Fiona Trust & Holding Corporation v Privalov & Ors

Damages under an undertaking given in support of an improperly obtained freezing order are assessed by ordinary contractual principles, including causation, mitigation and remoteness, applied flexibly where appropriate. A defendant must prove a real, rather than fanciful, chance that the restrained funds would have been used profitably. The possibility that the proposed venture might have made a loss is not an absolute bar to recovery. Where the counterfactual outcome involves several contingencies, the court should assess the overall chance of the claimed profit rather than apply successive percentage discounts. A defendant is not required to make an application to vary an order where that application would have been difficult, delayed and unlikely to succeed. A judgment will be set aside for fraud only where deliberate dishonesty was material and causative of the decision.

The defendants sought damages under undertakings given when the claimant obtained worldwide freezing orders in 2005 and 2007. The underlying claims, which alleged bribery, corruption and diversion of assets, largely failed, although judgment was entered for a limited sum. An earlier order directing an inquiry into loss had been made by Andrew Smith J in [2014] EWHC 3102 (Comm).

The defendants claimed that, but for the orders, they would have invested in shipping, particularly Korean newbuilding contracts, and made substantial profits. The claimant argued that the losses were speculative, too remote, avoidable by an application to vary the orders, or tainted by fraud and unclean hands. The issues were the loss caused by each order and whether the inquiry order or equitable relief should be set aside.

1. The 2005 freezing order caused loss. The defendants would, on the balance of probabilities, have sought to invest the secured funds in a programme of newbuildings. There was a real and substantial chance that contracts would have been concluded with Korean yards in late 2005, the vessels resold before the 2008 crash, and the resale proceeds received on delivery.

2. The order expressly prohibited the purchase of vessels under construction. The later security regime also prevented use of the secured funds in the ordinary and proper course of business without a successful court application. Causation was therefore established. The defendants had not failed to mitigate: any application would have been time-consuming, strongly opposed and attended by only moderate prospects of success.

3. The claimed loss was not too remote. It was within the reasonable contemplation of the parties that the defendants would wish to reinvest the proceeds of earlier vessel sales in shipping ventures. The loss was of the same kind as that identified in the defendants’ contemporaneous warnings.

4. The risk that the venture might have produced a loss did not defeat the claim. The defendants had to prove, to the appropriate standard, that the proposed trading had a real chance of being profitable. The court could then make the best assessment possible, allowing for uncertainty.

5. Because the claim involved multiple contingencies, the appropriate method was to assess the overall chance of achieving the claimed profit. A 50 per cent discount was applied to the claimed newbuilding profit, with further credits for returns actually or notionally earned.

6. The 2007 order caused no loss. The defendants failed to establish that, absent that order, the funds held with Wegelin would have been invested differently.

7. The application to set aside the inquiry order concerning the 2005 order for fraud or to withhold relief on equitable grounds was dismissed. The evidence said to have been suppressed was already before the earlier court. The claimant’s equivalent application concerning the 2007 order did not arise because no loss had been proved.

The judgment records that the defendants’ appeal from the underlying liability judgment was concluded in the Court of Appeal: [2013] EWCA Civ 275. The present decision was a first-instance inquiry into damages and related applications.