Freezing orders (formerly known as a Mareva Injunctions) were famously described as “one of the law’s two nuclear weapons”. The metaphor has been invoked ever since. They are certainly a weapon of great potency, which should be handled with care and only deployed when no lesser measure will suffice. Anyone looking for an example of what can go wrong need go no further than the decision of the Royal Court in Nautech Services Limited v CSS Limited and Others.
The recent decision of the English Court of Appeal in SCF Tankers Limited (formerly known as Fiona Trust & Holding Corporation) and Others v Yuri Privalov and Others highlights how a cross-undertaking in damages – a central feature of a freezing order – can return to haunt an applicant if their substantive case subsequently fails.
As noted by Lord Justice Beatson, a cross-undertaking represents a commitment “designed to mitigate the risk of leaving a person restrained by an injunction unprotected in respect of loss caused by it when the underlying claim subsequently fails”.
The appellants were SCF Tankers Ltd, formerly Fiona Trust & Holding Corporation, and seventy-five other companies including OAO Sovcomflot, the Russian state-owned shipping company (“the appellants”). The respondents were Mr Yuri Nikitin and seven companies controlled by him (“the respondents”). The appellants obtained a worldwide freezing order against the respondents. In doing so they gave the usual cross-undertaking in damages. The order did not prevent the respondents from conducting transactions in the ordinary course of business, but specifically prohibited the sale and purchase of ships. The respondents subsequently paid $208 million in security to discharge the freezing order, however the prohibition pertaining to ships remained in place. The respondents had liberty to apply to use the secured funds, but no such application was ever made.
The majority of the underlying claims (in support of which the freezing order was obtained) were dismissed at trial. This resulted in the appellants being liable in damages (pursuant to the cross-undertaking) on the basis that the frozen funds would have been used to enter new shipbuilding contracts which would have generated a substantial profit. At first instance Males J ordered the appellants to pay $59.8 million in damages and $11.04 million in interest.
The principal question in the Court of Appeal was whether the absence of an application to release the secured funds prevented causation of loss being established. The Court held that it did not and dismissed the appeal. It held that where a court exercises its discretion to enforce an undertaking in damages it is for the enforcing party to establish that the loss would not have been sustained ‘but for’ the freezing order. If a prima facie case is established which is not rebutted by evidence to the contrary then, by inference, the ‘but for’ test can be satisfied. The absence of an application to release the secured funds did not alter the basic effect of the freezing order. It was unnecessary for the respondents to demonstrate that any such application would have failed. It sufficed that the order prevented investment in new ships and that an application to release the funds would have presented difficulties. The Court also held that Males J had not erred in finding that the loss was not too remote and that the absence of an application did not constitute an unreasonable failure to mitigate the respondents’ loss.
To ensure that a freezing order is effective there is an inevitable temptation to cast it in the broadest possible terms. This decision illustrates the importance of exercising caution and limiting the relief sought to that which is necessary to safeguard the applicant’s position properly. Greater restrictions upon a defendant’s assets will often increase the risk occasioned by the cross-undertaking. As the Court observed (in relation to an observation made by Males J):
“The force of his observation that an improperly obtained freezing order is likely to cause significant loss to a businessman has more force where the freezing order departs from the usual form of words for such an order and precludes the person subject to the order from using monies in what is in the ordinary course of his or her business”.
The risk to applicants appears to have increased further as respondents who elect not to apply to vary or discharge freezing orders may not be adversely affected when seeking to enforce the cross-undertaking in damages.
Freezing orders are one of the most important tools available in civil proceedings, particularly for victims of fraud. The preservation of assets pending the outcome of legal proceedings prevents dissipation by wrongdoers seeking to frustrate the judicial process. However, they are not a remedy without risk. This case is a salutary reminder that they are a weapon that can backfire.
Charles Sorensen, Senior Associate
 Donaldson LJ, Bank Mellat v Nikpour  F.S.R. 87 at 92.
 JRC089. This case related to the other nuclear weapon, a Search Order.
  EWCA Civ 1877.
 It is less prominent in circumstances where a freezing order is sought post judgment.
 Ibid at 49.
 Ibid at 53.