Court of Appeal reinforces 'serious consequences' where freezing order causes loss

Yuri Nikitin and his companies, referred to by the court as Standard Maritime, were under no obligation to apply to the court to have two WFOs granted against them varied in order to demonstrate that they had taken all steps to mitigate their loss, according to the Court of Appeal. All they were required to show was that the WFOs prevented them from making the investments, and the difficulties in applying to the court for the release of funds.

"[O]nce 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," said Lord Justice Beatson, giving the judgment of the court.

"I consider that, on the material before the judge, the Standard Maritime parties had established at least a prime 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 [the applicants] was to resist any application to remove the prohibition," he said.

The Fiona Trust parties therefore remained liable to pay Standard Maritime damages of $59.8 million, as well as a further $11m in interest.

Civil fraud and asset recovery expert Jennifer Craven of Pinsent Masons, the law firm behind Out-Law.com, said that the appeal court had "reinforced the serious consequences of losing at trial to those applying for WFOs, which could well result in the applicants being liable under cross undertakings in damages to compensate the respondents for their losses".

"The judgment underpins that where the court is satisfied that there is a prime facie case that the WFO was an effective cause of the respondents' loss, it will order the applicant to pay out compensation, pursuant to the cross undertaking in damages. This is even the case where the respondents have had the opportunity to vary or discharge the terms of the order. This is because all that is required is that the party seeking to enforce the undertaking shows that the damage he has sustained would not have been sustained but for the injunction," she said.

In 2005, Standard Maritime was ordered to pay $208.5m into a designated account to satisfy a freezing order obtained by Fiona Trust. A further order in 2007 froze another $278m. Fiona Trust ultimately won damages worth $16m plus interest, meaning that the freezing order had extended to cover assets worth "far in excess of the sums for which Mr Nikitin and his companies were ultimately held liable", according to Mr Justice Males in the High Court.

The High Court judge found that Fiona Trust had "committed serious and culpable breaches of their duty of full and frank disclosure" when it sought the freezing order. Although he acknowledged that Mr Nikitin had been dishonest in "at least some of his business dealings", this did not necessarily affect the likelihood that no losses had been caused as a result of the WFO, he said.

Fiona Trust appealed against Mr Justice Males' award of damages, arguing that the judge had erred when he concluded that the companies would have "vigorously opposed" any application by Standard Maritime to vary the freezing order. They also argued that the judge was wrong to find that it was up to them to prove that Standard Maritime had not taken reasonable steps to mitigate their losses. The Court of Appeal disagreed.

"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," said Lord Justice Beatson.

"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," he said.