We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
28 October 2014
In Energy Venture Partners Ltd v Malabu Oil and Gas Ltd(1) the Court of Appeal endorsed for the first time the accepted criteria that must be satisfied before the court can order an application for fortification of a cross-undertaking in damages.
In summary, the court must make an intelligent estimate of the likely amount of loss which might result to a respondent by reason of the injunction. The applicant must show that there is a sufficient risk of loss so as to require fortification, and that the grant of the injunction has caused or is likely to cause such loss.
An applicant seeking a freezing order is often required to give a cross-undertaking in damages to compensate the respondent if it is subsequently determined that the applicant should not have been granted the relief sought.
In certain circumstances, the court may also consider it appropriate for the applicant to provide security for the cross-undertaking – for example, by providing a bank guarantee.
This provision of security in support of a cross-undertaking in damages is known as 'fortification'.
Energy Venture Partners (EVP) Ltd (a company incorporated in the British Virgin Islands) obtained a worldwide freezing order up to the value of $215 million against the assets of Malabu Oil and Gas Ltd (a company incorporated in Nigeria) in connection with a claim brought by EVP in the English court in respect of commission allegedly owed to it by Malabu. Specifically, the underlying claim arose out of services provided by EVP to Malabu, designed to assist Malabu in finding a buyer for an oil field that it owned in Nigeria.
In April 2011 Malabu apparently surrendered the oil field to the federal government of Nigeria. However, the government then agreed to allocate the oil field to two other companies in return for payment. EVP's case was that it was a result of its efforts that the transaction went ahead; this was denied by Malabu.
EVP had been granted a worldwide freezing order which Malabu applied to discharge. This application was denied and the freezing order was upheld subject to various modifications, in particular:
The order to provide a guarantee in the sum of $150 million was made before the $215 million was paid into court. However, once the $215 million was paid into court, Malabu applied for further fortification of the cross-undertaking on the basis that it would suffer substantial losses, since the cost of borrowing was far higher than the interest rate of 0.15% which the sum of $215 million would earn from the funds in court. In particular, Malabu noted that the US prime rate was 3.25% and the cost of borrowing in Nigeria was even higher.
Malabu's application succeeded and EVP was required to provide further fortification of the cross-undertaking such that interest on the $215 million was to be assessed on the basis of the US prime rate of 3.25%. EVP appealed.
The Court of Appeal dismissed EVP's appeal, affirming the decision of the first-instance judge.
The judge had outlined a three-stage test for fortification, pursuant to the principles set out in Harley Street Capital v Tchigirinski,(2) which derived from the judgments in Re: DPR Futures Limited(3) and Sinclair Investment Holdings v Cushnie.(4) These principles are considered in turn below.
Likely amount of loss
The court must make an intelligent estimate of the likely amount of loss which might result by reason of the injunction. The judge noted that this part of the test was easily satisfied. He confirmed:
"This is not a complex damages claim involving intricate issues of causation and remoteness. It is a straightforward claim by the defendant for the time value of money as a consequence of being kept from the use of the sum of US$215 million which has been paid into court."
It was noted that the appropriate rate for an international company operating in US dollars would be the US prime rate. The Court of Appeal accepted that an order for fortification based on 3.25% (representing the US prime rate) was an appropriate order for the judge to have made.
Level of risk of loss
The applicant for fortification had shown a sufficient level of risk of loss to require fortification.
In this connection, the judge found that Malabu had lost the use of the $215 million and therefore would be entitled to make a claim for compensation in respect of that sum. The judge rejected EVP's argument that Malabu had sufficient funds such that it did not need to borrow at a higher interest rate. Specifically, he said that "it was not correct to suggest that a rich claimant could not recover interest for loss of the use of his money".
The Court of Appeal confirmed that Malabu did not need to provide specific evidence in relation to the actual borrowing arrangements or show that it actually needed to borrow the $215 million.
It was also noted that EVP had not presented evidence to the court as to its substantive financial position. Further, the evidence suggested that Malabu's prospects of successfully defending the underlying claim were reasonable.
Loss due to grant of injunction
The contemplated loss would be caused by the grant of the injunction.
The judge considered that if the respondent could show that it would suffer an interest loss if it successfully defended the underlying claim and thus enforced the cross-undertaking in damages, then this should be protected.
This is the first time that the Court of Appeal has considered the accepted test for ordering fortification of a cross-undertaking in damages. Its endorsement of the test provides helpful guidance for applicants seeking such fortification.
For further information on this topic please contact Geraldine Elliott or Sarah Bishop 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)  EWCA Civ 1295.
(2)  EWHC 2471 (Ch).
(3)  1 WLR 778.
(4)  EWHC 218 (Ch).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.