Fiona Trust & Holding Corporation & Ors v Yuri Privalov & Ors

A court may refuse to enforce a cross-undertaking in damages where the defendant’s conduct has an immediate and necessary relation to obtaining, continuing or enforcing the interim order. The discretion is equitable, but misconduct generally must be related to the relief sought. The court should be slow to deny an inquiry where the claimant obtained a large freezing order through material and culpable non-disclosure or misrepresentation. An applicant need only provide credible evidence that the order may have caused loss; the court need not determine the ultimate damages claim at that stage. Damages are assessed by analogy with contractual damages, subject to causation, remoteness and mitigation, applied with appropriate flexibility.

The claimants had obtained worldwide freezing orders in 2005 and 2007 against the applicants, supported by cross-undertakings in damages. Following the trial, most of the underlying fraud claims failed, although some claims succeeded against Mr Nikitin and related entities. The Court of Appeal dismissed the claimants’ appeal from the trial judgment, and permission to appeal to the Supreme Court was refused.

The applicants sought directions for an inquiry into compensation under the undertakings. The claimants argued that the undertakings should not be enforced because of Mr Nikitin’s misconduct and that the applicants had not shown sufficient evidence of loss. The issues were whether the court should refuse an inquiry on equitable grounds and whether the applicants had established a sufficient evidential basis for one.

1. The inquiry was directed. The applicants had shown sufficient evidence that the 2005 and 2007 freezing orders caused loss.
2. The governing principles stated by Lord Diplock in Hoffmann-La Roche & Co. AG v Secretary of State [1975] 1 AC 295 are authoritative but obiter. The court retains an equitable discretion not to enforce an undertaking where the defendant’s conduct makes enforcement inequitable.
3. The relevant conduct is not unrestricted misconduct. It must relate to obtaining or continuing the injunction, or enforcing the undertaking. This reflects the clean-hands principle: the misconduct must have an immediate and necessary relation to the equity sought. The broader approach suggested in Cheltenham and Gloucester BS v Ricketts [1993] 1 WLR 1545 and Financiera Avenida v Shiblaq was understood consistently with that limitation. Dadourian Group International Inc v Simms [2009] EWCA Civ 169 did not exhaustively define every circumstance relevant to the discretion, but required the necessary link where defendant conduct was relied upon.
4. Mr Nikitin’s relevant misconduct was attributable to the corporate applicants because he wholly owned and controlled them. However, the claimants had themselves obtained the freezing orders through serious and culpable non-disclosure and misrepresentation. In that context, it would not be equitable to refuse an inquiry. The court should not readily deny compensation where large freezing orders were improperly obtained.
5. Under Yukong Line Ltd v Rendsburg Investments Corp [2001] 2 Lloyd’s LR 113, an applicant must provide credible evidence of loss; the court will not order an inquiry where the proposed claim is plainly unsustainable. That threshold was met. It was credible that the applicants would have deployed the unfrozen funds profitably in shipping or other investments.
6. Compensation is assessed by analogy with contractual damages. The order must be an effective cause of loss, and reasonable mitigation is required. The principles of remoteness may be applied flexibly, particularly because knowledge is assessed by reference to those obtaining the relief and may include knowledge acquired while the order continued. The final quantum issues were left to the inquiry.

The judgment records that the claimants’ appeal from the December 2010 trial judgment was dismissed by the Court of Appeal on 26 March 2013. Permission to appeal to the Supreme Court was refused. The present judgment directed an inquiry into damages under the freezing-order undertakings.