The judgment of Mr Justice Males in Fiona Trust & Holding Corporation v Privalov and others helpfully illustrates the courts’ approach to assessing whether a defendant has suffered loss as a result of an incorrectly granted freezing order, for the purpose of enforcing the claimant’s cross-undertaking in damages. The decision confirms that the court should make a “liberal assessment” of the defendant’s damages, to reflect the “inherent imprecision” of calculating damages suffered as a result of a freezing order, and that damages may be awarded for loss of profits, even if the defendant might have used its funds in a way which could have resulted in a loss.
Mr Yuri Nikitin and companies controlled by him (together the “defendants”) faced claims for damages (wide ranging allegations of bribery, corruption and diversion of assets) in excess of US$ 577 million. On 31 August 2005, the claimants (the Russian state owned shipping company OAO Sovcomflot) obtained a worldwide freezing order in the sum of US$ 225 million. In May 2007, the claimants obtained a further order, this time freezing assets to the total value of US$ 377 million. In December 2010, the claimants obtained judgment for US$ 16 million plus interest. The majority (around 95% by value) of the claims were dismissed.
When each freezing order was granted, the claimants were required to give the usual cross-undertaking in damages, namely that “If the court later finds that this order has caused loss to the respondent, and decides that the respondent should be compensated for that loss, the applicants will comply with any order the court may make“. The defendants sought an order for the enforcement of the undertakings and for an inquiry as to the damages suffered by them as a result of the freezing orders. The claimants resisted enforcement of the undertakings on the basis that the defendants had not shown a sufficient case that they had suffered loss that should be compensated.
The court rejected the claimants’ arguments and ordered an inquiry as to damages. The claimants applied to set aside the inquiry, arguing that it had been obtained by fraud on the part of the defendants, or that the court retained a discretion to withhold an equitable remedy under the “unclean hands” principle. Mr Justice Males had to consider: (1) what loss the defendants had suffered as a result of the freezing orders; (2) whether to set aside the order for an inquiry.
Assessment of loss under the cross-undertakings
Males J confirmed, applying Hone v Abbey Forwarding Ltd  EWCA Civ 711 (covered on the blog here), that the court will assess compensation using the contractual basis for assessing damages, by reference to the principles of causation, remoteness and mitigation, although the court may need to make “logical and sensible” adjustments to take account of the fact that it is dealing with compensation for loss caused by an injunction that was wrongly granted, rather than a breach of contract. The freezing order need not be the sole cause of the loss, but it must be an effective cause.
The judge confirmed that the court should adopt a “liberal assessment” of the defendants’ damages. This did not mean that a defendant should be treated generously in the sense of being awarded damages which it had not suffered, but the court had to recognise that the assessment of damages suffered as a result of a freezing order would often be “inherently imprecise” – for example because the defendant could not say precisely what it would have done with its funds but for the freezing order, and because the problem had been created by the claimant obtaining an injunction to which it was not entitled. The defendant was not absolved from proving its loss, but the court had to bear these factors in mind in deciding whether it had succeeded in doing so.
Males J rejected the claimants’ argument that damages could not be awarded if the defendants would have used their funds in a way which might have resulted in a loss. In principle, damages can be awarded for loss of profits even if a claimant might have made a loss. The court had to ask whether the claimant had proved to a sufficient standard (which might be on the balance or probabilities or sometimes merely that there was a real and substantial chance) that its trading would have been profitable. If that was the case, the court would make the best assessment of the damages that it could, if necessary applying a discount to reflect any uncertainty, while recognising that a party seeking to show what might have happened was not required to perform an impossible task with unrealistic precision. This was clear from the judgments of Flaux J and the Court of Appeal in Parabola investment Ltd v Browalia CAL Ltd  EWHC 901 (Comm) and  EWCA Civ 486.
It was held that, on the balance of probabilities, the defendants had suffered a loss as a result of the 2005 order and were entitled to damages. Males J found that, taking into account all the uncertainties, there was a 50% chance that the defendants would have made the profits claimed and that damages should be calculated accordingly. However, the judge found that the 2007 order did not cause any loss to the defendants.
Should the inquiry as to damages be set aside?
Males J dismissed the claimants’ application that the inquiry as to damages should be set aside on the basis that it had been obtained by fraud on the part of the defendants. He found that the defendants had not consciously or deliberately concealed their assets. The judge also rejected the argument that he had a discretion to refuse relief to the defendants based on the “unclean hands” principle. He found that there had been no conduct on the part of the defendants that warranted invoking the principle.
The judge acknowledged that Mr Nikitin had been found to be dishonest in some of his business dealings and untruthful in his evidence. However, he stressed the trial judge’s comment that even serious and well-founded criticisms of a defendant’s character did not mean that claimants could be less scrupulous in complying with their duties when applying for a freezing order; nor did they provide a reason not to enforce an undertaking. In Males J’s view, it was only just that claimants who obtained orders to which they were not entitled should be ordered to provide appropriate compensation for losses suffered – even more so where they were guilty of serious failures to disclose material facts and had pursued claims described by the trial judge as “obviously unsustainable“.