Court of Appeal clarifies law on freezing orders and compensation

Court of Appeal clarifies law on freezing orders and compensation

The difficulties a defendant faces when confronted with a freezing injunction can be enormous and the impact of the order can have a massively detrimental impact not only on the defendant’s business but also their family life.  The Court of Appeal in Hone at the end of last week acknowledged this (Hone and others v Abbey Forwarding and HMRC [2014] EWCA Civ 711). In doing so, it had provided clarity on a number of issues which apply equally to practitioners either looking to obtain a freezing injunction or acting for a defendant who is subject to one.

Compensation

When determining whether compensation should be paid to the defendant, under the cross undertakings, the court will apply, by analogy, the contractual test of foreseeability of damage and remoteness under the rule in Hadley v Baxendale.

This had been the position for a considerable period of time following the dictum of Lord Diplock in Hoffman-La Roche (Hoffmann-La Roche v Sos For Trade and Industry [1974] 2 All ER 1128).

However, recent first instance decisions had cast doubt on whether it was still good law.  Given the Court of Appeal’s decision last week it clearly is.

However, the Court of Appeal added a caveat.

The Caveat

When applying this test by analogy it may be that logical and sensible adjustments will be required.  This caveat was added to take into account that the court is not awarding damages for breach of contact rather it is awarding compensation for loss caused by the incorrect grant of an injunction.

The difficulties for defendants.

The Court of Appeal set out a list the difficulties defendants face when confronted with a freezing order.  It provides a helpful pointer as to the issues which need to be considered when acting for the defendant in such cases:

  • freezing injunctions will, almost invariably, be served on a defendant come out of the blue
  • the defendant, in being subject to the order, will be limited as to costs and living expenses.  They will need to understand the impact of the order on them
  • the defendant may also be required to identify and verify his assets
  • the defendant will need to quickly assess the evidence relied on in obtaining the injunction, with its legal team, before the return date, with a view as to:
    • whether to oppose the continuation of the order,
    • whether to apply for a variation of the order, and
    • what will be the defence to the action being brought by the claimant
  • any application to vary such an injunction can take time and not inconsiderable cost
  • the freezing orders do not assist the defendant in obtaining any variation as it does not set out the claimant's approach to agreeing any variation nor do such orders provide 'suitable written indications to banks and other third parties that particular payments are not caught by the order'

Payment of compensation

When determining any payment of compensation the court:

  • does not require proof of 'actual notice of the actual circumstance' creating the loss for compensation to be recoverable.
  • will look at whether a claimant had 'knowledge of special circumstances, giving rise to potential type of loss', or other actual knowledge of a particular loss it will be recoverable
  • when considering the knowledge of the claimant will look to the specific circumstances; this aspect being 'intensely fact-sensitive'

On a practical level the clarification provided by the Court of Appeal in this area, could mean that in future claimants may find it more difficult to avoid paying out a realistic sums for damages to the defendant(s).

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About the author:

Janna is a dispute resolution lawyer. She deals primarily with cross border issues and is active in the work being undertaken in relation to the implications of Brexit for Dispute Resolution lawyers. Janna also heads up a LexisNexis costs team bringing together expertise from across the company to deal with the costs issues facing the profession.