Injunctions and useful lesson about providing undertakings to Defendants

29 November 2017

Author: Olivia O'Kane
Practice Area: Media and Defamation

O_okane

In SCF Tankers Ltd (Formerly known as Fiona Trust & Holding Corp) and others v Privalov and others [2017] EWCA Civ 187, the Courts provided a useful warning about cross undertakings when granting interim injunctions.

Privalov and others (the “Claimant”) obtained a worldwide freezing injunction against SCF Tankers Ltd (Formerly known as Fiona Trust & Holding Corp) (the “Defendant”). When a freezing injunction is obtained, the Claimant is usually required to give an undertaking in damages, referred to as the “cross-undertaking”. This is needed as interim injunctions are granted before trial and therefore before the case has been determined. The Claimant must undertake to compensate the Defendant if it is determined by the courts that the Claimant was not entitled to the relief granted.

The Claimant gave cross-undertakings to, if ordered to do so by the court, pay any damages for any loss caused by an injunction wrongly granted at the interim stage. The injunction did not prohibit transactions in the ordinary course of the Defendant’s business but it excluded any investment in shipbuilding contracts from the Defendant’s definition of ordinary course of business. The injunction was discharged upon $208 million being paid as security by the Defendants but the clause which excluded investments in shipbuilding contracts from the Defendant’s ordinary course of business still applied. The Defendants were allowed to apply to the court for the use of the secured funds ($208 million) for the purpose of investing in shipbuilding contracts, but they never exercised this right.

The Claimant’s claims of bribery, corruption and diversion of assets were eventually dismissed in favour of the Defendant. The Defendant’s therefore sought compensation for the losses they incurred as a result of the interim injunction being granted wrongly at the earlier stage. The Claimants were ordered to pay the Defendants $59.8 million in damages and $11.04 million in interest. The Claimants brought the case to the Court of Appeal, they believed that the Defendant’s still had the opportunity to invest in shipbuilding contracts if they had applied to the court to use the secured funds accordingly. The Claimant argued that the Defendant’s failure to apply for funds to be released from the security meant that causation, the connection between conduct and a resulting effect, could not be established.

The issues

The Court of Appeal had to assess what compensation should be awarded where an undertaking in damages has been provided and the Defendant thereafter can enforce that undertaking given by the Claimant. The court relied upon with the principles of remoteness, causation and mitigation that apply to the assessment of contractual damages.

Burden of Proof

In Air Express Ltd v Ansett [1979] 146 CLR 249, it was stated that "it was for the party seeking to enforce the undertaking to show that the damage he has sustained would not have been sustained but for the injunction."

The burden of proof is thus on the Defendant to show that the interim injunction was an actual cause of their loss. As the Defendant’s argued - but for the order, they would have invested in ships.

Causation

The Claimants argued that the Defendant’s had the option to apply for the release of secured funds and therefore causation could not be established. However, the Defendant’s did not have to prove that an application to release the funds would have failed, it was enough for them to prove to the court that the interim injunction prevented them from investing in shipbuilding contracts. They had established sufficient evidence that the damage was caused by the interim injunction, that if it was not for the order restricting them they would have invested in ships. This was enough for the court to find that causation was established. The right to apply to the court and possibility of thereby relying upon the $208 million security (which the defendant did not do and instead the defendant abided by the interim injunction), did not affect the fact of an interim injunction being granted which restricted them from doing certain acts.

Conclusion

The court dismissed the appeal and upheld the decision to grant the Defendant substantial compensation for the loss it sustained as the result of a wrongly granted interim injunction.

It was suffice for the Defendant to show that the interim injunction prevented them from making investments and the court held that the Defendant should be compensated for losses that they should not have suffered. This decision highlights the potential consequences of giving a cross-undertaking. Claimants applying to the courts for an interim injunction should bear in mind the significance and potential consequences of cross undertakings when applying for interim injunctions.

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