to borrow at a higher interest rate. Specifically, he said that:
"it was not correct to suggest that a rich claimant could not recover interest for loss of the use of his money”.
The Court of Appeal confirmed that Malabu did not need to provide specific evidence in relation to the actual borrowing arrangements or to show that it actually needed to borrow the $215m. It was also noted that EVP had not presented evidence to the court as to its substantive financial position and furthermore, the evidence suggested that Malabu’s prospects of successfully defending the underlying claim were reasonable.
- The contemplated loss would be caused by the grant of the injunction
The judge considered that if the respondent could show that it would suffer an interest loss in the event that it successfully defended the underlying claim and thus enforced the cross-undertaking in damages then this should be protected.
This is the first time that the Court of Appeal has considered the accepted test for ordering fortification of a cross-undertaking in damages. Its endorsement of the test provides helpful guidance for an applicant seeking such fortification.