The Financial Services Authority (a company limited by guarantee) v Sinaloa Gold plc and others and Barclays Bank plc

The Supreme Court considered whether the Financial Services Authority (FSA), when seeking an interim freezing injunction under section 380(3) of the Financial Services and Markets Act 2000 (FSMA) and/or section 37(1) of the Senior Courts Act 1981, should be required as a matter of course to give a cross-undertaking in damages in favour of innocent third parties affected by the injunction. The court held that there is no general rule requiring a public authority acting in pursuit of public duties to give such a cross-undertaking. Key factors included the statutory context of FSMA (including paragraph 19 of Schedule 1 which limits the FSA's liability), the public interest in enforcement action, and the existence of statutory non-court freezing powers under Part IV of FSMA which could produce similar third-party effects. The court distinguished between undertakings in respect of third-party costs (which the FSA accepted) and open-ended undertakings in respect of third-party losses and concluded that, in the absence of special circumstances, the starting position is that no cross-undertaking should be required.

Background and factual matrix:

• On 17 December 2010 the FSA obtained a without-notice freezing injunction under section 380(3) FSMA and/or section 37(1) SCA in proceedings it issued on 20 December 2010 against Sinaloa Gold plc and others alleging unauthorised financial promotions and other contraventions of FSMA. Barclays Bank plc, as a bank holding accounts in the name of Sinaloa for which a third party was the sole signatory, was notified and potentially affected by the injunction.
• Schedule B to the injunction contained an undertaking by the FSA declining to give a cross-undertaking in damages, coupled with an undertaking to pay reasonable costs incurred by third parties; an inconsistency in the draft led to FSA reserving the right to vary the costs undertaking.

Procedural posture:

• The FSA applied to remove language referring to potential third-party damages; HHJ David Hodge QC refused that application on 25 January 2011 ([2011] EWHC 144 (Ch)).
• The Court of Appeal reversed and ordered a limited cross-undertaking covering third-party costs but not an open-ended undertaking in respect of third-party losses (reported [2012] Bus LR 753).
• Barclays appealed to the Supreme Court; the appeal raised the general legal question whether a public authority like the FSA should be required to give a cross-undertaking in damages to third parties.

Issues framed by the court:

1. Whether the position of a public authority seeking interim injunctive relief to enforce public law (a ‘law enforcement action’) should be equated with that of a private claimant for the purpose of requiring a cross-undertaking in damages.
2. Whether any distinction is required between undertakings protecting defendants and those protecting innocent third parties.
3. Whether there is any coherent distinction between cross-undertakings covering third-party costs and those covering third-party losses.

Court’s reasoning and conclusion:

• The court reviewed the long-standing private-law practice (the ‘usual undertaking’) and the development of third-party undertakings in freezing (Mareva) injunctions, and then analysed the leading authority Hoffmann-La Roche and its progeny. Hoffmann-La Roche permits the court a discretion whether to require a cross-undertaking from the Crown or a public authority in law enforcement actions rather than mandating a cross-undertaking as a matter of course.
• The court accepted a general distinction between public enforcement claims and private litigation: public authorities act to enforce the law in the public interest and may be deterred if routinely required to expose public funds to open-ended compensation risk. That distinction supports a starting position that no cross-undertaking should be required from an authority like the FSA unless particular circumstances justify it.
• Specific statutory context reinforced the position: FSMA gives the FSA Part IV powers to impose assets requirements and to notify institutions in a way that can freeze funds without court proceedings, and Schedule 1 paragraph 19 provides a statutory limitation on the FSA’s liability in damages except for bad faith or Convention-rights breaches. Requiring a routine cross-undertaking in court-based cases but not where the FSA acts under Part IV powers would be incongruous.
• There is a relevant distinction between third-party costs (which are finite, identifiable and can be required by the court) and open-ended third-party loss; the latter poses the strongest risk of deterring public enforcement and therefore the FSA should not be required routinely to give such an undertaking.
• Applying these principles, the court concluded there were no special circumstances in this case to depart from the starting position and that the Court of Appeal was right to limit the undertaking to third-party costs; the appeal was dismissed.

Wider observations:

The court noted that the same starting position applies at the without-notice stage, and that third parties ought to come forward at the earliest hearing to explain any loss feared; the court must weigh the public interest in enforcement against the risk of uncompensated third-party loss.

Appeal dismissed. The Supreme Court held there is no general rule requiring a public authority like the FSA to give a cross-undertaking in damages to third parties when seeking interim freezing relief under section 380(3) FSMA and/or section 37(1) SCA. The court emphasised the public interest in law-enforcement injunctions, the statutory context of FSMA (including Schedule 1 paragraph 19 and Part IV freezing powers), and the distinction between third-party costs (which may be required) and open-ended third-party losses (which should not be the subject of a routine cross-undertaking). No special circumstances existed in this case to require such an undertaking.

The application was first considered by HHJ David Hodge QC who refused the FSA's application to remove a reference to third-party damages from the injunction ([2011] EWHC 144 (Ch)). The Court of Appeal reversed that decision and ordered a limited cross-undertaking in the form of an undertaking to meet reasonable costs of third parties but not to meet third-party losses ([2012] Bus LR 753; appeal from [2011] EWCA Civ 954). The FSA appealed to the Supreme Court which dismissed the appeal ([2013] UKSC 11).