The Court of Appeal confirms the principles to be applied when assessing causation under a crossundertaking in damages

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management - Freezing Orders

28-02-2018

SCF Tankers Limited & Ors v Yuri Privalov & Ors [2017] EWCA Civ 1877

Facts of the case

– an applicant for a freezing order must usually undertake to compensate the respondent for any loss caused by the injunction (a “crossundertaking in damages”)

– in this case, the applicant (“A”) had successfully sought a worldwide freezing order (the “WFO”) against the respondent shipping company (“R”). The WFO allowed R to undertake transactions in the ordinary course of its business (as is usual), but specifically prohibited the sale and purchase of ships. A also gave a cross-undertaking in damages for any loss suffered by R

– R subsequently paid over USD 200M as security to discharge the WFO (the “Secured Funds”). However, the prohibition on R entering into contracts for the sale and purchase of ships was continued, although R could apply to the court to use the Secured Funds for this purpose

– at trial, almost all of A’s claims (95 per cent by value) were dismissed, and the High Court ordered A to pay R USD 70 million pursuant to the cross-undertaking in damages

– A appealed the High Court’s decision

The decision

– the Court of Appeal (“CoA”) upheld the High Court’s decision finding that, but for the WFO, R would have entered into contracts for the sale and purchase of ships

– the CoA found that R had established at least a prima facie case that its loss was caused by the WFO, and R did not therefore have to show that any application to release the USD 200 million would have failed

– instead, it was sufficient to show that (i) the WFO and subsequent security prevented R from entering into contracts for the sale and purchase of ships and (ii) the difficulties of any application for the release of the Secured Funds

– the CoA also held that R’s losses were not too remote to be recoverable (being within the actual or reasonable contemplation of the parties at the time of the WFO and subsequent security) and that R had not unreasonably failed to mitigate its loss

– this was on the basis that it would have been difficult for R to either (i) enter into a contract which was stated to be subject to a successful court application for the release of the Secured Funds or (ii) apply to the Court to use such funds without a concrete proposal

– A’s argument that the WFO did not prevent R from entering into new contracts for the sale and purchase of ships (but only from using the Secured Funds to do so) was rejected as it did “did not reflect the reality of financing such transactions”

Analysis and practical advice

– this case highlights the common sense way in which the court will approach the question of causation under a cross-undertaking in damages. Once a prima facie case that the loss was exclusively caused by the order has been established, then in the absence of evidence to the contrary, the court will not require a respondent to deal with every conceivable or theoretical cause of the loss claimed

– the case is also a reminder of the potentially substantial exposure of an applicant under such an undertaking. In particular, in assessing damages, the courts will be mindful of the practical difficulties often faced by respondents in agreeing or applying for variations to freezing orders, or persuading third parties such as banks that certain payments are not caught. Applicants should not therefore assume that they will be able to avoid liability by arguing that (i) the respondent should have applied to vary the order or (ii) that the loss is too remote simply because it is unusual

– clearly, where a party is a respondent to a freezing order, it should ensure that it keeps as full a record as possible of any losses incurred in order to support any later claim under the cross undertaking in damages

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