Commercial Court directs fortification of undertakings in damages not limited to future loss

In the recent case of Alta Trading UK Ltd and others v Bosworth and others [2021] EWHC 1126 (Comm), the Commercial Court handed down judgment dismissing an application seeking further fortification of an undertaking in damages concerning a freezing order. Notably, in reaching this judgement the court reversed their approach to estimating loss indicating that if a finding of fortification is justified, there is no reason why fortification could not be directed in relation to past losses as well as future losses.

Background

The Claimants (“the Arcadia Group”) initiated proceedings against the Defendants alleging that they had suffered as victims of a substantial fraudulent conspiracy to divert money, allegedly $340 million, away from the Claimants. The Claimants alleged that funds were diverted into the hands of companies owned and/or controlled by the individual Defendants, who were former senior executives of the Arcadia Group or their associates.

On 12th February 2015, the Claimants applied for and obtained freezing injunctions against two of the ten Defendants to prevent them from disposing of or dealing with the diverted money. The following day, the Claimants commenced proceedings, and gave an undertaking in damages, voluntarily agreeing to fortify or secure an undertaking in the sum of $2 million. This payment, called a “fortification” is often paid into court where an interim injunction is sought in order to protect the Defendant from any losses caused by the injunction and to facilitate the compensation of the Defendant were appropriate. The level of fortification required is decided by the court on a case by case basis.

In September 2017, both Defendants applied for an increase in the fortification of the undertaking in damages by the Claimants up to $10 million. However, by the time of the hearing, the application was pursued only by a single Defendant. The Claimants subsequently resisted the application.

Decision of the Court

In considering this application, the court was required to consider if fortification of undertakings in damages should be limited to future loss. Limiting fortification to future loss was the standard approach of the court and this approach was upheld as recently as 2020 by Mr Michael Green QC, sitting as a deputy High Court Judge in Standing v Power [2020] EWHC 1173 (Ch);

"It furthermore seems to me that I have to be so satisfied as at the date of the hearing that the evidence shows that there is a real risk of a loss being suffered from a sale falling through in the future. If the evidence indicates that the sale has already fallen through, then that has happened while there was no added fortification to the cross-undertaking and was a risk that the applicant took in delaying his application. I do not think that fortification should be ordered for losses already incurred by the time the application is heard."

However, in his consideration of this case, Peter MacDonald Eggers QC sitting as a Deputy rejected this approach;

"I do not accept that the Court's jurisdiction to order the fortification or further fortification of an undertaking in damages must relate only to losses which may be suffered in the future rather than losses which have already been incurred. If the Court considers that fortification is justified having regard to the [relevant factors], I see no reason why fortification could not be directed in relation to past losses as well as future losses."

This determination was reached for the following reasons:

1. The purpose of a fortification to bind the applicant to an undertaking to compensate the respondent for losses suffered. Therefore, there is no "meaningful distinction" between losses suffered in the past or likely to be suffered in the future.
2. Fortification can be viewed in a similar light to an order for security for costs. As security for costs can be ordered for incurred and future costs, there is no ground to restrict fortification of the undertaking in damages to merely future loss.
3. Finally, a change in circumstances might justify an order of fortification where such an order was not previously warranted. It would be unfair if the court's jurisdiction was limited to restrict any fortification to future losses, or if the court's discretion should be exercised against fortifying the undertaking in respect of past losses.

It was therefore concluded that there was no reason to restrict any further fortification to be ordered to future losses.

Decision

The Defendant’s application for further fortification was ultimately rejected by the Court as they failed to demonstrate that there was a risk that any award of damages would not be satisfied by the Claimants. However, this change in approach remains significant. Although this case was heard before the Commercial Court in England and Wales there can be no doubt that it will serve an influential precedent in the Commercial Court of Northern Ireland.

If you would like any further information or advice, please do not hesitate to get in touch with our Litigation and Dispute Resolution team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.