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Fortification fortified: the Court of Appeal’s decision in EVP Ltd v Malabu Oil and Gas

Grahame Anderson discusses the recent Court of Appeal decision in Energy Venture Partners Limited v Malabu Oil and Gas Limited [2014] EWCA Civ 1295 (9 October 2014).

Summary

In EVP Ltd v Malabu Oil and Gas Ltd, the Court of Appeal (Tomlinson LJ (substantive judgment),
McFarlane LJ and Sir David Keene) has approved the three-stage test for
granting fortification of a cross-undertaking in damages set out in a number of
first instance judgments but not, up to now, dealt with at appellate level.

Facts

EVP was a British Virgin Islands company involved in oil and
gas transaction and exploration opportunities, with a primary interest in
Nigeria. Malabu was a Nigerian company and had been awarded by the government
of Nigeria 100% ownership of an oil prospecting licence (“the Licence”) for an
oilfield off the Eastern Niger Delta. EVP claimed that Malabu had agreed to pay
at least 200 million USD for commission services provided in respect of an
agreement whereby Malabu would surrender the Licence back to the Nigerian
government for a figure approaching 1.1 billion USD.

EVP was successful in obtaining a worldwide freezing
injunction for 215 million USD which was paid into court. A 10 million USD
fortification was ordered by Hamblen J on the basis of the US Prime Rate of
interest of 3.25% ([2012] EWHC 79 (Comm)).

At first instance

The test employed by Hamblen J for whether or not to grant
fortification had three limbs: (1) was the court able to make an intelligent
estimate of the likely amount of loss which might result to a defendant by
reason of the injunction; (2) can the applicant for fortification show a
sufficient level of risk of loss to require fortification; (3) would the
contemplated loss be caused by the grant of the injunction (see paragraph 13 of
the Court of Appeal judgment).

On appeal

The appeal was founded on three points: first, that Hamblen
J had applied the wrong test; second, that even if he had, EVP should not have
been ordered to provide fortification; third, if fortification should have been
ordered, it had been assessed incorrectly. All three contentions were rejected
and the appeal dismissed.

This note focuses on the first question.

The case has a long procedural history with substantive
judgment given for EVP at trial in 2012. By the time the case came to a full
Court of Appeal hearing in 2014, the issues decided by the Court were almost
entirely academic, as Tomlinson LJ notes in the first paragraph of his judgment.

The Court of Appeal endorses the approach taken at first
instance, approving for the first time at appellate level the three-stage test
set out in the High Court in cases including Harley Street Capital v Tchigirinski [2005] EWHC 2471 (Ch), Sinclair Investment Holdings v Cushnie [2004]
EWHC 218 (Ch) and Re DPR Futures Limited [1989]
1 WLR 778.

The Court expressly rejected a submission in the appellant’s
early skeleton that a party seeking fortification must demonstrate on the
balance of probabilities not that loss has or will be caused by the grant of
the injunction and the actual or likely extent of any such loss. This was based
on a “mis-reading” of the judgment in Jirehouse
Capital v Beller
[2008] EWHC 725 (Ch),

Three limbs of the test

Intelligent estimate
of the likely amount of loss

Courts are often called upon to engage with incomplete
evidence in order to arrive at a position that does approximate justice between
the parties, pending more detailed scrutiny. When estimating the likely amount
of loss an injuncted party might suffer, the exercise is “informed and
realistic although it may not be entirely scientific.” Evidence on the balance
of probabilities is not required (the same being true for the risk of loss
question and the causation question).

On the facts of the case, arriving at an intelligent
estimate was not a complex exercise. As in most cases involving a freezing
injunction, the intelligent estimate will be the time value of the money put
out of the defendant’s reach by the order. Between creditworthy commercial
parties, this will amount to the borrowing costs of an equivalent amount.
Tomlinson LJ cites the judgment of Aikens J in Mamidoil-Jetoil Greek Petroleum Company v Okta Crude Oil Refinery AD [2003]
1 Lloyd’s Rep 1 at page 42 for the proposition that when the currency of the
loss is US dollars, the court ill consider the cost of borrowing in US dollars,
etc. As such, the US Prime Rate was the basis for the intelligent estimate of
likely amount of loss arising out of Malabu’s not having access to its money.

Risk of loss

Tomlinson LJ agrees with “Hamblen J’s resort to symmetry” at
paragraph 52: since a claimant is able to obtain a freezing injunction on a
good arguable case it is “only appropriate” that, if a defendant can show that
it too has a good arguable case that it will suffer loss in consequence of an
injunction, it too should be protected.

There is no need to prove the risk on the balance of
probabilities. Such an approach would be (a) contrary to principle and (b)
encourage wasteful satellite litigation (paragraph 53 of the Tomlinson LJ
judgment).

It remains open to a claimant, responding to an application
for fortification, to argue that the injunction will cause the other side no
loss. EVP tried and failed. It argued that:

(1)
it was possible that Malabu was under an
obligation to pay the 215 million USD straight on to a third party; if that was
so, there would be no basis for an argument founded on the cost of
borrowing/any deposit interest it would otherwise have obtained;

(2)
since the overall price it was to receive from
the Nigerian government was close to 1.1 billion USD, there was no need for it
to borrow a further 215 million USD;

(3)
there was no evidence that Malabu needed to or
in fact would borrow money of that order.

These arguments failed at first instance, a result approved
in the Court of Appeal. On point (1), Tomlinson LJ took the view that where
there was an obligation to pass on the funds, a defendant was therefore under aprima facie obligation to borrow to
make up the shortfall. As to (2), there was no legal reason why a rich
defendant should be deprived of interest it would otherwise have received on
money which belonged to it. (3) There was no requirement to demonstrate the
necessity of the money in relation to actual arrangements.

The ordinary measure of compensation for the loss of the use
of money is simply an interest claim based on the cost of borrowing.
Accordingly, it is difficult to imagine a situation in which a claimant would
be able to resist an argument that a freezing order gave rise to a good
arguable case that the frozen party would suffer loss on the basis of an
interest claim arising out of its being locked out of use of its own money.

At paras 45-49, the Court of Appeal explores a series of
cases in which the requisite hurdle was not overcome by defendants applying for
fortification. The facts of those cases are more esoteric than an argument on
the basis of borrowing costs and deal with frozen real property or the value of
shares.

Causation

The test here is sine
qua non
(paragraph 54, citing an Australian case Air Express v Ansett). In other words, the defendant need only show
that the making of the order would be or has been a cause without which the
relevant loss would not or would not have occurred. Ordinary contractual
principle apply: ‘the assessment is made 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 plaintiff and the
defendant that the plaintiff would not prevent the defendant from doing that
which he was restrained from doing by the terms of the injunction
per Waller J in Tharros Shipping Co Limited v Bias Shipping Limited [1994] 1
Lloyd’s Rep 577.

Here there is more scope for a fight. Loss stemming from the
grant of the injunction is to be delineated from loss that stems from the
existence of the litigation in general. This was stated by Floyd J in Bloomsbury International Limited v Holyoake [2010]
EWHC 1150 (Ch) in which the frozen party complained of a loss of standing in
the eyes of creditors/associates since the grant of the order. This was also a
factor in the Australian case cited above.

However, where disproving an asserted causal link would
require the canvassing of substantial evidence so as to amount to a mini-trial,
it is to be avoided at the interlocutory stage (para 54 of Tomlinson LJ’s
judgment).

The decision is noteworthy in that it (a) clarifies and
confirms the test that must be satisfied when applying for fortification of a
cross-undertaking in damages and (b) underlines the point that the assessment
of compensation on a cross-undertaking depends on ordinary contractual
principles. See further the decision of the Court of Appeal in Hone and ors v Abbey Forwarding Limited and
anor
[2014] EWCA 711.

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