Court of Appeal clarity on fortification

On 9 October 2014, the Court of Appeal confirmed, for the first time at appellate level, the test that the court will apply when determining whether or not the fortification of a cross-undertaking in damages should be provided.

The appeal was against a freezing order made by Hamblen J in the Commercial Court on 13 January 2012 requiring the appellant to provide additional fortification of its cross-undertaking in damages.

The Court of Appeal has provided welcome clarity regarding the test that the court will apply when determining whether or not fortification of a cross-undertaking in damages should be ordered in a particular case. The decision reflects a common sense and principled approach to the issues.

The applicable test

In order to obtain a freezing injunction it is well-established that a claimant must show (inter alia) that it has a ‘good arguable case’ against the defendant in its substantive cause of action. The Court of Appeal confirmed that a symmetrical test should apply when a defendant seeks fortification of a claimant’s cross-undertaking in damages, ie the defendant must show that it too has a ‘good arguable case’ that it will suffer loss in consequence of the making of the freezing order.

In confirming the test, the court dismissed any suggestion that a defendant has to prove loss on the balance of probabilities because, in the court’s view, this would encourage wasteful satellite litigation.

Tomlinson LJ, who gave the leading judgment, approved Briggs J’s summary in Jirehouse ([2008] EWHC 725 (Ch)) of the three principles relevant to satisfying this test (which the judge set out whilst sitting as a Deputy Judge in Tchigirinski ([2005] EWHC 2471 (Ch)):

‘Broadly speaking, they require [1] an intelligent estimate to be made of the likely amount of any loss which may be suffered by the applicant for fortification (here the defendants) by reason of the making of an interim order. They require [2] the court to ascertain whether there is a sufficient level of risk of loss to require fortification. They require [3] that the loss has been or is likely to be caused by the granting of the injunction’ (numbers added)

His Lord Justice considered that Briggs J’s three requirements are ‘inextricably linked’ and could equally be summarised as a requirement that the applicant for fortification must show a good arguable case for it. Tomlinson LJ continued that, in the interlocutory context, showing a sufficient level of risk of loss to require fortification is synonymous with showing a good arguable case to that effect.

It was recognised that in some cases the assessment of loss at the interlocutory stage may be difficult and in such cases an ’intelligent estimate’ will be required. Tomlinson LJ stated that an ‘intelligent estimate’ will be ‘informed and realistic although it may not be entirely scientific’.

Causation

As to the question of causation, the Court of Appeal confirmed that at the stage of considering whether fortification of the undertaking is required the court has to be satisfied that the making of the order is, or was, a cause without which the relevant loss would not be, or would not have been, suffered. The court stated that it is open to respondents (claimants) to demonstrate that defendant applicants have not surmounted this hurdle by demonstrating that there is no causal link between the granting of the injunction and the loss in question. However, the court was clear that if disproving the causal link requires the ‘deployment of extensive contentious evidence and argument’ then such an exercise cannot be attempted at the interlocutory stage.

Court and judgment details

The appeal from the judgment of Hamblen J ([2012] EWHC 79 (Comm)) was heard by Tomlinson and McFarlane LLJ and Sir David Keene on 17 July 2014. Judgment was handed down on 9 October 2014. Tomlinson LJ gave the lead judgment with which the other judges agreed.

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