Court of Appeal sets down the test for fortification of a cross-undertaking

10/10/14

The Court of Appeal (Tomlinson LJ, Macfarlane LJ and Sir David Keene) yesterday handed down judgment in Energy Venture Partners Ltd v Malabu Oil and Gas Limited [2014] EWCA Civ 1295, addressing for the first time at an appellate level the test for whether or not fortification of a cross-undertaking should be ordered. 

Notwithstanding that the substantive judgment in this matter was handed down by Gloster LJ (as she had by then become) in July 2013 (Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2013] EWHC 2118 (Comm)), following a trial in the Commercial Court in November and December 2012, an outstanding interlocutory appeal finally came before the Court of Appeal in July 2014. 

The Claimant (“EVP”) obtained a Worldwide Freezing Order in respect of the assets of the Defendant (“Malabu”) up to the value of US$215 million (and ultimately, the sum of $215 million was paid into Court). Malabu then applied for fortification of EVP’s cross-undertaking. That was granted by Hamblen J ([2012] EWHC 79 (Comm)), who ordered EVP to provide fortification in the amount of $10 million. EVP appealed against that decision, and obtained permission to appeal from Rix LJ on three issues: (1) whether Hamblen J applied the correct legal test for deciding whether fortification should be ordered in respect of a cross-undertaking in damages; (2) if he did apply the correct legal test, whether EVP should have been ordered to provide fortification; and, (3) if fortification should have been ordered, whether Hamblen J assessed the amount of fortification correctly, in doing so by reference to a borrowing rate of interest.  

The first issue raised the question of what, as a matter of principle, an applicant for fortification was required to establish. Whilst this had been considered in a number of first instance decisions – most notably Sinclair Investment Holdings v Cushnie [2004] EWHC 218 (Ch); Harley Street Capital v Tchigirinski [2005] EWHC 2471 (Ch); Jirehouse Capital v Beller [2008] EWHC 725 (Ch); Bloomsbury International Limited v Holyoake [2010] EWHC 1150 (Ch); and Fortress Value Recovery Fund v Blue Skye Special Opportunities [2012] EWHC 1486 (Comm) – it had not previously been considered at an appellate level.

Tomlinson LJ (with whom the remainder of the Court agreed), in dismissing EVP’s appeal, approved Briggs J’s summary of the three relevant principles in Jirehouse v Beller in the following terms:

‘Broadly speaking, they require an intelligent estimate to be made of the likely amount of any loss which may be suffered by the applicant for fortification (here the defendants) by reason of the making of an interim order.  They require the court to ascertain whether there is a sufficient level of risk of loss to require fortification.  They require that the loss has been or is likely to be caused by the granting of the injunction’.

He concluded that these three principles could ‘equally be summarised … as a requirement that the applicant for fortification show a good arguable case for it’. He clarified the causation test in the following terms: ‘at the stage of considering whether fortification of the undertaking is required, the proposition could be restated as it is sufficient for the court to be satisfied that the making of the order is or was a cause without which the relevant loss would not be or would not have been suffered’.

This judgment (and see in particular paragraphs 52-54) now authoritatively sets out the test that an applicant for fortification of a cross-undertaking must meet.

The judgment is here.