On 27 February 2013 the Supreme Court handed down judgment in the case of The Financial Services Authority (Respondent) v Sinaloa Gold plc and others (Respondents) and Barclays Bank plc (Appellant).

We previously reported on the Court of Appeal decision in November 2011 which decided that, when applying for an injunction, a public authority, such as the FSA, is not obliged to give a cross-undertaking for losses to innocent third parties affected by the injunction.  Barclays (the third party in the case) appealed this decision. The Supreme Court dismissed the appeal.  Banks and other asset holders who, by the nature of their business, find themselves caught up in disputes which require injunctive relief should be aware of this decision.

Facts and judicial history

To recap the facts and the judicial history of this case: The FSA conducted an investigation into Sinaloa Gold Plc, PH Capital Invest and Mr Hoover, a director of Sinaloa (together the "Defendants"), for alleged offences in the context of a suspected share-sale scam.  On 17 December 2010, under the express power conferred on it by section 380(3) of the Financial Services and Markets Act 2000 ("FSMA"), the FSA applied for, and the High Court granted, interim injunctive relief to prevent the Defendants from dealing in their assets up to the value of £820,000 – being the amount paid to Sinaloa Gold by investors. The FSA did not give a cross-undertaking to the Defendants on the basis of the dispensation principle, which permits a public body, such as the FSA, to dispense with giving a cross-undertaking because the injunction is being used as a method of law enforcement.  The FSA did, however, give a cross-undertaking to Barclays, the third party affected by the injunction by virtue of the fact that it had to freeze the funds.  The cross-undertaking given to Barclays was in the standard form - that is, covering both the bank's costs of compliance with the injunction and any losses suffered as a result of the injunction being subsequently discovered to have been wrongly obtained.

At a later High Court hearing in January 2011 at which the FSA applied to extend the injunction for a further period of time, the FSA sought to limit the cross-undertaking given to Barclays to costs alone.  Barclays intervened and argued that the cross-undertaking should remain in its current form, i.e. covering both costs and losses.  At this hearing the Defendants also took the opportunity to argue that the dispensation principle is not absolute and that the court should exercise its discretion to grant a cross-undertaking in their favour.  Judge Hodge QC remained of the view that the FSA did not have to give a cross-undertaking to the Defendants, and retained the cross-undertaking to Barclays in the form in which it had originally been given.  The FSA appealed.  The Court of Appeal allowed the appeal (for the reasons explained in our report in November 2011) and limited the cross-undertaking to Barclays to costs alone.  Barclays appealed to the Supreme Court, arguing that it should also cover losses.

The Supreme Court decision

Lord Mance, who gave the leading judgment, dismissed the bank's appeal.  In coming to this decision he considered three issues:

  • Whether and how far the position of the FSA, in seeking an interim injunction pursuant to its public law function and duty, is to be equated with that of a person seeking an injunction for private interests

The leading case on the position of a public authority acting in pursuance of its public functions is F Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry (1975).  In Hoffmann-La Roche a public authority (the Department of Trade and Industry) sought injunctive relief and the court had to consider whether it should give a cross-undertaking.  The court's starting point was to draw a distinction between an individual bringing a claim in a private capacity and a public authority bringing, what Lord Diplock described as, a "law enforcement action".  The court was, however, reluctant to set an absolute rule requiring a cross-undertaking in the former situation and not in the latter.  Rather, it was of the view that a cross-undertaking in a law enforcement action "ought not to be applied as a matter of course" but "should be considered in the light of the particular circumstances of the case" (Lord Diplock).

Despite arguments from Barclays in the present case that Hoffmann-La Roche should be distinguished on certain grounds, Lord Mance was of the view that the distinction drawn in Hoffmann-La Roche between private litigation and public law enforcement actions was still good law, and was relevant to the case at hand.  This meant that a public authority bringing a claim in the public interest required separate consideration and that no cross-undertaking should be exacted as a matter of course.  He said: "In private litigation, a claimant acts in his own interests and has a choice whether to commit its assets and energies to doing so.  If it seeks interim relief which may, if unjustified, cause loss or expense to the defendant, it is usually fair to require the claimant to be ready to accept responsibility for loss or expense…Different considerations arise in relation to law enforcement action, where a public authority is seeking to enforce the law in the interests of the general public, often in pursuance of a public duty to do so, and enjoys only the resources which have been assigned to its functions" (paragraphs 30 and 31 of the judgment).

Applying this reasoning, Lord Mance was of the opinion that, on the facts of the case at hand, there was nothing which indicated that the FSA, in pursuing a law enforcement action in the form of injunctive relief, should give the cross-undertaking for loss sought by Barclays.

  • Whether and how far the position regarding the giving of any cross-undertaking differs according to whether it is to protect a defendant or a third party

Barclays argued that Hoffmann-La Roche stood as authority for the protection of defendants, and not third parties (being the issue at hand), and that the two should be distinguished on the basis that the former has allegations of breach of law against it, but the latter is innocent.  Lord Mance dismissed this distinction, stating that it is the loss caused by the grant of an injunction to anyone affected by it, in circumstances where it should not have been granted in the first place, that is covered by the cross-undertaking. Any other consideration is not relevant.  Lord Mance therefore concluded that Hoffmann-La Roche applied as much to third parties as to defendants.

  • Whether there is any coherent distinction between a cross-undertaking in respect of third party losses and costs

Barclays argued that no distinction can exist between a cross-undertaking in respect of costs (which was not at issue here, as the FSA had agreed to provide Barclays with this) and one in respect of losses (which was at issue).  Lord Mance did not agree, and was of the opinion that there was "a pragmatic basis for a distinction between specific costs and general loss.  The rationale of Hoffmann-La Roche, that public authorities should be able to enforce the law without being inhibited by the fear of cross-claims and of exposing financially the resources allocated by the state for their functions, applies with particular force to any open ended cross-undertaking in respect of third party loss.  It does not apply in the same way to a cross-undertaking in respect of third party expense" (paragraph 35 of the judgment).

In addition to the above points, Lord Mance added that, under Part IV of FSMA, the FSA could, without any application to court, freeze the assets of an authorised person, in a way which could equally cause loss to innocent third parties, and that if the exercise of this power subsequently transpired to be inappropriate, there was no basis upon which third parties could be indemnified for this loss.  He said "There would be an apparent imbalance,  if the FSA were required to accept potential liability under a cross-undertaking when it addresses the activities of unauthorised persons and has therefore to seek the court's endorsement of its stance in order for a freezing order to issue" (paragraph 38 of the judgment).

At the close of his judgment, Lord Mance shared some further thoughts, saying that, in his opinion, the "starting position" should be that no cross-undertaking should be required at the without notice or on notice stages of an injunction, as this would provide no incentive to defendants or third parties "to come forward, to explain the loss feared and to apply for any continuation of the injunction to be made conditional on such cross-undertaking" (paragraph 43 of the judgment).  Whether Lord Mance's view is picked up in further cases in this vein remains to be seen.

Comment

The decision is perhaps a predictable result, but not one that banks and other asset holders will particularly welcome, as it provides little comfort against losses incurred when they find themselves caught up in an injunction obtained by a public authority pursuing a law enforcement action which is subsequently found to have been obtained on unjustifiable grounds.  Third parties should bear in mind, however, that the lack of a cross-undertaking in such a scenario is not an absolute rule: Rather case law has established that a cross-undertaking "ought not to be applied as a matter of course" but "should be considered in the light of the particular circumstances of the case".  Third parties have nothing to lose by putting forward arguments in favour of a cross-undertaking when finding themselves affected by an injunction brought by a public authority.  Such arguments will depend on the facts of the particular case.