In Morelli v Morelli, the Royal Court of Jersey has for the first time ruled on the mechanism and approach by which an undertaking in damages, given pursuant to ex parte injunctive proceedings, is to be enforced.
The court ultimately declined permission to enforce the undertaking in damages but has provided some useful guidance for practitioners and for those representing parties who become subject to injunctions granted by the Royal Court.
Background
The Plaintiffs obtained free-standing freezing injunctions in support of succession proceedings in Monaco. The injunctions bound the Defendants, who were the ultimate beneficial owners of a Jersey company called LBSI, and LBSI's corporate administrators (the "Parties Cited").
The Monaco proceedings concerned the shares in LBSI, which had belonged to the late mother of the Defendants and the Plaintiffs. The Plaintiffs claimed that the shares had been wrongly misappropriated by the Defendants in June 2015, thereby depriving the Plaintiffs of their forced heirship rights in Monaco.
The injunctions prevented the Defendants and the Parties Cited changing administrators or winding up LBSI. The terms of the injunction contained the standard undertakings given by plaintiffs: to comply with any order the Court may make as to damages if the court later finds that the injunction has caused loss for which the court decides there should be compensation. The undertaking in damages is designed to protect the Defendants and Parties Cited from damage they should not have sustained if it turns out that the injunctions should not have been granted, for example if the underlying proceedings are resolved against the Plaintiffs.
Three months after the injunction was granted, the proceedings were compromised and discharged by a consent order that, save for a minor variation, replicated the operative provisions of the injunction by means of reciprocal undertakings. The Plaintiffs' undertakings in damages would continue and in exchange the Defendants and Parties Cited would continue to be bound not to do the things prohibited by the injunction. The reciprocal undertakings were to remain in force "until final resolution of the Monaco civil proceedings or further order."
In October 2018 the Monaco proceedings came to an end. The Plaintiffs disagreed that they had, and contested an application brought by the Defendants in Jersey for a determination of that point. In September 2019 the Royal Court agreed that the Defendants and Parties Cited had been discharged from their undertakings in October 2018. The court on that occasion reserved its position on whether the Plaintiffs' undertaking in damages had also been automatically discharged by the resolution of the Monaco proceedings, but proceeded on the assumption it had not.
The time span between October 2018 and September 2019 turned out to be highly material to the amount LBSI was able to claim by way of compensation under its undertaking in damages.
The amount LBSI sought to recover in damages was the cost of keeping its corporate administrators in office for the duration of the injunction until the discharge in September 2019. This amounted to over £100,000 in fees. The Defendants, as assignees of LBSI's rights (which had been wound up), sought leave to enforce the undertaking in damages to recover these charges from the Plaintiffs.
Principles and procedures
The Royal Court has declared, following the English procedure, that enforcing the undertaking is a two-step process: first the applicant must seek leave, which, if granted, will then be followed by a hearing to assess the recoverable damages.
The court's involvement is required because an undertaking in damages, while often regarded as 'the price' for obtaining an ex parte injunction, does not operate as a contract between the plaintiff and defendant but is a promise given to the court. Only with the court's leave can it be enforced.
Because the court may be required to rule on factual issues (including the enforcing party's conduct), both the leave hearing and the damages hearing should be constituted by a judge and jurats.
The leave hearing
The first hearing is concerned with whether or not to enforce the undertaking in damages. The key issues for the court are:
- whether the injunction had been wrongly granted; and if so
- whether the causative test in principle has been met.
Whether an injunction was wrongly granted does not depend on whether the judge made a mistake in granting it. It involves looking at all the facts at the time of the leave hearing, with the benefit of knowledge of all those facts and applicable law, and hindsight. In this case, the Monaco proceedings did not vindicate the claims the Plaintiff made to obtain the injunction in Jersey, and the injunction was held to have been wrongly granted.
It is then for the party seeking to enforce the undertaking to make out a prima facie case that the damages sustained would not have been sustained but for the injunction. It is sufficient for the making of the order or injunction to be a cause without which the relevant loss would not have been suffered. The court will consider how the losses claimed fall within the rule in Hadley v Baxendale (see below). The court is also entitled to have regard to the likely measure of loss which it is said has been sustained.
The first hearing is also a discretionary exercise. The court retains a discretion not to enforce the undertaking if it considers that the conduct of the defendant in relation to the obtaining or continuing of the injunction or the enforcement of the undertaking makes it inequitable to do so. The court can take into account all the circumstances relevant to whether it is fair and just to refuse an inquiry (including events after the end of the proceedings). This would include any delay.
The quantum hearing
The second hearing is concerned with assessing the quantum of the damages caused by the injunction and issues of causation and remoteness. The measure of damages is assessed by having regard to the principles in Hadley v Baxendale1 i.e.
- the damages which the other party ought to receive should be such as may fairly and reasonably be considered either arising naturally from what has happened (the first rule); or
- the source of loss was known or may reasonably be supposed to have been in the contemplation of both parties, as the probable result of the breach of it (the second rule).
Result
In this case the matter did not progress past the leave stage. Despite concluding that the injunction had been wrongly granted in the first place, the court concluded that the damages claimed were not prima facie caused by the terms of the injunction. The court also considered that it would not be fair to enforce the undertaking because the applicants had failed to discharge what the court regarded as the burden upon them, to satisfy it that they had not been a source of delay in the winding up of the Monaco proceedings.
The Royal Court concluded that even though the Plaintiffs had contested the point, there could have been no recoverable losses caused by the terms of the injunction after October 2018, when the end of the Monaco proceedings had automatically discharged the injunctive relief. The fact that the Plaintiffs did not appreciate that was the case until the Jersey Court said so, nearly a year later, was irrelevant.
Guidance
The judgment serves as a warning to respondents to injunctive proceedings before the Royal Court, particularly those seeking to compromise injunctive proceedings by way of a consent order.
- Exercise caution when using shorthand that cross-refers back to the terms of undertakings set out in the body of an injunction if it is to be compromised by a consent order. If the effect of the consent order is to discharge the injunction, this may inadvertently trigger an automatic release of the protections afforded by the Plaintiff's undertaking in damages which, in the standard Jersey wording for a freezing injunction, refer to 'damage caused by this order.' On this occasion the court considered that was not the parties' intention but did consider the consent order to be capable of being read in that way.
- Specify clearly the date on which the terms of any undertaking are deemed to come to an end. If the trigger is the end of foreign proceedings; be clear about what that means and what is to happen if there is disagreement about whether that trigger has been met. The party subject to restraint will need to have as much protection on their undertaking in damages as possible if the plaintiff refuses to acknowledge the proceedings have come to an end and there is a long delay before that issue is resolved.
- Be careful not to be perceived as 'sitting on your rights'. A party subject to restraint with the benefit of undertakings in damages should put the plaintiffs on notice if they stand to incur a loss which the plaintiff might not be aware of or they wish to take any step that might engage the undertaking in damages. This puts the plaintiff on notice (for the purposes of the second limb in Hadley v Baxendale) and on risk if they refuse consent to a variation of the injunction.
- Ensure that conduct occurring after victory in the main proceedings is not interpreted negatively by the court from whom leave to enforce the undertaking is sought.
Footnote
1 [1854] 9 Ex 341
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
