The Privy Council has considered the approach to assessing damages payable by an unsuccessful claimant under the standard cross-undertaking to compensate the respondent to a freezing order for any loss resulting from the order. The decision is relevant to applicants for freezing orders, who can potentially face very large claims if their substantive action fails, and to respondents with frozen assets who may wish to pursue such claims: Ennismore Fund Management v Fenris Consulting Ltd [2022] UKPC 27.
The Privy Council confirmed that damages under such cross-undertakings will generally be assessed in the same way as damages for breach of contract. Accordingly, where a respondent makes a claim for damages which reflect the profits it says it would have earned by investing the funds if they had not been frozen, the court may have regard to the market conditions at the time of the hypothetical investment and any other objective factors relevant to the question of what the respondent would have done with the funds. In the present case, the respondent’s evidence in this regard was largely rejected in light of the market volatility following the 2008 financial crash.
Further, the extent of losses recoverable under a cross-undertaking will be assessed in line with the ordinary principles of causation. Here, the recoverable losses did not extend beyond the date on which the freezing order was discharged so as to include the period between the first instance judgment against the respondent and its successful appeal. The respondent’s lack of access to the funds during that later period was not due to the freezing order (which had been released) but to the effect of the first instance decision.
Although Privy Council decisions are not strictly binding on the English courts, they are very influential. In particular, the Board’s approach to the relevance of market conditions is likely to be particularly pertinent where freezing orders cover periods of economic volatility or are made in respect of inherently volatile assets such as cryptocurrency and other digital assets (which is of course increasingly common).
Parties with frozen assets should be aware that if they wish to pursue a claim under a cross-undertaking it will be incumbent on them to satisfy the court on the balance of probabilities as to what they would have done with the funds and with what result. That may be assisted by keeping contemporaneous records of what actions they could and would have taken throughout the period. However, they should expect a court to scrutinise the likelihood of their counterfactual scenario in all the circumstances.
Hussein Mithani, an associate in our disputes team, considers the decision further below.
Background
The substantive proceedings
In the underlying proceedings in the Cayman Islands, the respondent to the appeal, Ennismore, had sought to claw back certain bonus payments that had been paid to the appellant, Fenris, in the form of shares in an investment fund worth approximately €2 million.
In February 2009 Ennismore obtained a without notice freezing order against Fenris in respect of the shares and the proceeds of their redemption, on the basis that the monies might be withdrawn from the fund and lost for enforcement purposes. In the usual way, Ennismore provided a cross-undertaking in damages. Shortly after the freezing order was granted the shares were converted into cash and placed, by Court order, into an interest-bearing account in the name of the parties’ attorneys.
Ennismore was successful in its substantive claim at first instance and in 2012 the disputed sums were paid to it pursuant to a judgment of the Cayman Court, and the freezing order was discharged.
However, Fenris successfully appealed to the Cayman Court of Appeal, and the Privy Council subsequently upheld the judgment in Fenris’ favour. The disputed sums were repaid to Fenris in May 2016. A dispute then arose as to the amount payable to Fenris under the cross-undertaking in damages given in the 2009 freezing order, including for what period damages would have to be paid.
The claim under the cross-undertaking
Fenris argued that if the freezing order had not been granted, it would have invested the disputed sums and adopted a profitable investment strategy in line with that taken by its principal in the period before 2009, resulting in returns in excess of €12 million. It was said that those returns would have accrued during the entire period between February 2009 when the freezing order was granted, and May 2016 when the disputed sums were returned to Fenris after its successful appeal.
At first instance, the Cayman Court accepted Fenris’ case on the investment strategy it would have adopted and ordered Ennismore to pay in excess of €5 million, being the amount it determined would have been earned between 2009 and 2016 pursuant to that strategy.
Ennismore appealed to the Cayman Court of Appeal, which reduced that figure to some €558,000. The Court of Appeal held that the court below had erred in its judgment by relying too heavily on Fenris’ witness evidence and ignoring objective factors concerning falls in market values and market volatility during the relevant period, and the actual (more conservative) investment decisions taken by Fenris’ principal in the relevant period.
Further, the Court of Appeal determined that damages should be assessed only for the period in which the freezing order had been in force (i.e. until 2012) as losses after that date resulted from the judgment of the first instance court, and not the freezing order itself.
Fenris appealed to the Privy Council arguing that the Court of Appeal erred in its assessment of loss.
Decision
The Privy Council (Lords Briggs, Sales and Stephens, Lady Rose, and Dame Kate Thirlwal) recommended that the appeal be dismissed. The Board was satisfied that the Cayman Court of Appeal’s conclusions were consistent with authority and open to it on the evidence.
The Privy Council followed the approach in F Hoffmann La Roche & Co AG v Secretary of State for Trade and Industry [1975] A.C. 295 to the effect that, when assessing damages payable under a cross-undertaking, the court should take an approach analogous to that taken in breach of contract claims. In essence, Fenris was entitled to recover damages from Ennismore as though the parties had entered into a contract by which Ennismore had agreed not to prevent Fenris from doing that which the freezing order prevented.
In the present case, the Privy Council accepted that if the freezing order had not been granted Fenris would have invested the frozen money profitably, which was not in dispute. The issue for the court was what loss flowed from this and, in particular, whether – on the balance of probabilities – Fenris would have invested the money in the way it alleged (the Privy Council rejected an argument by Fenris that it only needed to establish this on the basis of a prima facie case). Having reviewed the factors taken into account by the Court of Appeal, the Privy Council agreed with its factual assessment that, on the balance of probabilities, Fenris would have taken a more conservative investment approach in the circumstances it faced and would have earned a lower sum than it asserted.
Regarding the period in respect of which losses could be claimed, the Privy Council agreed with the Court of Appeal that the ordinary principles of causation applied, meaning that the loss caused by the freezing order did not continue after the order had been discharged. Any loss after this date flowed from the judgment of the first instance court (which resulted in the disputed sums being paid to Ennismore) rather than the freezing order. Further, any compensation for a successful appellant having been out of funds as a result of a judgment which is later overturned is limited to interest on the judgment debt, rather than damages.
Interestingly, the Board observed that Fenris had adopted an “adventurous, all or nothing approach” to its pleadings and evidence regarding its hypothetical investment strategy and earnings, with no alternative or fall-back case to support a lesser quantification. The Board commented that, given Fenris had failed in establishing its only case, the Court of Appeal’s assessment of the amount recoverable “may be thought to be a generous one”. However, it was an assessment that was open to it.
For further information, please contact:
Hussein Mithani, Herbert Smith Freehills
hussein.mithani@hsf.com
