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17 June 2014
The Court of Appeal recently considered a claim for compensation under a cross-undertaking in damages by respondents to a wrongfully obtained freezing injunction.(1) In doing so, the court gave useful guidance on how the level of such compensation should be determined and the principles governing the process.
The underlying issue in the claim had been a debt of excise duty and value added tax owed to Her Majesty's Revenue and Customs (HMRC) by Abbey Forwarding Ltd. HMRC issued a winding-up petition against Abbey and appointed a provisional liquidator. Abbey issued proceedings against three of its directors, alleging negligence and involvement in fraudulent activity. As part of this process, Abbey sought and obtained freezing orders against the directors. As would be expected, Abbey was required under the freezing orders to provide cross-undertakings in damages to the directors.
At trial, Abbey's claim was dismissed and the freezing orders were discharged. The directors sought compensation against Abbey under the cross-undertakings, and an inquiry was ordered. The heads of loss and damage under which compensation was sought largely related to loss of business opportunities. HMRC had given an indemnification to Abbey for any losses that it suffered under the cross-undertakings, and was joined to the inquiry proceedings.
At first instance, the judge ordered Abbey to pay general damages to the directors in respect of some of the alleged losses. However, he dismissed a number of the directors' claims because, in his judgment, they involved losses which were not foreseeable. The directors were therefore awarded damages of £8,000 each plus, to one director, an additional award of £3,100 in special damages.
However, the judge also ordered the directors to pay Abbey's costs of the inquiry proceedings largely on the indemnity basis, because they had failed to beat a Part 36 offer made by Abbey.
The directors appealed the first-instance decision. They claimed that the sums awarded to them were insufficient, and that the adverse costs award should not have been made. Of particular importance, the directors argued that the normal principles of remoteness did not apply when assessing compensation under cross-undertakings in damages; instead, the position was analogous to equitable compensation for breach of fiduciary duty entitling the directors to compensation for all losses, whether foreseeable or not.
HMRC cross-appealed, claiming that no damages should have been awarded to the directors. HMRC was granted permission to appeal in relation to the three individual awards of £8,000, but was refused permission to appeal (both initially, and upon a renewed application before the Court of Appeal) in relation to the additional award to one director of £3,100 in special damages.
The Court of Appeal held that, subject to one caveat, compensation under cross-undertakings should be assessed by reference to the rules on assessing damages for breach of contract. Therefore, general principles of causation, remoteness and mitigation apply. The Court of Appeal principally based this finding on Lord Diplock's comments in Hoffmann-La Roche & Co v Secretary of State(2) that the assessment is made, in effect, on the basis that the undertaking had been a contract. Diplock's comments had in turn been based on two previous authorities binding on the Court of Appeal – Schlesinger v Bedford(3) and Smith v Day.(4) In the Court of Appeal's view, the law:
"meets the justice of the matter. A defendant wrongly injuncted should be compensated for losses that he should not have suffered, but a claimant should not be saddled with losses that no reasonable person would have foreseen at the time when the order was made."(5)
The caveat to the Court of Appeal's decision was that when assessing damages under a cross-undertaking:
"[l]ogical and sensible adjustments may well be required, simply because the court is not awarding damages for breach of contract. It is compensating for loss for which the defendant 'should be compensated' (to apply the words of the undertaking)… but because there is in truth no contract there has to be room for exceptions."(6)
As a result of the above, the Court of Appeal held that Abbey was liable only in relation to losses which were reasonably foreseeable at the time that the injunction was granted. However, the Court of Appeal considered that the amount of compensation awarded by the first-instance judge should have been higher, increasing it from £8,000 to £15,000 per director (the additional £3,100 in special damages to one director remained, given that it was not subject to the appeal).
The convenient result of the Court of Appeal's decision on damages was that it did not have to determine the costs appeal, because the first-instance order had to be set aside in any event.
However, the Court of Appeal did level some criticism at the first-instance judge, considering that he had concentrated unduly on criticisms relating to the directors' conduct without proper regard to criticisms relating to HMRC's and Abbey's conduct. The Court of Appeal concluded that if it had not allowed (in part) the appeal on the substantive matters, it would have allowed the costs appeal.
Undertakings in damages are often referred to as the 'price' of obtaining an injunction. The value of such undertakings can often be substantial and a significant downside risk to any prospective applicant. Equally, they provide an important protection to a respondent which finds itself at the sharp end of an injunction wrongfully granted.
Given their importance, therefore, it is crucial to have a clear regime in place for assessing claims for compensation under cross-undertakings in damages. The Court of Appeal's decision in Abbey has helped to ensure this by confirming the applicable principles. Applicants for freezing orders will also welcome the Court of Appeal's decision not to expand a respondent's potential entitlement to compensation beyond that ordinarily available under general principles of causation, remoteness and mitigation.
However, the practical effect of applying the general principles will remain difficult to predict; the quantum of compensation in any given case will of course be fact-specific and usually highly complex to determine. Therefore, while Abbey provides helpful confirmation of the position, it is unlikely to provide practitioners with much assistance when advising clients on the likely scale of potential compensatory awards under a cross-undertaking.
For further information on this topic please contact Daniel Wyatt or Simon Hart at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1) Hone v Abbey Forwarding Ltd  EWCA Civ 711.
(2)  AC 295.
(3) (1893) 9 TLR 370.
(4) (1882) 21 Ch D 421.
(5) Para 64.
(6) Para 63.
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