A recent decision of the Privy Council (Ennismore Fund Management Ltd v Fenris Consulting Ltd (Cayman Islands) [2022] UKPC 27 (27 January 2022) (bailii.org)) has confirmed that damages payable under cross-undertakings given in a freezing order application will generally be assessed in the same way as damages for breach of contract. While the decision is not specifically binding on the courts in England and Wales, they will clearly be influenced by it. The decision will be relevant to applicants and respondents of a freezing order alike, particularly when a substantive action fails and a claim for significant damages may follow.

In this article, our Dispute Resolution team provides more details on this decision and its significance.

Background

Ennismore Fund Management Ltd (EFML) brought proceedings against Fenris Consulting Ltd (Fenris) in the Cayman Islands in February 2009. EFML sought to recover bonus payments that had been paid to Fenris in the form of shares in an investment fund, worth approximately two million euros. EFML had concerns that the sums in dispute could be withdrawn from the fund and then be 'lost' for enforcement purposes. On 27 February 2009, EFML therefore sought and obtained a without notice freezing order for the shares and the proceeds of their redemption, providing a cross-undertaking in damages in return. The proceeds were placed into an interest bearing bank account held jointly by the parties' attorneys, subject to the freezing order.

EFML's claim was successful at first instance and the judgment sum was paid out from the funds held in the joint bank account on 16 February 2012. Fenris successfully appealed the decision to the Court of Appeal (CoA) and in response, EFML appealed to the Privy Council (JCPC). The JCPC dismissed the EFML appeal on 4 May 2016 and the judgment sum was finally repaid to Fenris on 25 May 2016, some seven years after the shares were frozen.

Claim under the cross-undertaking

A further dispute then arose as to the damages that should be paid to Fenris as a result of the freezing order and an inquiry into damages took place. Fenris argued that it had been deprived of the opportunity to invest the funds frozen by the injunction in the period 27 February 2009 to 25 May 2016. Adopting the same investment strategy that Fenris asserted it had used previously and would have followed again, the Court at first instance assessed Fenris' losses at over 5.3 million euros.

EFML appealed to the CoA. EFML had argued that Fenris would have taken a more conservative investment approach and – in any event – Fenris' losses were limited to the period between 27 February 2009 and 16 February 2012; the date the freezing order was made and the date it was discharged. The CoA accepted the arguments made by EFML and substituted the award with an amount just in excess of 550,000 euros, which represented the loss suffered by Fenris between 16 May 2009 (when the funds from the redeemed shares were deposited in the joint bank account) and 16 February 2012 (the date of the original first instance decision on liability). Fenris appealed to the JCPC.

JCPC decision

The JCPC did not accept that the CoA had erred in its assessment of the loss, either as to the duration of the period of loss or in its assessment of the losses suffered by Fenris, and the appeal was dismissed.

Duration of period of loss

The JCPC held that the loss flowing from the freezing order did not continue after the freezing order had been discharged. Any loss after the freezing order had been discharged flowed from the judgment and consequential orders, which led to frozen monies being used to meet the first instance judgment in favour of EFML – not from the freezing order.

The JCPC referred to the long established principle that the courts do not compensate a litigant who succeeds on appeal for losing at first instance. Where a litigant has been prevented from accessing funds during the period between judgment and appeal, interest on the judgment sum can be claimed. In this case, the period of loss was the period between the date on which Fenris would have invested the money from the shares had the funds not been frozen and the date of the first instance judgment: between 16 May 2009 and 16 February 2012.

Assessment of loss

The JCPC held that the approach to be taken when assessing damages payable under a cross-undertaking is analogous to that taken where there has been a breach of contract. This is so notwithstanding there is no contract between the parties and the undertaking is given to the court rather than to the injuncted party. In this case, Fenris was entitled to recover damages from EFML as though the parties had entered into a contract, under which EFML would not prevent Fenris from doing that which the injunction prevented.

The fact that the burden of proving the loss was on Fenris as the party seeking compensation pursuant to the undertaking was not disputed, and there was no dispute that Fenris could prove on the balance of probabilities that it had lost the opportunity to invest the frozen money profitably. The issue for the court was what loss flowed from that lost opportunity. The parties disagreed about how the money would have been invested and how the loss was to be quantified.

The JCPC upheld the findings of the CoA that Fenris would have invested far more conservatively than it had argued. It was incumbent on the injuncted party to establish that it would have acted in a particular way on the balance of probabilities, with more than a prima facie case. Fenris failed to establish that it would have undertaken more risky investments with higher returns. On the balance of probabilities, the CoA found that Fenris would have taken a more conservative investment approach in the circumstances it faced and would have earned a lower sum than it asserted. The JCPC agreed with the CoA assessment.

Conclusion

This decision is helpful in illustrating how an inquiry as to damages flowing from an injunction will be undertaken and confirming that recoverable losses will be assessed in line with the ordinary principles of causation that apply to a claim for breach of contract. If a claim under a cross-undertaking is to be pursued, the onus will be on the party making the claim to satisfy the court – on the balance of probabilities - what they would have done with the 'frozen funds' and what the result would have been.

If you have any questions, please get in touch with Catherine Naylor, Sean Adams or Teresa Edwards.