The law's nuclear weapons explained

A client unjustly subjected to a freezing injunction - a measure the courts have referred to as one of the law's "nuclear weapons" - will want to know what remedy is available.

Normally, the person applying for an interim freezing injunction will have been required to provide an undertaking to the court to pay any damages which the respondent sustains which the court considers the applicant should pay. This is known as the 'cross-undertaking in damages'.

However, there has been some uncertainty as to the correct approach to assessing compensation under the cross-undertaking. The Court of Appeal recently clarified the position in Hone & Ors v Abbey Forwarding Ltd (In liquidation) and another [2014] EWCA Civ 711.

In Hone, the liquidator of Abbey successfully applied for an interim freezing injunction against three of Abbey's former directors, and gave a cross-undertaking in damages. At trial, however, the judge dismissed Abbey's action and discharged the freezing order.

Following an inquiry as to damages caused by the freezing injunction, the directors were awarded compensation for loss of profits and general damages. The directors appealed against the assessment of loss arguing that the contractual principles of remoteness and foreseeability of damages did not apply to compensation under a cross-undertaking.

The historical approach

The court has historically assessed compensation under a cross-undertaking on similar principles as an assessment of damages for breach of contract. In Hoffmann-La Roche & Co AG v Secretary of State [1975] AC 295, Lord Diplock referred (obiter) to the assessment of compensation being "upon the same basis as that upon which damages for breach of contract would be assessed if the undertaking had been a contract between the [claimant] and the defendant that the [claimant] would not prevent the defendant from doing that which he was restrained from doing by the terms of the injunction".

However, in the more recent decision of Lilly Icos LLC v 8PM Chemists Ltd [2010] FSR 4, Mr Justice Arnold considered the remedy under a cross-undertaking should instead be regarded as equitable compensation and that the general contractual rule that damages should be assessed as at the date of the breach was not applicable, raising questions as to what was the correct approach.

The correct approach

The Court of Appeal considered the authorities in Hone. Allowing the appeal in part, the court applied the following principles, which serve as useful guidance as to the correct approach to the assessment of compensation under a cross-undertaking:

• The approach taken by Lord Diplock in Hoffmann-La Roche is the appropriate starting point and so contractual rules of remoteness and foreseeability apply by analogy.

• No more than an 'analogy' with contractual principles is required, however, and, as the court noted, analogies are imprecise comparators.

• "Logical and sensible adjustments" may be required because the court is not in fact awarding damages for breach of contract but is compensating for loss for which the defendant "should be compensated". Therefore, a claimant may find that they are liable for losses which would not usually be foreseen, for example, if the loss arises before a defendant had an opportunity to notify the claimant of the likely loss or to apply for a variation of the court order.

• General damages for distress and anxiety may be awarded to compensate for consequences which cannot be claimed as special damages.

• Ultimately, the court will strive to do justice by compensating the wrongly injuncted party without saddling a claimant with losses that no reasonable person would have foreseen at the time the injunction was ordered.

This is welcome clarification for those advising clients on available remedies. Those advising on seeking a freezing injunction would be wise to heed the court's warning that "damage is inevitable" when wrongly deployed and they should give very careful consideration to the potential adverse consequences.

As Lord Justice Vos noted: "[t]hose who inappropriately seek, obtain and enforce freezing orders should be aware of the kinds of damage they may cause, and of the fact that the courts will be astute to hold them to account by making such awards for their breaches of their notional contracts." SJ

Conrad Walker is a partner and Jonathan Lawrence, pictured, is an associate at Clyde & Co