Since writing on the recent High Court decision: Claimants Listed in Schedule 1 v Spence  EWHC 925 (Comm) (“the High Court Decision”) in our previous article titled “Fortification for damages in freezing injunctions: Out with the old, in with the new?”, the Court of Appeal has heard and handed down judgment on the appeal. In short, the status quo has been restored, with the original principles for fortification applications being applied. The decision resolves any doubt that was cast by the High Court Decision, particularly in relation to the need for “real evidence” of harm to be shown.
In our earlier article, we discussed the concept of fortification and the principles applicable to an application for fortification. Put briefly, and as many commercial practitioners know, freezing orders are part and parcel of the Commercial Court’s business, particularly where it is alleged that the respondent has committed a fraud. For an applicant to obtain the freezing order, they will have to provide a cross-undertaking in damages to the court, which provides protection to the respondent to a freezing order, from the harm it may suffer because of the restrictions imposed.
This need to provide an undertaking in damages as a pre-condition to obtaining a freezing order can cause problems particularly for an applicant that is an international entity which may struggle to show it has sufficient assets within the jurisdiction to give its cross undertaking in damages any real value. It is at this point that a respondent to the freezing order will make a cross-application for fortification of the undertaking in damages proffered by the applicant. The court will then assess what harm may be suffered by the respondent and examine whether fortification of the damages could resolve any lingering risk of harm that may be suffered by the respondent.
As highlighted in our earlier article, the law regarding fortification for damages in freezing orders was, prior to the High Court Decision, in a fairly settled state. There had to be a good arguable case that there was a sufficient risk of loss to the respondent due to the freezing order being granted, and there would need to be sufficient evidence to allow an intelligent estimate of the quantum of the losses to be made.
However, the High Court Decision of Moulder J appeared to depart from this formerly consistent approach and risked bizarre and far reaching consequences for applicants to freezing orders. One of the key issues in the High Court Decision was that no real or documentary evidence was adduced to support the respondent’s application for fortification. The Judge herself remarked that there was an “absence of evidence” in the case. Neither was there an estimate of loss which could be considered to be informed, intelligent or realistic.
The High Court Decision was appealed and heard in April 2022 in Claimants Listed in Schedule 1 v Spence  EWCA Civ 500. The primary respondent to the appeal was Mr Spence.
The relevant principles confirmed
The Court of Appeal noted at para  that there was no dispute as to the principles to be applied when deciding whether to order fortification of an undertaking in damages, and also noted that Moulder J had correctly identified those legal principles. These principles were summarised by Popplewell J in Phoenix Group Foundation v Cochrane  EWHC 2179 as follows:
- First, that the court can make an intelligent estimate which is informed and realistic, although not necessarily entirely scientific, of the likely amount of any loss which might be suffered by the applicant by reason of the freezing order.
- Secondly, that the applicant has shown a sufficient level of risk of loss to require fortification, that is to say, has shown a good arguable case to that effect.
- Thirdly, that the making of the interim order is or was a cause without which the relevant loss would not be, or would not have been, suffered.
One of the appellants’ grounds of appeal was that an application for fortification could not be based on an assertion or supposition, but required an evidential foundation. The Court of Appeal highlighted that this is not a separate requirement when granting an application for fortification. It was simply an obvious aspect of the need for the applicant to demonstrate a good arguable case – and it would be impossible to show there was a good arguable case without a proper evidential basis.
Further, the appellants submitted that for an application for fortification the applicant needed to show that the losses would result because of the injunction being granted by the court, rather than due to the underlying proceedings: see Harley Street Capital Limited v Tchigirinski  EWHC 2471 (Ch). Moreover, it was important to recognise that it may be difficult to disentangle the prospect of damage caused by the mere existence of the litigation from the making of the freezing order. The Court of Appeal once again considered this was simply another aspect of the causation element of the applicable requirements for an application for fortification.
Had the respondent shown an arguable case that he would suffer loss?
In the High Court Decision, the Judge’s main focus was on Mr Spence’s financial arrangements. Mr Spence had a US dollar loan with Coutts of c.$9 million, which he had used to buy US assets, and which was secured by a sterling deposit of c.£8.8 million. Although he was incurring interest on the dollar loan, his evidence was that he intended to redeem the loan once sterling had appreciated to the rate of $1.55 to £1. He complained that there was a risk that Coutts would call in his dollar loan and that he would be forced to discharge the sterling deposit to redeem the US dollar loan at a rate over which he had no control and which would be lower than the exchange rate at which he intended to exchange currency to redeem the US dollar loan. As such, the early and forced realisation of his sterling deposit risked causing him harm and loss. The measure of that loss was, he contended, the difference between the rate at which he might be forced to realise the sterling deposit and the rate at which he intended to convert it.
The Court of Appeal found that this approach was “too narrow”, failing to reflect Mr Spence’s overall financial planning and arrangements. The Court observed that Mr Spence had put in place these arrangements to provide an effective hedge. By maintaining a sterling fund which would match the dollar assets (standing as security for the loan that was used to purchase them), he had effectively protected himself from the risk of depreciation of the dollar against sterling. The realisation of the sterling deposit would not therefore cause Mr Spence any loss. The real loss was the loss of his protection (i.e. his hedging arrangements) – and the measure of that loss was the cost of putting in place an alternative hedging arrangement.
The Court of Appeal considered that there were potentially a number of ways in which Mr Spence could replace his existing currency protection. He could simply replicate the hedge – by re-mortgaging his US assets and converting the proceeds to sterling. Alternatively, he could enter into forward currency trades or purchase suitable options or swaps. The Court of Appeal raised this as an issue in advance of the appeal and invited the parties to respond. Mr Spence did not adduce any evidence about the availability or cost of these replacement options, and simply invited the Court of Appeal to assess his loss in the full amount that would occur in the worst-case scenario i.e. that sterling reached $1.55 at some point after he had been forced to convert the sterling deposit at a much lower rate. He also argued that he could not reasonably be expected to put alternative arrangements in place because of the complexity of doing so and his inability to prove their cost without actually having to enter into them.
The Court of Appeal rejected his arguments. It found that Mr Spence could reasonably have been expected to obtain evidence about whether alternative financial arrangements were available. Moreover, it said that adducing such evidence was a pre-requisite of inviting the judge at first instance to embark on the assessment of speculative future losses based on currency movements.
It was therefore held that Mr Spence had failed to show a good arguable case that he would suffer loss as a result of the worldwide freezing order and the judge at first instance was wrong to have found that he had.
It was not strictly necessary, given that finding, for the Court of Appeal to go on to consider the basis of the appellants’ appeal. However, it proceeded to do so and thereby provided some important indicators for the proper approach to applications for fortification.
Was there sufficient evidence?
The first question was whether Moulder J had been wrong to accept Mr Spence’s assertion that he intended to retain the sterling deposit until the dollar exchange rate hit $1.55, without any supporting documentary evidence.
The Court of Appeal agreed with the appellants to the extent that the arrangements Mr Spence had made with Coutts were questionable commercially. The arrangements were in place and only made sense if Mr Spence was anticipating a steep rise in sterling in the short-to-medium term. As such, and notwithstanding the lack of evidence, the judge was entitled to accept his evidence as to the exchange rate at which he planned to unwind the arrangement as the basis of the assessment of loss.
Was there a sufficient risk that Coutts would make a demand?
The next ground of appeal was whether Moulder J had been entitled to find that there was a sufficient risk (as contended by Mr Spence) that Coutts would make a demand on the dollar loan. The Court of Appeal noted and agreed with Moulder J’s observation that under the terms of the loan, Coutts was able to make such a demand at any time without giving warning to Mr Spence, regardless of whether there was a worldwide freezing order present or not. However, the question was whether it was arguable that the freezing order (as distinct from the allegations in the claim more generally) would cause Coutts to make such a demand.
In this regard, the Court noted that Coutts was substantially over-secured by cash for the loans. It continued to benefit from substantial interest payments on the loan. It had no financial reason to terminate the arrangement which had already been in place for some years. Furthermore, and importantly, Coutts had had notice of the freezing order for several weeks and had not given any indication that it would seek to call in the loan. That was a clear indication that it was not sufficiently concerned by the freezing order to terminate its arrangements with Mr Spence.
Accordingly, the Court found that the judge at first instance was wrong to find that there was a real, as opposed to a fanciful, risk that Coutts would call in the loan.
Was there an intelligent estimate of loss?
Finally, the Court of Appeal considered whether there had been an intelligent estimate of the loss. Moulder J had found that the likely loss was in the region of £800,000, but had failed to explain her reasoning for this, and in particular, had not explained what values she was ascribing to various factors which had been identified as relevant to estimating the loss.
The Court of Appeal noted that this was not surprising since the estimation of loss based on exchange rate movements was “notoriously difficult” and, by definition, was “entirely speculative”. In those circumstances, however, the unexplained number arrived at by the judge was “intelligent guesswork”, but not an intelligent estimation of loss.
Accordingly, the Court held that Mr Spence’s losses were inherently speculative and incapable of intelligent estimation.
So what does the Court of Appeal decision highlight?
Firstly, the decision highlights the importance of correctly characterising and identifying the loss which a freezing order might cause to materialise.
Secondly, even though the test on an application for fortification is merely that there must be a good arguable case of a risk of loss, it is not permissible to gloss over the causation element. The risk of loss must be specifically linked to the injunction rather than the substantive allegations in the litigation.
Thirdly, when assessing loss, it is crucial that the court makes an informed, realistic and intelligent estimate of the proposed loss. It cannot simply be the product of intelligent guesswork based on entirely speculative foundations.
From now on, as confirmed by the Court of Appeal in this decision it appears to be the case that no detailed evidence = no fortification.
© Sian Mirchandani KC & Hannah Daly of 4 New Square Chambers
This article was first published in ThoughtLeaders4FIRE Magazine