The test whether to order fortification of the cross-undertaking in damages

Anna Caddick

In Energy Venture Partners v Malabu Oil and Gas, the Court of Appeal considered for the first time the question of what is the appropriate test to apply when determining whether fortification of the cross-undertaking in damages should be provided.

This is a case and an appeal with an odd and long procedural history, almost all of which is not relevant for our purposes, but which to an extent makes the judgment somewhat unsatisfactory.

Tomlinson LJ, delivering the judgment of the court, agreed with Hamblen J’s resort to symmetry in the first instance ruling. As the claimant had obtained a freeze of assets over which it may enforce on the basis of a good arguable case, it was appropriate that if the defendant could show that it had a good arguable case that it would suffer loss as a result of the freeze then it should equally be protected.

The claimant had argued that it was necessary to require proof on the balance of probabilities that loss would be suffered. Tomlinson LJ rejected that out of hand. To require this would encourage wasteful satellite litigation. What was necessary was an intelligent estimate to be made of the likely amount of any loss. That required the court to ascertain whether there was a sufficient level of risk of loss. The suggested loss had to be linked to the granting of the injunction (and not, for example, to the mere existence of the litigation), but an extensive exercise was not to be carried out at the interlocutory stage.

This case was a simple one of the defendant being deprived of the use of money. Hamblen J had applied the normal test for compensation in such circumstances: an interest claim based on the usual cost of borrowing an equivalent sum. The rate applied was the US Prime rate (then 3.25%), the rate at which lending would be provided to the most credit-worthy companies. In this case, the evidence was that the costs of borrowing in the country of incorporation of the defendant would have been higher than 3.25% and correspondingly also that defendant would have obtained a higher rate of interest on deposit than 3.25%.

Tomlinson LJ had no difficulty in finding that Hamblen J was right to order fortification in such circumstances and that where commercial parties are involved it is the cost of borrowing which is relevant. There might be cases where the default rule can be displaced; this was not one of them given the evidence that the defendant could have obtained a higher rate on deposit. Tomlinson LJ also found that it was irrelevant as to whether the defendant would need to or would borrow money to replace the funds paid into court.

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