PROVING THINGS 75: PROVING CAUSATION ON AN UNDERTAKING TO PAY DAMAGES: THE INJUNCTION THAT COST THE APPLICANT TENS OF MILLIONS OF DOLLARS: ROUND 2

November 21, 2017 · by · in Appeals, Applications, Damages, Injunctions

We have looked before at the decision in Fiona Trust & Holding Corporation -v- Yuri Privalov & others [2016]. An applicant for a freezing order was found to have obtained the order wrongly. Consequently they were ordered to pay damages that stretched to tens of millions of dollars.  That decision was considered by the Court of Appeal in SCF Tankers Ltd & Ors v Privalov & Ors [2017] EWCA Civ 1877.  The Court upheld the  judge’s finding on causation and that the defendant had suffered substantial losses.  This is one decision that must be borne in mind whenever a party is applying for a freezing injunction. It is not the only case where an applicant has had to pay substantial damages on the basis of the undertaking for damages.

THE CASE

The claimant obtained a freezing injunction against the assets of a businessman. That injunction was discharged upon £205. million being paid into a designated account. The sums frozen were far in excess of the sums for which the claimant eventually obtained judgment. The court held that the injunctions had been obtained with “serious and culpable breaches” of the duty of full and frank disclosure.  On an assessment of damages, based on the undertakings that the applicant for an injunction must give, the judge assessed damages that amounted to tens of millions of dollars.

ON APPEAL

The Court of appeal rejected the claimant’s appeal.

    1. The necessary background to my analysis are the findings made by the judge for which there is no permission to appeal. These are that: (1) at all times the Standard Maritime parties were in fact prohibited by the orders from concluding newbuilding contracts; (2) but for the orders Mr Nikitin would have invested in newbuildings; (3) he did not have other funds to do so, but that, even if contrary to his evidence, he did, the risks of such investment to his capital together with the risk to the security provided to obtain the discharge of the freezing order meant that little if any significance could be attached to the fact that he did not in fact undertake a newbuilding programme; and (4) there was a real and substantial chance Mr Nikitin would have sold any vessels bought in the spring of 2008, and he would have done so well before the first delivery due in September 2008. I summarised them at [24] – [25], and [27] – [30] above.

    2. The issue before the court is whether, despite those findings, Mr Gaisman’s overarching submission that Mr Nikitin’s failure to apply for funds to be released meant that legal causation was not established is correct. There are a number of strands in his submission that the judge was wrong to find such causation and treating the case as one of mitigation, some of which are connected.

    3. The first of those strands is that the judge only considered factual, “but for” causation, not legal causation. He did not ask whether there was a sufficient relationship between the freezing order and the alleged loss and he did not consider the purposes sought to be achieved by the Fiona Trust parties’ undertaking as to damages.

    4. The second strand is that the order did not prevent the making of new contracts, but only prevented the use of the frozen money and, after the freezing order was discharged, the secured funds. Mr Gaisman argued that the freezing order was irrelevant because nothing would have happened in the 19 days for which it was in place and that the order giving effect to the security arrangements itself caused no loss because it did not stop the Standard Maritime parties from applying for permission to use the money.

    5. The third strand was that the judge erred in concluding (at [38]) that it was not realistic to expect the Standard Maritime parties to apply to the court if they wanted to invest in newbuildings. Mr Gaisman submitted that the judge misunderstood the nature of the Fiona Trust parties’ claims and was wrong to characterise them as proprietary when most were not. At its highest, Mr Gaisman maintained there were no arguable proprietary claims of any relevance because the claims related to the shares in the ship owing companies acquired by the Standard Maritime parties rather than their assets, and the remedies sought were all personal. It was, he argued, that misunderstanding and mischaracterisation which led the judge to consider that an application to release the funds would have been far from straightforward and vigorously opposed. He argued that, absent a proprietary claim, an application to the court to permit trading in the ordinary course of business would have succeeded. He pointed to the observation of Patten LJ when giving permission that absent such a claim it was difficult to see how the Fiona Trust parties could have successfully resisted release of the funds for use in relation to newbuilding contracts. He also referred to Walker v Medlicott & Son [1999] 1 WLR 727, a case in which it was held that it was incumbent on a plaintiff suing defendant solicitors in respect of a failure to carry out the instructions of a testatrix first to issue proceedings for rectification of the will.

    6. Mr Gaisman developed his submissions as to the non-proprietary nature of the Fiona Trust parties’ claims (or most of them) in great detail, arguing inter alia that the Hyundai vessels had not been sold when the US$208.5 million security was provided, that the Fiona Trust parties were not able to rescind the option agreements in relation to two of the companies, Buckthorn and Southbank, because, by 2005 it was not possible to make restitutio in integrum, and that there was no proprietary claim in the proceeds of the sale of the vessels. He accepted that previous counsel had argued the case on the basis that there were proprietary claims but said that that did not change the reality.

    7. Mr Gaisman also submitted that there was nothing in the order dealing with the provision of security and the undertakings that would prevent the Standard Maritime parties from negotiating a contract with a shipbuilder and applying to the court. The judge was wrong to say (at [85]) that the Standard Maritime parties faced a “practical dilemma” because they could hardly go to the Korean shipyards to request a quote on the basis that they would like to conclude some shipbuilding contracts but would need an application to the court to find out whether they were allowed to do so, but could also hardly apply to the court for permission without having a concrete proposal in hand for the court to assess.

    8. It is well established that the purpose of the cross-undertaking in damages and liability under it is to protect a party who is subjected to such an injunction preventing him from doing something but who subsequently prevails at the trial of the action from loss caused by the injunction: see Hoffmann-La Roche & Co v Secretary of State for Trade & Industry (1975) 2 AC 295 at 361, per Lord Diplock. The court has discretion whether or not to enforce a cross-undertaking in damages.

    9. If the court decides to enforce a cross-undertaking, the decision of the High Court of Australia in Air Express Limited v Ansett Transport Industries (Operations) Proprietary Limited (1979) 146 CLR 249 has been influential in relation to the approach to causation and the burden of proof. Mason J stated at 325 that it is “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”. Although Mason J dissented as to the result, on burden of proof there was no division of view: see Gibbs and Stephen JJ at 313 and 320. The approach in the Ansett case has been followed by a number of decisions in this jurisdiction. They include the decision of this court in Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2014] EWCA Civ 1295, [2015] 1 WLR 2309, a case concerned with whether a cross-undertaking as to damages should be fortified. Referring to the judgment of Gibbs J, in the Ansett case as to what was required to enforce the undertaking itself, Tomlinson LJ stated (at [54]) that “[a]s to causation, it is sufficient for the court to be satisfied that the making of the order or injunction was a cause without which the relevant loss would not have been suffered”.

    10. The person who seeks to do so must show that the loss would not have been suffered “but for” the order; that is, on the facts of this case, that the freezing order and the security undertakings were an effective cause of the Standard Maritime parties’ loss. See also Tharros Shipping Co v Bias Shipping Ltd. (The Griparion No 1) [1994] 1 Lloyd’s Rep 577 at 582 (Waller J), Harley Street Capital v Tchigirinski [2005] EWHC 247 1 (Ch) at [20] – [21] (Mr Michael Briggs QC), Hamblen J at first instance in Energy Venture v Malibu [2012] EWHC 79 (Comm) at [19] and the discussion in Gee, Commercial Injunctions, 6th ed. 2016, §11.044 at p. 365.

    11. The Ansett case had also been relied on sixteen years earlier by Saville J in Financiera Avenida v Shiblaq Transcript 21 October 1988. The decision is unreported but extracts from Saville J’s judgment are set out by Waller J in the Tharros Shipping case. After stating that it is 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, Saville J added:

“This approach does not mean that a party seeking to enforce an undertaking must deal with every conceivable or theoretical cause of the damage claimed, however unlikely this may be. Once a party has established a prima facie case that the damage was exclusively caused by the relevant order, then in the absence of other material to displace that prima facie case, the court can, and generally would, draw the inference that the damage would not have been sustained but for the order. In other words, the court seeks to approach and deal with this question of causation in a common-sense way.”

In this court, Lloyd LJ with whom Stocker LJ and Sir George Waller agreed, stated that he saw no fault or flaw in Saville J’s judge’s approach or in his conclusion on causation: see Transcript 7 November 1990.

    1. The submissions made in this case must be considered in the light of the circumstances of this case and the statements in Energy Venture v Malabu, Avenida v Shiblaq and the Tharros Shipping case. In my judgment, the judge did not err in finding that the orders prevented the Standard Maritime parties from investing in newbuildings: see [84] summarised at [30] above. The fact that the Standard Maritime parties were given liberty to apply for the release of secured funds to enable them to do this did not affect the nature or effect of the restriction imposed by the order.

    2. I have also concluded that the judge did not err in stating that causation was established. Mr Gaisman’s submission that the order did not prevent the making of contracts for newbuildings, but only prevented the use of the frozen money for such purpose, and, after the freezing order was discharged, of the secured funds is highly technical and does not reflect the reality of the financing of such transactions. The judge’s use of the word “therefore” in the statement “[c]ausation is therefore established” might be open to criticism in some circumstances, but not in the circumstances of this case. He stated (at [48], see [26] above) that the order must be an effective cause of the loss. If anything, that was a stricter test than the “but for”, sine qua non test laid down in the authorities to which I have referred. He was entitled to approach and deal with the question of causation in a common-sense way.

    3. I do not consider that the onus was on the Standard Maritime parties to show that an application to release funds would fail. It sufficed for them to show that the order prevented them from such investing in newbuildings and the difficulties of any application to the court for the release of funds. In the words of Saville J, once a party has established a prima facie case that the damage was caused by the order then, in the absence of other material to displace that prima facie case, the court can draw the inference that the damage would not have been sustained but for the order. See also Tomlinson LJ’s statement in Energy Venture v Malabu, albeit in the context of the fortification rather than enforcing the undertaking, that once a prima facie case has been established “it is open to the respondent to demonstrate that it has not been surmounted, as by demonstrating that there is no causal link between the granting of the injunction or order and the loss in question.” That is not what the Fiona Trust parties have sought to do. In this court, they argued that the burden lay on the Standard Maritime parties to show not only a prima facie case, but that an application would fail. In my judgment, that submission is not consistent with the authorities to which I have referred.

    4. I consider that, on the material before the judge, the Standard Maritime parties had established at least a prima facie case that the damage was caused by the order. The order prohibited them from engaging in newbuilding transactions and the position taken by the Fiona Trust parties was to resist any application to remove the prohibition. At the hearing on 7 September they successfully resisted the submission that clause 30 should be varied by removing the word “not” because of the effect that would have on the value of their proprietary claims. That position was reiterated by Mr Briggs QC on their behalf at the adjourned return date on 15 September 2005. He stated that “we make proprietary claims to the entire undertaking of these companies”. The outcome was the provision of security, but without the ability to engage in newbuilding transactions. At the hearing before Judge Mackie on 14 February 2006, the position of the Fiona Trust parties was similar. Mr Christopher Carr QC stated that they would require a mortgage to be executed over any ship or shares acquired by the Standard Maritime parties. He also stated that they would require the Standard Maritime parties to make full disclosure of their assets so that they and the court could be satisfied that there were no other funds available, and would need to know where the US$208.5 million had come from so as to be satisfied that it did not include monies to which they were making or might make a proprietary claim. This position was the background to Judge Mackie’s reaction to the suggestion that the court would approve a variation allowing the transactions. The position taken by the Fiona Trust parties and Judge Mackie’s reaction suffice to show the difficulties of any application for the release of the security funds.

    5. Insofar as Mr Gaisman’s argument depends on his submission that the judge erred in characterising the Fiona Trust parties’ claims as proprietary, the way they had presented their case at those hearings is also material. I summarised the way the Fiona Trust parties did so in the last paragraph. At the adjourned return date on 15 September 2005, Mr Eder QC, on behalf of the Standard Maritime parties, accepted that the Fiona Trust parties’ claims were proprietary claims to the shares and effectively to the vessels themselves, and stated that it was because of that that they would give them “the security over the very property over which they say they have claims”. It thus appears that very distinguished counsel on both sides accepted that the claims were proprietary.

    6. The fact that at the material time the court and the parties were concerned with orders made at an interlocutory stage is also important. The orders made at that stage were made on the assumption that the Fiona Trust parties’ allegations of fraud were true and were probably well founded in law. Mr Berry QC submitted that the proprietary claims could not have been disproved short of trial. Whether or not that is so, I accept that it would have been very difficult to do so without the sort of mini trial involving the deployment of extensive contentious evidence and argument. In Energy Venture v Malabu Tomlinson LJ stated (at [54]) that this was not an exercise to be attempted at the interlocutory stage. The orders were designed to provide pragmatic justice at an interim stage. The undertaking as to damages was designed to mitigate the risk of leaving a person restrained by an injunction unprotected in respect of loss caused by it when the underlying claim subsequently fails.

    7. In any event, the judge did not consider that all the claims were proprietary. At [84] of his judgment he stated that they had “a proprietary claim over the proceeds of resale of the Hyundai and Daewoo vessels”. The judge cannot be criticised for not dealing with the submission that the only proprietary claims the Fiona Trust parties had ever advanced in the main action related to the shares and not the assets, and the distinction between the shares that were the subject of the proprietary claims and the underlying assets which were not, because this had not been relied on before the appellants’ skeleton dated 10 January 2017. The way the claim is now put simply differs from the way the claim was put in 2005 and was put at least until after the trial of the inquiry before the judge.

    8. Moreover, as Lord Justice Lewison observed during the course of the hearing, Mr Gaisman’s submissions depend on stating that when the security was provided in substitution for the freezing order the proprietary nature of the claim disappeared. I respectfully agree with his observation that this is a very legalistic way of reading an order which is designed to do pragmatic justice at an interim stage. The question whether a person is required to embark on litigation, whether in the context of causation or in the context of mitigation, is an intensely fact-specific inquiry. The judge recognised (at [43]) that other commercial or appellate judges might take a different view of the difficulties the Standard Maritime parties would face to that taken by Judge Mackie and himself but nonetheless reached the conclusion that they faced considerable difficulties and were not required to make the application and to embark on litigation. Provided his decision was not one which falls outside the margin accorded to the judge deciding such questions it is not susceptible of appeal. I consider that, on the evidence before him and the findings of fact that he made, his conclusion was one he was entitled to reach.

    9. Mr Gaisman also sought to rely on the submission that the Standard Maritime parties would have been able to fund the six newbuildings, or at least some of them, as a further reason for stating that the orders were not the cause of their loss. This argument was advanced below. I have summarised what the judge said about it at [24] – [26] above. The judge did not reject Mr Nikitin’s evidence on this point, stating at [70] that it was challenged only by reference to his general propensity to tell lies and was supported to some extent by the written evidence of Mr Baum. I have stated that, although what the judge said in that paragraph is not the clearest finding of fact, the only sensible reading of that paragraph is that he did find that Mr Nikitin did not have sufficient ready funds available after providing the security. The difficulty for Mr Gaisman is that there is no permission for the Fiona Trust parties to appeal on the question whether the Standard Maritime parties would have been able to fund the six newbuildings. Nor is it open to them to rely on the submission that the Standard Maritime parties could have obtained the release of US$179 million, which was not subject to any proprietary claim to invest in newbuildings. That point was not put to any witness at trial, was not the subject of expert evidence, the judge understandably made no findings about it, and this court is not able to do so.

    10. Mr Gaisman criticised the judge for approaching the case on the basis that it was to be presumed that loss had been caused to the Standard Maritime parties by the orders. Although made in a more measured way than many of his other criticisms of the judge, I do not consider it is justified. The judge’s description at the outset of his judgment is simply that, a description. The force of his observation that an improperly obtained freezing order is likely to cause significant loss to a businessman has more force where the freezing order departs from the usual form of words for such an order and precludes the person subject to the order from using monies in what is in the ordinary course of his or her business.

    11. For the reasons I have given, I do not consider that the judge erred on the two points at the core of the Fiona Trust parties’ case on causation: that he mischaracterised and misunderstood the nature of the Fiona Trust parties’ claims as proprietary, and that this mischaracterisation led him to err in concluding that an application to release the funds would have been far from straightforward. I have not relied on Mr Berry’s submission that what was relevant in deciding whether the Standard Maritime parties were obliged to make an application was Mr Nikitin’s perception of the difficulties he would face, although I recognise that what happened in court on 15 September 2005 and 14 February 2006 may well have affected his perception of what the hurdles he would have to overcome to be able to engage in newbuildings transactions.

    12. For similar reasons, I have concluded that the judge did not err in his assessment of mitigation in [84]. I do not consider that he erred in stating that the Standard Maritime parties would face a “practical dilemma” in attempting to present themselves to Korean shipyards while stating that any transaction depended on a successful application to the court, or in making an application to the court without a concrete proposal in hand for the court to assess in order to have a realistic prospect of success in any application. The judge was entitled to take into account the position taken by the Fiona Trust parties in the past.

    13. In relation both to the “practical dilemma” point, but also more generally, the statement of McCombe LJ in Abbey Forwarding Ltd (in liquidation) v Hone [2014] EWCA Civ 711, [2015] Ch 309 about the position of a person who is subject to a freezing order should be borne in mind. His Lordship stated at [65]:

“[T]he court must be realistic as to the dilemma facing a defendant when served, out of the blue, with a freezing order. Some claimants are far from reasonable in practice – the present case provides a very clear example … Applications for variation are not that simple. They take time to prepare and are not without cost. … Approaches to claimants who agree variations, or even to provide suitable written indications to banks and other third parties that particular payments are not caught by the order, are often far from straightforward. If, in such circumstances, a defendant is shown to have suffered an unusual loss, then in my judgment the claimant should not be surprised if the court orders him to pay for it.”

  1. That statement is primarily relevant to mitigation and to remoteness, but it also fits with Saville J’s statement in Financiera Avenida v Shiblaq that questions of causation should be treated in a common-sense way and that, once a party has established a prima facie case that the damage was caused by the order then in the absence of other material to displace that prima facie case the court can draw the inference that the damage would not have been sustained but for the order. In the present case the loss was not unusual but uncertain. The judge did not err in his treatment of that uncertainty or in his assessment that in the light of the facts known to the Fiona Trust parties the loss fell within the first limb of the rule in Hadley vBaxendale.

  2. In view of my conclusions on these points, it is not necessary for me to consider the new argument Mr Berry advanced on behalf of the Standard Maritime parties or his submissions about the timing of the lost investment. The new argument was that the terms of the order made on 15 September 2005 precluded them from applying to have the provision deeming sale and purchase of ships not to be in the ordinary or proper course of business because they had undertaken “in absolute terms” not to apply to discharge the order made on 31 August 2005 as subsequently varied. Mr Berry’s submission on timing was that the time required for an application for permission for any appeal would inevitably have delayed any investment well beyond the last quarter of 2005 and, until the court had approved of an application to permit the use of what was held as security the Standard Maritime parties could not pay the deposits, let alone the other instalments.

  3. For these reasons, if my Lords agree, this appeal will be dismissed.

 

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