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[Buy ICLR report:  1 WLR 5623]
||Neutral Citation Number:  EWCA Civ 1877
||Case Nos: A3/2016/4165 & A3/2016/4167
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION, COMMERCIAL COURT
THE HON MR JUSTICE MALES
 EWHC 2163 (Comm),  EWHC 2451 (Comm)
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE LEWISON
LORD JUSTICE KITCHIN
LORD JUSTICE BEATSON
|| SCF TANKERS LIMITED
(formerly known as FIONA TRUST & HOLDING CORPORATION)
||- and -
Mr Jonathan Gaisman QC, Mr Dominic Dowley QC, Mr Justin Higgo,
and Mr Dan McCourt Fritz (instructed by Reynolds Porter Chamberlain LLP) for the Appellant
Mr Steven Berry QC, Mr Nathan Pillow QC and Mr Adam Board (instructed by Lax & Co LLP) for the Respondent
Hearing date : 4 October 2017
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Lord Justice Beatson :
- This appeal concerns the application of the principles governing the award of damages against a person who has given cross-undertakings in respect of an interlocutory injunction he obtained where the claims which were the basis of the interlocutory relief are subsequently dismissed at trial. The appellants are SCF Tankers Ltd., formerly Fiona Trust & Holding Corporation, and seventy-five other companies including OAO Sovcomflot, the Russian state-owned shipping company, and subsidiaries of Sovcomflot. As the material events occurred before the change of name, I shall refer to them as "the Fiona Trust parties". The respondents are Mr Yuri Nikitin and seven companies controlled by him, who I shall refer to as "the Standard Maritime parties".
- In this case the damages were awarded to the Standard Maritime parties as compensation for loss caused by a worldwide freezing order obtained by the Fiona Trust parties on 31 August 2005 and security undertakings which the Standard Maritime parties gave on 15 September 2005 in order to discharge the freezing order. The freezing order contained the usual undertaking as to damages by the applicants. The basis of the Fiona Trust parties' application for the freezing orders were claims by them of bribery, corruption and diversion of assets by Mr Nikitin and others. The trial of those claims took place over seventy-six days between October 2009 and March 2010. Its outcome was that in December 2010 most of the claims were dismissed because the transactions were not dishonest or in breach of trust. The trial judge, Andrew Smith J made damning findings about the honesty and credibility of both parties, as to which see  below. On 3 October 2014, he ordered an inquiry as to the damages suffered by the Standard Maritime parties.
- The matter came before Males J together with an application by the Fiona Trust parties made in October 2015 that the order made on 3 October 2014 be set aside on the ground that it had been obtained by fraud or that the court should exercise its discretion to withhold an equitable remedy. In orders dated 26 August and 27 October 2016, Males J dismissed the set-aside and denial of remedy applications, and ordered the Fiona Trust parties to pay US $59.8 million in damages and US $11.04 million interest to the Standard Maritime parties as compensation for loss caused by the 2005 freezing order and the security undertakings given to obtain its discharge. He dismissed a claim by them for losses claimed in respect of another freezing order made on 21 May 2007 which he held had not caused them further loss. On 24 November 2016, Patten LJ gave the Fiona Trust parties limited permission to appeal against the award of damages but refused permission to appeal against the dismissal of the set-aside and denial of remedy applications.
- The 2005 freezing order expressly excluded the sale and purchase of vessels from the definition of the ordinary and proper course of the Standard Maritime parties' business. When that order was discharged on 15 September, while the Standard Maritime parties were given liberty to apply to use the secured funds in the ordinary course of business, the Fiona Trust parties' right to oppose the use of the secured funds in that way was preserved. The award of damages was made on the basis that the freezing order and the security undertakings prevented the Standard Maritime parties from investing in the purchase and sale of "newbuildings" (that is the construction of new ships) from Korean shipyards.
- The appellants' case is that the judge erred in law in holding that the freezing order and the security undertakings caused the Standard Maritime parties not to seek to invest in "newbuildings". Mr Gaisman QC, on their behalf, relied on what he submitted were errors as to causation, mitigation, and remoteness by the judge, and a mistaken conclusion by him as to the extent to which they had proprietary claims against the Standard Maritime parties. When granting permission to appeal, Patten LJ stated that it was arguable that the judge over-estimated the ability of the Fiona Trust parties to establish a proprietary claim in respect of the funds.
- One strand of their case is that the judge erred in concluding that it was reasonable for the Standard Maritime parties not to make an application to the court for the release of funds for the purpose of investing in newbuildings because such an application would have been "far from straightforward", "vigorously opposed", "would take some time to be determined and its outcome would be (at best) for the [Standard Maritime parties] uncertain": see judgment below  and . The Fiona Trust parties argued that the judge erred in characterising their claim as proprietary, and that, absent a proprietary claim by them, an application for the release of the funds to permit investment in newbuildings which was in the ordinary course of the Standard Maritime parties' business would have succeeded. They also maintain that the judge was wrong to find causation established and to treat the case as one of mitigation with the burden of proof lying on the Fiona Trust parties to show that the Standard Maritime parties failed to take reasonable steps to mitigate their losses. This, they argued, was because the judge only considered causation "in fact" and did not consider causation "in law". The question whether any loss was caused by the order and the undertakings was an anterior one to that of mitigation, and that the burden that an application to the court to permit such investments would not have succeeded lay on the Standard Maritime parties.
- The remainder of this judgment is organised as follows. Part II sets out the factual and procedural background. Part III sets out or summarises the material terms of the 2005 orders. Parts IV and V respectively summarise the cases of the parties before the judge and the judgment below. Part VI contains my analysis of the submissions of the parties and my conclusion that that this appeal should be dismissed. In a nutshell, my reasons for this conclusion are that, having considered the evidence before him, in particular that of Mr Nikitin and taking account of the fact that serious adverse findings about his credibility and honesty had been made about him, I consider that the judge did not err in his conclusions. These were: at all material times the Standard Maritime parties were in fact prohibited by the orders from concluding newbuilding contracts; this caused them loss that was not too remote, and their failure to apply to the court for the release of the secured funds or part of them to enable the investment neither broke the chain of causation nor was an unreasonable failure to mitigate their loss. I observe that a number of the submissions made in support of the appeal differed significantly from those made at the hearing below. These included the submissions based on causation and what was said to be the non-proprietary nature of the Fiona Trust parties' claims or many of them.
- The background is fully summarised by the judge at  –  and, for present purposes, a briefer summary suffices. The claims of the Fiona Trust parties which were the basis of their applications for the freezing orders were for damages of over US$577 million. They gave the usual undertaking as to damages in a freezing order, and the order contained the usual term providing that it did not prohibit transactions in the ordinary course of business. But the order also contained a significant qualification to the latter, an express statement that the sale and purchase of vessels and other specified matters "are not in the ordinary course of business". On the return date on 7 September 2005, the Standard Maritime parties sought to have that qualification removed from the order. They were unsuccessful save in respect of a variation to permit payment of the final instalment for the acquisition of a vessel that was due on 12 September 2005, the resale of that vessel, and specified incidental payments.
- In an affidavit dated 12 September 2005, Mr Nikitin maintained that the sum frozen by the order was too high and the Fiona Trust parties' undertaking in damages was inadequately secured. He stated that the provision preventing the sale and purchase of vessels would give rise to significant losses. A skeleton argument dated 14 September 2005 on his behalf contains submissions that dealings within the ordinary course of business ought to be permitted in accordance with the usual form of freezing order. In the event, on 15 September 2005 an order was made providing for the discharge of the freezing order on the payment by the Standard Maritime parties of $208.5 million into the account of their then solicitors and the creation of a charge on Mr Nikitin's house. The clause which stated that the sale and purchase of vessels "are not in the ordinary and proper course of business" continued to have effect, but the Standard Maritime parties were given liberty to apply to the court to permit such use of the secured funds, without prejudice to the Fiona Trust parties' right to argue that the funds should not be used in the ordinary course of business.
- No application for permission to use the funds was subsequently made but, on 22 December 2005, the Standard Maritime parties made an application that the Fiona Trust parties increase the sum provided as security for their undertaking in damages. That application was rejected by HHJ Mackie QC on 24 February 2006: see  EWHC 758 (Comm). He did so because there had been no relevant change of circumstance since September 2005. During the course of the hearing, Mr Christopher Carr QC, then counsel for the Fiona Trust parties, submitted that the Standard Maritime parties were not precluded from using the money for further investments because they had a liberty to apply to do so. Judge Mackie responded that that was "an illusory provision" because the Fiona Trust parties would never be content and the court would never approve "the sort of variation that would be required to allow the defendants to let rip in the investment markets they have in mind": Transcript, 14 February 2006 p105 line 21 – p 106 line 1. In his judgment, Judge Mackie stated (at ) that
"the security on which the [Fiona Trust parties] are entitled to insist would never permit the risk to capital which the [Standard Maritime parties'] commercial aspirations would require".
- I have stated that the trial of the claims by the Fiona Trust parties began in October 2009 and that judgment was given in December 2010. About 95% of the claims by value were dismissed: see  EWHC 3199 (Comm). The trial judge, Andrew Smith J, was scathing about the evidence and conduct of both sides. He made adverse findings about the honesty and credibility of Mr Nikitin and of a number of the witnesses who gave evidence in support of the claims: see the summary by Males J at  EWHC 2163 (Comm) at ,  and . He also found that there were serious breaches by the Fiona Trust parties of their duty of full and frank disclosure when obtaining the freezing orders. Because of their conduct before and during the proceedings, he did not award them their costs: see  EWHC 664 (Comm) at  – .
- After an appeal by the Fiona Trust parties was dismissed (see  EWCA Civ 275), Mr Nikitin and the Standard Maritime parties sought to enforce the undertaking as to damages. The Fiona Trust parties resisted this on the ground of Mr Nikitin's dishonesty and misconduct and because the Standard Maritime parties had not shown that they suffered loss. Andrew Smith J accepted that Mr Nikitin was guilty of misconduct relevant to the obtaining and continuation of the 2005 and 2007 freezing orders but rejected the appellants' submissions: see  EWHC 3102 (Comm). He considered the serious breaches by the Fiona Trust parties in obtaining the freezing orders outweighed Mr Nikitin's misconduct.
- Andrew Smith J stated that if the case that the Standard Maritime parties suffered loss depended on the credibility of Mr Nikitin he would have hesitated to direct an inquiry. This was because he viewed Mr Nikitin's evidence circumspectly: "simply because throughout this litigation he has apparently been prepared to tell any lies he considers would assist him" and there was no documentary evidence corroborating his claim that Standard Maritime would have entered into contracts for more newbuildings in late 2005 or at any relevant time. There was, however, expert evidence about what returns might have been made on the $208.5 million given as security. Andrew Smith J concluded that he found it "wholly credible that, but for the orders, Mr Nikitin would have continued to invest in shipping": see  EWHC 3102 (Comm) at  – .
- The Fiona Trust parties had also submitted that any damage from the continuation of the freezing orders was too remote to be recoverable, and that any damage suffered by the Standard Maritime parties was because they did not mitigate their loss by applying to the court for sufficient funds to be released to enable them to contract to buy newbuildings and make payments for them. Andrew Smith J rejected these submissions. He stated that the Fiona Trust parties would have vigorously opposed any application to release the security or the frozen funds, and the argument that the Standard Maritime parties did not mitigate their loss seemed a difficult one. There was sufficient evidence to justify an inquiry as to damages and it was neither necessary nor desirable to anticipate the evidence that might be presented on that inquiry. For those reasons, on 3 October 2014, he ordered an inquiry as to the damages suffered by the Standard Maritime parties.
- The Fiona Trust parties did not appeal against the order made on 3 October 2014, but in October 2015, applied for it to be set aside. They did so on two grounds. The first was that it had been obtained by fraud by Mr Nikitin and the Standard Maritime parties, who, at the hearing before Andrew Smith J, had lied in their evidence as to how they had in fact used their money between May and December 2007. They also argued that the court should exercise its discretion to withhold an equitable remedy. As I have stated, the set-aside applications and the inquiry as to damages matter came before Males J in July 2016. In a judgment handed down on 26 August 2016, he dismissed the set-aside and denial of remedy applications, and on that day and 27 October 2016, he made the orders as to the damages that are the subject of this appeal.
III The material terms of the 2005 orders:
- References in the orders to "the applicants" are to the Fiona Trust parties, and those to "the respondent" are to the Standard Maritime parties. The 2005 freezing order applied to assets held by the Standard Maritime parties worldwide up to a value of $225 million and contained the usual undertaking in damages in paragraph (1) of Schedule B:
"If the court later finds that this order has caused loss to the respondent, and decides that the respondent should be compensated for that loss, the applicants will comply with any order the court may make".
- I have stated that the other terms of the 2005 freezing order were, subject to one qualification, also the usual ones for a worldwide freezing order. The order permitted the corporate defendants but not Mr Nikitin to deal with their assets in the ordinary and proper course of business. The qualification was that this permission was subject to the exclusion from the meaning of "ordinary course of business" in paragraph 30. That provided:
"This order does not prohibit Standard Maritime or any of its subsidiaries, from dealing with or disposing of any of its assets in the ordinary and proper course of business. For the avoidance of doubt, for the purpose of this Order, the sale and purchase of vessels (including vessels under construction), the sale and purchase of shares in any company or corporation and the grant of security over any vessels or shares are not in the ordinary and proper course of business."
- As I have stated, the order made on 15 September 2005 provided that the 2005 freezing order would be discharged if security of $208.5 million was provided by the Standard Maritime parties and paid into the account of their then solicitors and the balance of the amount required secured by a charge on Mr Nikitin's house. Paragraph 5 of the "discharge" order did not include paragraph 30 of the freezing order as one of the provisions that would "cease to have effect" when the security was provided and it was thus retained. Paragraph 5 also provided:
"This order and the undertakings given are an interim measure only in order to allow the [Standard Maritime parties] sufficient time to seek to provide alternative security and nothing in the order or undertaking shall in away affect the appropriate form of security. The [Standard Maritime parties] shall have liberty to apply to use funds in the Lawrence Graham Account in the normal course of business to vary the undertaking given above so as to provide substitute security or otherwise. This shall be without prejudice to any contentions that might be put forward by the [Fiona Trust parties] that such funds should not be used in the ordinary course of business or that such substitute security is not satisfactory or that the undertakings should otherwise be maintained."
- Paragraph (1) of Schedule C of the "discharge" order replaced the undertaking in damages given by the Fiona Trust parties when the 2005 freezing order was obtained. It provided:
"If the court finds later that this order, the orders made 31 August 2005, 7 September 2005 or the provisions of undertakings as set out in this order or as may be provided in connection with the provision of security in accordance with this order, have caused loss to any respondent, and decides that any respondent should be compensated for that loss, the applicants will comply with any order the court may make".
IV The cases of the parties before the judge:
- The Standard Maritime parties put their claim for damages suffered by them by reason of the orders and the security they had provided in four ways: judgment,  – . It is only necessary to refer to one of these, the "newbuildings" case. This, see judgment  – , is that the funds used to provide security would have been used to contract with Korean shipyards for the purchase of newbuildings. The investment would probably have been in four Suezmax tankers and two VLCCs, which would have been ordered in the final quarter of 2005 and re-sold before delivery in the Spring of 2008 at a profit (pleaded to be US $221.6 million). They claimed that the proceeds would have been re-invested in a portfolio which would earn further significant profits, which were pleaded at US$ 229.83 million, that is, a total profit of some US$ 450 million. After giving credit for interest and other returns in fact earned, this resulted in a claim of US$ 387 million.
- The Fiona Trust parties claimed (see judgment ) that the claim was a dishonest claim which did not reflect what would actually have happened. There was no evidence that Mr Nikitin had any intention to invest in shipping. Nothing was said at the time and there were no preliminary documents. He was in fact following a policy of asset protection: judgment . They had two further arguments. The first (see judgment ) was that he had adequate funds unencumbered by the 2005 orders to invest in this way, and it was pure speculation to suggest that he would have sold the vessels in the Spring of 2008, close to the top of the market, or invested the proceeds in a portfolio which would have made a further large profit. The second (see judgment ) was that the orders did not in fact prevent the Standard Maritime parties from investing in newbuildings because, had they wished to undertake such transactions, they could have applied to the court for permission, which they did not do. Their failure to apply to the court thus meant either that the orders did not cause their loss or that they had failed to mitigate their losses or that the losses were too remote.
- The factual evidence before the judge consisted of written and oral evidence by Mr Nikitin and written evidence by Mr Baum, a senior manager at Wegelin, a private Swiss bank which had invested sums in the accounts of Standard Maritime Holding Corp, the BVI company through which Mr Nikitin conducted his shipping business. There was also evidence by experts in various disciplines. Four were called by the Fiona Trust parties. Three were called by the Standard Maritime parties.
V The judgment below:
- The judge stated that he would not go behind the findings of Andrew Smith J as to Mr Nikitin's general lack of credibility but concluded that: "even a habitual liar may sometimes be telling the truth": see judgment . He stated that, before him, Mr Nikitin's evidence had been tested by cross-examination and the matters relied on by the Fiona Trust parties as casting doubt on the claim as to his investment plans had been examined in greater detail than was necessary before Andrew Smith J. Notwithstanding that more detailed examination, the judge (at ) decided that Andrew Smith J's conclusion (which I summarised at  above) that it is highly credible that, but for the orders, Mr Nikitin would have continued to invest in shipping remained valid. He dealt with the submissions of the Fiona Trust parties, which I have summarised at  above at  –  of his judgment.
- Mr Nikitin's evidence was that he did not have sufficient ready funds available after providing the security in September 2005, and that the prospect of borrowing in order to finance the initial payments which would have been required pending receipt of the April 2006 funds was destroyed by the freezing order which caused great damage to his relationship with Credit Suisse, his principal bank. The judge stated (at ) that this was not specifically challenged, other than by reference to Mr Nikitin's general propensity to tell lies and "was supported to some extent" by the written evidence of Mr Baum. The judge recognised that evidence was untested but considered it was entitled to some albeit limited weight. Although not the clearest finding of fact, I have concluded the only sensible reading of  of the judgment is that the judge found that Mr Nikitin did not have sufficient ready funds available after providing the security. The judge also stated (at ) that even if, contrary to Mr Nikitin's evidence, he had sufficient funds prior to April 2006, little if any significance could be attached to the fact that he did not in fact undertake a newbuilding programme with whatever funds were available to him because that would have been a high-risk strategy. The investment policy which he in fact adopted faced with the freezing order said little about what he would have done if there had been no such order.
- The judge's conclusion (at ) was that:
"[I]t remains inherently credible, without needing to depend to any real extent on Mr Nikitin's credibility, that but for the 2005 order Mr Nikitin would have wished to invest the proceeds of re-sale of the four Hyundai and Daewoo newbuildings … in the shipping business … which was experiencing a boom … and that by far the most likely shipping investment for him was a further programme of newbuildings".
Although, (see ) the investment would not necessarily have consisted of the purchase of four Suezmax vessels and two BLCCs, it was not suggested that the profits to be made from such vessels were markedly out of line with profits from the purchase of other types of vessel. The judge proceeded on the basis that those were the types of vessel which Mr Nikitin would probably have sought, making some allowance for the uncertainty involved in this choice, which at  he assessed meant that the Standard Maritime parties had a 50% chance overall of achieving the profit they claimed.
- The judge had previously set out the legal principles governing the approach to losses that are claimed to have been suffered by reason of a freezing order, an exercise which he stated will often be inherently imprecise. After considering the authorities, he concluded (at ) that what the Standard Maritime parties needed to prove was that on the balance of probabilities they would have sought to invest in a way that had a real, as distinct from fanciful, chance of making a profit and, if so, the best possible assessment of the overall chance of making that profit has to be made, taking account of the uncertainties inherent in the exercise. When setting out the principles, referring to Abbey Forwarding Ltd (in liquidation) v Hone  EWCA Civ 711,  Ch 309, the judge had stated (at ) that the freezing order did not have to be the sole or exclusive cause of the loss in question. It had to be "an effective cause" and the burden is on the party who obtained the order to demonstrate a failure to mitigate. What must be within the reasonable contemplation of the parties is the type of loss but not the particular loss within that type.
- The newbuildings case was examined in detail at  – . The judge concluded at  that there was at least a real and substantial chance that Mr Nikitin would have been able to conclude newbuilding contracts with Korean yards in the final quarter of 2005, and that he considered it highly probable that he could have done so.
- As to whether the Standard Maritime parties would have sold the vessels under construction in the spring of 2008, the judge did not attach much weight to Mr Nikitin's evidence because, quite apart from the issues as to his credibility generally, his evidence could not but have been "affected consciously or subconsciously by hindsight": judgment . He considered whether there were reasons for him not to have sold the vessels at that time. He stated (at ) that it was unlikely that he would have already have sold them because in a rising market "a resale would not have been perceived as urgent, and it would have made sense not to sell the vessels too far in advance of delivery" and (at ) that it was "highly likely" that Mr Nikitin would have wished to conclude sales for the vessels a reasonable time before the first delivery, which was due no later than September 2008.
- The judge concluded (at ) that there was a real and substantial chance that Mr Nikitin would have sold the vessels in the spring of 2008, although there was also a possibility that he would not have done. If he had not sold the vessels then, he might have achieved a better or a worse price, but the judge considered that it was likely that he would have achieved a price which would show a substantial profit. The judge stated at  that all the uncertainties he had mentioned meant that the Standard Maritime parties had a 50% chance overall of achieving the profit they claimed. He concluded (at  and [143c]) that the proceeds would then have been invested by Wegelin & Co in the same way and with the same return as the Standard Maritime parties' funds in fact held with Wegelin.
- I turn to the judge's treatment of causation, mitigation and remoteness. After referring (at ) to the qualification in the order and the hearings on 7 and 15 September 2005, he stated (at ) that there was no doubt that at all times the Standard Maritime parties were in fact prohibited by the orders from concluding newbuilding contracts. He continued: "[c]ausation is therefore established". He also stated that it was unrealistic to think that an application to the court for the removal of this prohibition would have been straightforward. He had dealt with the various applications made by the Standard Maritime parties that I summarised at  –  above earlier in his judgment as follows:
(a) At the hearing on the return date on 7 September 2005, the application to vary paragraph 30 was rejected save in relation to a single vessel and certain incidental payments, and the express prohibition on the Standard Maritime parties buying and selling vessels remained in place. The submission of counsel then appearing for the Fiona Trust parties (see ) was that because they had a proprietary claim it was wholly inappropriate to allow the party who is the subject to that proprietary claim to deal with the asset in the ordinary course of business. That remained the position of the Fiona Trust parties until Andrew Smith J handed down the liability judgment in December 2010.
(b) The security regime which the parties put in place (see ) prohibited the Standard Maritime parties from using the secured funds even in the ordinary and proper course of business unless they first made a successful application to the court to permit such use. In that event, however, the claimants expressly reserved a right to argue that such funds should not be used in the ordinary course of business. The judge did not regard the submission of the Fiona Trust parties that this provision demonstrated that the Standard Maritime parties did not then have a present need to use the funds and that the parties contemplated that if a future need arose, the Standard Maritime parties would say so and if necessary make an application for permission to do so, as realistic and rejected it.
(c) The observation of Judge Mackie QC when refusing the application for increased security for the Fiona Trust parties' undertaking in damages set out at  above was (see ) "revealing". It demonstrated that "an application by the [Standard Maritime parties] for the release of the security which they had provided in order to employ the funds in a project such as the purchase of newbuildings would have been far from straightforward".
- As to mitigation, after referring (at ) to his conclusion that the Fiona Trust parties would "undoubtedly have resisted vigorously any application to vary the terms of the security", and the difficulties demonstrated by Judge Mackie's reaction, the judge stated:
"The duty to mitigate is only a duty to act reasonably. Any failure by the [Standard Maritime parties] to make a further application which would have taken time, would have been strongly resisted, and which had only moderate prospects of success, was not unreasonable. There was here no failure to mitigate."
He considered (at ) that his view was reinforced by what he described as a "practical dilemma" which the Standard Maritime parties would have faced because they could not request a quote from the Korean shipyards "on the basis that they would like to conclude some shipbuilding contracts, but would need to make an application to the court in order to find out whether they were allowed to do so", but would need some concrete proposal in hand for the court to assess before applying to the court for permission.
- The judge stated (at ) that the submission that losses consisting of the profits to be made from shipbuilding contracts were too remote was also unsound. The losses fell within the first limb of the rule in Hadley v Baxendale (1854) 9 Ex 341 because it was within the reasonable contemplation of the parties that, if free to do so, the Standard Maritime parties would wish to invest the proceeds of sale of the vessels in further shipping ventures. Paragraph 30 of the freezing order demonstrated that the purchase and sale of vessels, including those under construction, was expressly contemplated by the Fiona Trust parties and (see ) the Standard Maritime parties made it clear in their written submissions for the hearing on 7 September 2005 that an aspect of their business was the purchase and sale of vessels. The Standard Maritime parties had informed the Fiona Trust parties, when seeking an increase in the security provided in support of their undertaking in damages, that their losses from the prohibition could be substantial. Although the loss claimed was considerably higher than the US$40 million which Mr Nikitin sought as security for the Fiona Trust parties' undertaking, the judge stated that was merely a consequence of the greater than expected rise in the market during the period after September 2005. The judge stated (at ) that the loss claimed was exactly the kind of loss of which the defendants had warned, albeit greater in extent. Accordingly, (see ) if, contrary to his view, the loss did not fall within the first limb of the rule in Hadley v Baxendale, it fell within the second limb.
- The necessary background to my analysis are the findings made by the judge for which there is no permission to appeal. These are that: (1) at all times the Standard Maritime parties were in fact prohibited by the orders from concluding newbuilding contracts; (2) but for the orders Mr Nikitin would have invested in newbuildings; (3) he did not have other funds to do so, but that, even if contrary to his evidence, he did, the risks of such investment to his capital together with the risk to the security provided to obtain the discharge of the freezing order meant that little if any significance could be attached to the fact that he did not in fact undertake a newbuilding programme; and (4) there was a real and substantial chance Mr Nikitin would have sold any vessels bought in the spring of 2008, and he would have done so well before the first delivery due in September 2008. I summarised them at  – , and  –  above.
- The issue before the court is whether, despite those findings, Mr Gaisman's overarching submission that Mr Nikitin's failure to apply for funds to be released meant that legal causation was not established is correct. There are a number of strands in his submission that the judge was wrong to find such causation and treating the case as one of mitigation, some of which are connected.
- The first of those strands is that the judge only considered factual, "but for" causation, not legal causation. He did not ask whether there was a sufficient relationship between the freezing order and the alleged loss and he did not consider the purposes sought to be achieved by the Fiona Trust parties' undertaking as to damages.
- The second strand is that the order did not prevent the making of new contracts, but only prevented the use of the frozen money and, after the freezing order was discharged, the secured funds. Mr Gaisman argued that the freezing order was irrelevant because nothing would have happened in the 19 days for which it was in place and that the order giving effect to the security arrangements itself caused no loss because it did not stop the Standard Maritime parties from applying for permission to use the money.
- The third strand was that the judge erred in concluding (at ) that it was not realistic to expect the Standard Maritime parties to apply to the court if they wanted to invest in newbuildings. Mr Gaisman submitted that the judge misunderstood the nature of the Fiona Trust parties' claims and was wrong to characterise them as proprietary when most were not. At its highest, Mr Gaisman maintained there were no arguable proprietary claims of any relevance because the claims related to the shares in the ship owing companies acquired by the Standard Maritime parties rather than their assets, and the remedies sought were all personal. It was, he argued, that misunderstanding and mischaracterisation which led the judge to consider that an application to release the funds would have been far from straightforward and vigorously opposed. He argued that, absent a proprietary claim, an application to the court to permit trading in the ordinary course of business would have succeeded. He pointed to the observation of Patten LJ when giving permission that absent such a claim it was difficult to see how the Fiona Trust parties could have successfully resisted release of the funds for use in relation to newbuilding contracts. He also referred to Walker v Medlicott & Son  1 WLR 727, a case in which it was held that it was incumbent on a plaintiff suing defendant solicitors in respect of a failure to carry out the instructions of a testatrix first to issue proceedings for rectification of the will.
- Mr Gaisman developed his submissions as to the non-proprietary nature of the Fiona Trust parties' claims (or most of them) in great detail, arguing inter alia that the Hyundai vessels had not been sold when the US$208.5 million security was provided, that the Fiona Trust parties were not able to rescind the option agreements in relation to two of the companies, Buckthorn and Southbank, because, by 2005 it was not possible to make restitutio in integrum, and that there was no proprietary claim in the proceeds of the sale of the vessels. He accepted that previous counsel had argued the case on the basis that there were proprietary claims but said that that did not change the reality.
- Mr Gaisman also submitted that there was nothing in the order dealing with the provision of security and the undertakings that would prevent the Standard Maritime parties from negotiating a contract with a shipbuilder and applying to the court. The judge was wrong to say (at ) that the Standard Maritime parties faced a "practical dilemma" because they could hardly go to the Korean shipyards to request a quote on the basis that they would like to conclude some shipbuilding contracts but would need an application to the court to find out whether they were allowed to do so, but could also hardly apply to the court for permission without having a concrete proposal in hand for the court to assess.
- It is well established that the purpose of the cross-undertaking in damages and liability under it is to protect a party who is subjected to such an injunction preventing him from doing something but who subsequently prevails at the trial of the action from loss caused by the injunction: see Hoffmann-La Roche & Co v Secretary of State for Trade & Industry (1975) 2 AC 295 at 361, per Lord Diplock. The court has discretion whether or not to enforce a cross-undertaking in damages.
- If the court decides to enforce a cross-undertaking, the decision of the High Court of Australia in Air Express Limited v Ansett Transport Industries (Operations) Proprietary Limited (1979) 146 CLR 249 has been influential in relation to the approach to causation and the burden of proof. Mason J stated at 325 that it is "for the party seeking to enforce the undertaking to show that the damage he has sustained would not have been sustained but for the injunction". Although Mason J dissented as to the result, on burden of proof there was no division of view: see Gibbs and Stephen JJ at 313 and 320. The approach in the Ansett case has been followed by a number of decisions in this jurisdiction. They include the decision of this court in Energy Venture Partners Ltd v Malabu Oil and Gas Ltd  EWCA Civ 1295,  1 WLR 2309, a case concerned with whether a cross-undertaking as to damages should be fortified. Referring to the judgment of Gibbs J, in the Ansett case as to what was required to enforce the undertaking itself, Tomlinson LJ stated (at ) that "[a]s to causation, it is sufficient for the court to be satisfied that the making of the order or injunction was a cause without which the relevant loss would not have been suffered".
- The person who seeks to do so must show that the loss would not have been suffered "but for" the order; that is, on the facts of this case, that the freezing order and the security undertakings were an effective cause of the Standard Maritime parties' loss. See also Tharros Shipping Co v Bias Shipping Ltd. (The Griparion No 1)  1 Lloyd's Rep 577 at 582 (Waller J), Harley Street Capital v Tchigirinski  EWHC 247 1 (Ch) at  –  (Mr Michael Briggs QC), Hamblen J at first instance in Energy Venture v Malibu  EWHC 79 (Comm) at  and the discussion in Gee, Commercial Injunctions, 6th ed. 2016, §11.044 at p. 365.
- The Ansett case had also been relied on sixteen years earlier by Saville J in Financiera Avenida v Shiblaq Transcript 21 October 1988. The decision is unreported but extracts from Saville J's judgment are set out by Waller J in the Tharros Shipping case. After stating that it is for the party seeking to enforce the undertaking to show that the damage he has sustained would not have been sustained but for the injunction, Saville J added:
"This approach does not mean that a party seeking to enforce an undertaking must deal with every conceivable or theoretical cause of the damage claimed, however unlikely this may be. Once a party has established a prima facie case that the damage was exclusively caused by the relevant order, then in the absence of other material to displace that prima facie case, the court can, and generally would, draw the inference that the damage would not have been sustained but for the order. In other words, the court seeks to approach and deal with this question of causation in a common-sense way."
In this court, Lloyd LJ with whom Stocker LJ and Sir George Waller agreed, stated that he saw no fault or flaw in Saville J's judge's approach or in his conclusion on causation: see Transcript 7 November 1990.
- The submissions made in this case must be considered in the light of the circumstances of this case and the statements in Energy Venture v Malabu, Avenida v Shiblaq and the Tharros Shipping case. In my judgment, the judge did not err in finding that the orders prevented the Standard Maritime parties from investing in newbuildings: see  summarised at  above. The fact that the Standard Maritime parties were given liberty to apply for the release of secured funds to enable them to do this did not affect the nature or effect of the restriction imposed by the order.
- I have also concluded that the judge did not err in stating that causation was established. Mr Gaisman's submission that the order did not prevent the making of contracts for newbuildings, but only prevented the use of the frozen money for such purpose, and, after the freezing order was discharged, of the secured funds is highly technical and does not reflect the reality of the financing of such transactions. The judge's use of the word "therefore" in the statement "[c]ausation is therefore established" might be open to criticism in some circumstances, but not in the circumstances of this case. He stated (at , see  above) that the order must be an effective cause of the loss. If anything, that was a stricter test than the "but for", sine qua non test laid down in the authorities to which I have referred. He was entitled to approach and deal with the question of causation in a common-sense way.
- I do not consider that the onus was on the Standard Maritime parties to show that an application to release funds would fail. It sufficed for them to show that the order prevented them from such investing in newbuildings and the difficulties of any application to the court for the release of funds. In the words of Saville J, once a party has established a prima facie case that the damage was caused by the order then, in the absence of other material to displace that prima facie case, the court can draw the inference that the damage would not have been sustained but for the order. See also Tomlinson LJ's statement in Energy Venture v Malabu, albeit in the context of the fortification rather than enforcing the undertaking, that once a prima facie case has been established "it is open to the respondent to demonstrate that it has not been surmounted, as by demonstrating that there is no causal link between the granting of the injunction or order and the loss in question." That is not what the Fiona Trust parties have sought to do. In this court, they argued that the burden lay on the Standard Maritime parties to show not only a prima facie case, but that an application would fail. In my judgment, that submission is not consistent with the authorities to which I have referred.
- I consider that, on the material before the judge, the Standard Maritime parties had established at least a prima facie case that the damage was caused by the order. The order prohibited them from engaging in newbuilding transactions and the position taken by the Fiona Trust parties was to resist any application to remove the prohibition. At the hearing on 7 September they successfully resisted the submission that clause 30 should be varied by removing the word "not" because of the effect that would have on the value of their proprietary claims. That position was reiterated by Mr Briggs QC on their behalf at the adjourned return date on 15 September 2005. He stated that "we make proprietary claims to the entire undertaking of these companies". The outcome was the provision of security, but without the ability to engage in newbuilding transactions. At the hearing before Judge Mackie on 14 February 2006, the position of the Fiona Trust parties was similar. Mr Christopher Carr QC stated that they would require a mortgage to be executed over any ship or shares acquired by the Standard Maritime parties. He also stated that they would require the Standard Maritime parties to make full disclosure of their assets so that they and the court could be satisfied that there were no other funds available, and would need to know where the US$208.5 million had come from so as to be satisfied that it did not include monies to which they were making or might make a proprietary claim. This position was the background to Judge Mackie's reaction to the suggestion that the court would approve a variation allowing the transactions. The position taken by the Fiona Trust parties and Judge Mackie's reaction suffice to show the difficulties of any application for the release of the security funds.
- Insofar as Mr Gaisman's argument depends on his submission that the judge erred in characterising the Fiona Trust parties' claims as proprietary, the way they had presented their case at those hearings is also material. I summarised the way the Fiona Trust parties did so in the last paragraph. At the adjourned return date on 15 September 2005, Mr Eder QC, on behalf of the Standard Maritime parties, accepted that the Fiona Trust parties' claims were proprietary claims to the shares and effectively to the vessels themselves, and stated that it was because of that that they would give them "the security over the very property over which they say they have claims". It thus appears that very distinguished counsel on both sides accepted that the claims were proprietary.
- The fact that at the material time the court and the parties were concerned with orders made at an interlocutory stage is also important. The orders made at that stage were made on the assumption that the Fiona Trust parties' allegations of fraud were true and were probably well founded in law. Mr Berry QC submitted that the proprietary claims could not have been disproved short of trial. Whether or not that is so, I accept that it would have been very difficult to do so without the sort of mini trial involving the deployment of extensive contentious evidence and argument. In Energy Venture v Malabu Tomlinson LJ stated (at ) that this was not an exercise to be attempted at the interlocutory stage. The orders were designed to provide pragmatic justice at an interim stage. The undertaking as to damages was designed to mitigate the risk of leaving a person restrained by an injunction unprotected in respect of loss caused by it when the underlying claim subsequently fails.
- In any event, the judge did not consider that all the claims were proprietary. At  of his judgment he stated that they had "a proprietary claim over the proceeds of resale of the Hyundai and Daewoo vessels". The judge cannot be criticised for not dealing with the submission that the only proprietary claims the Fiona Trust parties had ever advanced in the main action related to the shares and not the assets, and the distinction between the shares that were the subject of the proprietary claims and the underlying assets which were not, because this had not been relied on before the appellants' skeleton dated 10 January 2017. The way the claim is now put simply differs from the way the claim was put in 2005 and was put at least until after the trial of the inquiry before the judge.
- Moreover, as Lord Justice Lewison observed during the course of the hearing, Mr Gaisman's submissions depend on stating that when the security was provided in substitution for the freezing order the proprietary nature of the claim disappeared. I respectfully agree with his observation that this is a very legalistic way of reading an order which is designed to do pragmatic justice at an interim stage. The question whether a person is required to embark on litigation, whether in the context of causation or in the context of mitigation, is an intensely fact-specific inquiry. The judge recognised (at ) that other commercial or appellate judges might take a different view of the difficulties the Standard Maritime parties would face to that taken by Judge Mackie and himself but nonetheless reached the conclusion that they faced considerable difficulties and were not required to make the application and to embark on litigation. Provided his decision was not one which falls outside the margin accorded to the judge deciding such questions it is not susceptible of appeal. I consider that, on the evidence before him and the findings of fact that he made, his conclusion was one he was entitled to reach.
- Mr Gaisman also sought to rely on the submission that the Standard Maritime parties would have been able to fund the six newbuildings, or at least some of them, as a further reason for stating that the orders were not the cause of their loss. This argument was advanced below. I have summarised what the judge said about it at  –  above. The judge did not reject Mr Nikitin's evidence on this point, stating at  that it was challenged only by reference to his general propensity to tell lies and was supported to some extent by the written evidence of Mr Baum. I have stated that, although what the judge said in that paragraph is not the clearest finding of fact, the only sensible reading of that paragraph is that he did find that Mr Nikitin did not have sufficient ready funds available after providing the security. The difficulty for Mr Gaisman is that there is no permission for the Fiona Trust parties to appeal on the question whether the Standard Maritime parties would have been able to fund the six newbuildings. Nor is it open to them to rely on the submission that the Standard Maritime parties could have obtained the release of US$179 million, which was not subject to any proprietary claim to invest in newbuildings. That point was not put to any witness at trial, was not the subject of expert evidence, the judge understandably made no findings about it, and this court is not able to do so.
- Mr Gaisman criticised the judge for approaching the case on the basis that it was to be presumed that loss had been caused to the Standard Maritime parties by the orders. Although made in a more measured way than many of his other criticisms of the judge, I do not consider it is justified. The judge's description at the outset of his judgment is simply that, a description. The force of his observation that an improperly obtained freezing order is likely to cause significant loss to a businessman has more force where the freezing order departs from the usual form of words for such an order and precludes the person subject to the order from using monies in what is in the ordinary course of his or her business.
- For the reasons I have given, I do not consider that the judge erred on the two points at the core of the Fiona Trust parties' case on causation: that he mischaracterised and misunderstood the nature of the Fiona Trust parties' claims as proprietary, and that this mischaracterisation led him to err in concluding that an application to release the funds would have been far from straightforward. I have not relied on Mr Berry's submission that what was relevant in deciding whether the Standard Maritime parties were obliged to make an application was Mr Nikitin's perception of the difficulties he would face, although I recognise that what happened in court on 15 September 2005 and 14 February 2006 may well have affected his perception of what the hurdles he would have to overcome to be able to engage in newbuildings transactions.
- For similar reasons, I have concluded that the judge did not err in his assessment of mitigation in . I do not consider that he erred in stating that the Standard Maritime parties would face a "practical dilemma" in attempting to present themselves to Korean shipyards while stating that any transaction depended on a successful application to the court, or in making an application to the court without a concrete proposal in hand for the court to assess in order to have a realistic prospect of success in any application. The judge was entitled to take into account the position taken by the Fiona Trust parties in the past.
- In relation both to the "practical dilemma" point, but also more generally, the statement of McCombe LJ in Abbey Forwarding Ltd (in liquidation) v Hone  EWCA Civ 711,  Ch 309 about the position of a person who is subject to a freezing order should be borne in mind. His Lordship stated at :
"[T]he court must be realistic as to the dilemma facing a defendant when served, out of the blue, with a freezing order. Some claimants are far from reasonable in practice – the present case provides a very clear example … Applications for variation are not that simple. They take time to prepare and are not without cost. … Approaches to claimants who agree variations, or even to provide suitable written indications to banks and other third parties that particular payments are not caught by the order, are often far from straightforward. If, in such circumstances, a defendant is shown to have suffered an unusual loss, then in my judgment the claimant should not be surprised if the court orders him to pay for it."
- That statement is primarily relevant to mitigation and to remoteness, but it also fits with Saville J's statement in Financiera Avenida v Shiblaq that questions of causation should be treated in a common-sense way and that, once a party has established a prima facie case that the damage was caused by the order then in the absence of other material to displace that prima facie case the court can draw the inference that the damage would not have been sustained but for the order. In the present case the loss was not unusual but uncertain. The judge did not err in his treatment of that uncertainty or in his assessment that in the light of the facts known to the Fiona Trust parties the loss fell within the first limb of the rule in Hadley v Baxendale.
- In view of my conclusions on these points, it is not necessary for me to consider the new argument Mr Berry advanced on behalf of the Standard Maritime parties or his submissions about the timing of the lost investment. The new argument was that the terms of the order made on 15 September 2005 precluded them from applying to have the provision deeming sale and purchase of ships not to be in the ordinary or proper course of business because they had undertaken "in absolute terms" not to apply to discharge the order made on 31 August 2005 as subsequently varied. Mr Berry's submission on timing was that the time required for an application for permission for any appeal would inevitably have delayed any investment well beyond the last quarter of 2005 and, until the court had approved of an application to permit the use of what was held as security the Standard Maritime parties could not pay the deposits, let alone the other instalments.
- For these reasons, if my Lords agree, this appeal will be dismissed.
Lord Justice Kitchin :
- I agree.
Lord Justice Lewison :
- I also agree.
Note 1 The neutral citations of the judgments that gave rise to the orders that are the subjects of this appeal are  EWHC 2163 (Comm) (“liability”) and  EWHC 2451 (Comm) (“quantum”). There is a third judgment on costs:  EWHC 2567 (Comm). [Back]
Note 2 Les Laboratoires Servier v Apotex Inc  EWHC 2347 (CH) and Astrozeneca Abvkrka v Novo Mesto  EWCA Civ 484 at  on the need for a “liberal but fair assessment of loss”, Annie Bailey & Co Ltd v Balholm Securities Ltd (1973) 2 Lloyds Rep 404 and Parabola Investments Ltd v Browallia Cal Ltd  EWHC 901 (Comm),  EWCA Civ 486 on damages for loss of a chance even if the claimant might have made a loss. [Back]
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