The freezing order — a useful weapon, but there is a price tag attached

The ability to get a worldwide freezing order with comparative ease is one of the reasons why claimants like to bring their heavy international litigation to England. Quite right too: but there is a price attached, which can be high. It is known as the undertaking in damages. Today Fiona Trust found this out to their cost in the latest episode of the Privalov saga, Fiona Trust v Privalov [2016] EWHC 2163 (Comm). Essentially Fiona, a Russian state-owned shipping conglomerate, alleged that another Russian shipping magnate, Yuri Nikitin (whom Russia had previously tried without success to extradite from the UK and has it seems recently taken steps to prosecute in his absence), had suborned an officer of theirs to enter into charters that were disadvantageous to them and hugely profitable to him, in exchange for a cut of the profits. They claimed a cool half-billion dollars or rather more in damages, and in 2005 and 2007 got orders freezing assets of Nikitin worth, in round figures, $600 million. After bitter litigation (see  Fiona Trust v Skarga & Nikitin [2013] EWCA Civ 275, and also Novoship (UK) Ltd v Mikhaylyuk & Ors [2014] EWCA Civ 908;[2015] Q.B. 499, the latter of which is now a leading case on account of profits), Fiona recovered about $16 million.

The day of reckoning then arrived for the undertaking in damages. Andrew Smith J had earlier decided, rightly, that findings of dishonesty on Nikitin’s part did not bar such claims, on the basis that even crooks had rights not to have their financial lives upended without recourse (see Fiona Trust v Privalov [2014] EWHC 3102 (Comm)). Males J in the present follow-on case decided that Nikitin was entitled to damages in a sum which remained to be calculated, but cannot have been too far from $50 million. Most of this arose from the loss of the opportunity to make profits in the volatile shipping market. In particular Males J made some points that could usefully be borne in mind:

(1) A ‘liberal approach’ was appropriate, in that the court should not be over eager in its scrutiny of the evidence or too ready to subject its methodology to minute criticism, in part because the very nature of the exercise rendered precision impossible;

(2) The fact that all claims to would-be profits were speculative and that it was always possible that the person seeking recompense would in fact have made a loss was no bar;

(3) Although loss of profits had to be proved and a “loss of chance” award was not appropriate, there was no need for rigorous proof and the court could look at the figure in the round with reference to the vagaries of business;

(4) Males J was unimpressed with an argument that Nikita had failed to mitigate his loss by failing to apply for permission to use the blocked funds for business activities. Not only was there no such exception in the terms of the freezing orders; in any case to demand that a defendant to litigation indulge in further satellite litigation in such a situation was hardly reasonable;

(5) He was also unconvinced by an argument that in a volatile shipping market it should be possible for the person seeking compensation to rely on the rate at which he could have borrowed money (LIBOR + 2.5), either as surrogate proof for the profits he would have made, or as a ‘conventional’ measure.

All in all, one suspects, a chain of litigation that seems a fairly Pyrrhic victory for Russian state shipping. $16 million against an incidental ‘undertaking in damages’ bill of three times that amount is not that pretty a balance sheet, and might well serve as a warning.

Andrew Tettenborn