Appeal court orders claimant to pay more than $70m in damages

On November 21st in the case of SCF Tankers Limited (formerly Fiona Trust & Holding Corporation) and Others v Yuri Privalov and Others, the Court of Appeal handed down what legal firm Clyde and Co called “a welcome decision” concerning worldwide freezing orders Jessica Maitra, Amy Cope and Olga Kasatkina, of Clyde and Co, wrote that the Court clarified the principles governing the award of damages against a person who has provided a cross-undertaking in damages to obtain an injunction, where the claims which were the basis of such injunctive relief were subsequently dismissed at trial.

In this case the claimant (the appellant) obtained a worldwide freezing order (WFO) against the defendant. The claimant had to provide the usual cross-undertaking in damages, which was aimed at compensating the defendant if it was subsequently determined that the applicant was not entitled to the relief granted by the court.

WFO is a form of injunctive relief that restrains a party from disposing of, or dealing with its assets situated worldwide. When such relief is granted, the applicant is almost always required to give an undertaking in damages. The applicant is also required to give full and frank disclosure, which involves provision of not only the information that supports their case, but also that which may adversely affect it.

The defendant discharged the WFO by making a payment of $208.5m as security into the court. It was able to use the secured funds in the ordinary course of business, which did not include selling or purchasing vessels. The defendant was given liberty to apply to the court for the release of the secured funds for such excluded transactions, but did not do so.

The trial judge dismissed most of the claims brought by the claimant, and the claimant was made to honour the cross-undertaking and pay the defendant $59.8m in damages plus $11.04m interest as compensation for the loss caused by the WFO and the security provided. The claimant appealed.

The Appeal Court had to determine whether or not the defendant’s failure to make an application to the court for the release of the secured funds broke the legal chain of causation between the WFO and the loss.

1 – Burden of proof

It is for the party seeking to enforce the cross-undertaking to show that the damage they sustained would not have been sustained but for the injunction. The Judge found, therefore, that the defendant had to show that the WFO and the security provided were an effective cause of their loss.

2 – Causation

Lord Justice Beatson emphasised that establishing that the WFO was a cause without which the loss would not have been suffered was sufficient to prove causation. “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.”

Therefore it sufficed to show that the WFO prevented the defendant from entering into contracts to build ships and the difficulties associated with making a court application to have the funds released to enable them to enter into such contracts. The defendant did not need to show that such application to the court would fail.

The Judge found that the WFO prevented the defendant from entering into the contracts in question, and the liberty to apply to the court for the release of funds did not affect the nature or effect of the prohibition. Furthermore, in the event that the defendant had made an application to the court to allow it to engage in the sale and purchase of vessels, the claimant was likely to have strongly resisted any such application. Therefore, the chain of causation between the WFO and the loss was not broken when the usual “but for” test of causation was applied.

3 – Mitigation of loss

Lord Justice Beatson agreed with the lower court that the failure of the defendant to make an application for the release of funds was not an unreasonable failure to mitigate their losses. It was held that the defendant would have faced a “practical dilemma” in attempting to get a quote from the Korean shipyards on the basis that, although they were keen to conclude some shipbuilding contracts, they would need to make an application to the court in order to find out whether they were allowed to do so. At the same time, the defendant would need some concrete proposal in hand for the court to assess before applying to the court for permission.

4 – Remoteness of loss

The Court found that the loss sustained by the defendant was not unusual but uncertain. The Court agreed with the lower court’s assessment that, in light of the facts known to the claimant, the loss fell within the first limb of the rule in Hadley v Baxendale, that the losses incurred by the defendant due to the WFO were direct losses that were reasonably in the contemplation of the parties.

Clyde & Co’s team said that the case provided a vivid illustration of the potentially drastic financial consequences a party might face in circumstances where an injunction subsequently proved to have been improperly obtained. “Injunctions are not to be considered lightly, and should not be employed for the sole purpose of using them as a tactical device designed to exert pressure on the opposing party, especially given that in most, if not all, cases, the applicant must provide a cross-undertaking in damages”, the writers said.