The judgment of Lord Justice Longmore in Kazakhstan Kagazy plc and others v Zhunus and others helpfully explains that a freezing injunction may be granted in cases where a cause of action does not yet exist, provided it is possible to issue proceedings for the relief in aid of which the injunction is sought (as it is with contribution notices). Alternatively, if a co-defendant is entitled to issue and serve a contribution notice, that must mean that he has a cause of action for doing so, and a freezing injunction may be issued in support of the contribution notice. The Court of Appeal also held that, although it is necessary for an applicant for equitable relief to come to court with “clean hands”, this does not stop the court from granting a freezing order or making orders for equitable contributions between fraudsters.
The claimants claimed that between 2005 and 2009 the defendants dishonestly caused the claimants to make payments to a purportedly independent construction company for the development of a logistics centre and industrial park in Kazakhstan and caused losses of around US$ 160 million.
At first instance, Mr Justice Leggatt refused to grant the second and third defendants (“D2” and “D3”) permission to serve a contribution notice on the first defendant (“D1”), who had already settled with the claimants. He held that the notice was faulty because neither the claimants nor D2 or D3 “are currently making a factual case of any kind against D1“.
The judge also dismissed D2’s application for a freezing injunction in aid of his contribution claim on the ground that there were no proceedings in existence to support the application, although he said obiter that if he had granted permission to serve the contribution notice, a freezing injunction could properly have been granted against D1 to prevent judgment on that claim from being frustrated. D2 and D3 appealed.
Court of Appeal decision
Lord Justice Longmore gave judgment on behalf of the Court of Appeal. He agreed with Leggatt J that D2 and D3’s primary factual case was not a case against D1 but rather that there had been no fraudulent conduct at all. However, he did not agree that this meant D2 and D3 were not currently entitled to formulate an alternative case that, if they were held liable and there was a fraud, D1 was fraudulent as well. It is common for a defendant to assert he is not liable to a claimant but, in the alternative, that if he is liable, a co-defendant is too. The mere fact that that co-defendant settles with the claimant should not make any difference.
Leggatt J thought it would be an improper use of the court’s process for D2 and D3 to commence a claim for contribution against D1, when neither they nor the claimants were currently making a factual case against D1. The Court of Appeal did not agree. Longmore LJ pointed out that it could be said of any alternative case that it was not being pursued “currently” but only “conditionally“, but that did not mean that there was no intention of pursuing it further down the line. That was not equivalent to an abuse of process. Accordingly, the Court of Appeal gave D2 and D3 permission to serve their draft contribution notice.
The question then arose whether a freezing injunction could properly be granted against D1 in aid of the contribution notice Leggatt J had said that if D2 had obtained permission to bring a claim for contribution, a freezing injunction could properly have been granted. Subject to two arguments raised by D1 (that D2 and D3 had no cause of action against him, and that they were not coming to the court with “clean hands”), the Court of Appeal could not go behind his finding.
The “no cause of action” argument
D1 argued that D2 and D3 had no cause of action against him until they had been held liable to pay compensation to the claimants, as per section 10 of the Limitation Act 1980 (which ties the limitation period for bringing a contribution claim to the date of the judgment, agreement or arbitration award under which the right to recover a contribution accrues).
Leggatt J had concluded that, for the purpose of a freezing injunction, the requirement of cause of action is that an applicant “should have a right to commence proceedings claiming the substantive relief in aid of which the injunction is sought“. The Court of Appeal agreed with this. It pointed to Lord Scott’s observation in Fourie v Le Roux  UKHL 1 that once substantive proceedings had been or were about to be commenced, the court had jurisdiction to grant a freezing injunction. It had to follow that a freezing injunction could be granted even if a cause of action (in its strict sense) did not yet exist, provided it was possible to issue proceedings – as is the case with contribution notices. Alternatively, if a co-defendant is entitled to issue and serve a contribution notice, that must mean that he has a cause of action for doing so, and a freezing injunction may be issued in support of the contribution notice.
D1 argued that a freezing order should not be granted to D2 and D3 as alleged fraudsters who, in bringing the contribution claim, would have to rely on their own fraud and therefore did not come to the court with “clean hands”. Leggatt J had dismissed the argument on the basis that any misconduct by the applicant had to be connected with the relief sought, rather than the underlying substantive merits of the case – as Longmore LJ put it, that one fraudster should not be entitled to freezing relief against another fraudster.
Longmore LJ declared that this argument would mean that neither D1 nor his co-defendants could ever obtain relief against each other and it was too early to be certain that that would be the result. Leggatt J had pointed out that no conspiracy was alleged and even if he was not quite right to proceed on the footing that there was no allegation of joint misconduct, it might turn out that the misconduct of one party was more substantial than that of another. In such circumstances it was impossible to say that contribution would never be ordered. Thus there can be orders for equitable contribution between fraudsters (especially if one of them has benefited more than the other) and there cannot be any blanket denial of any recovery.
It was therefore appropriate to maintain the position by either imposing a freezing order or by extending undertakings D1 had given to the claimants in lieu of a freezing order for the benefit of D2 and D3.