Worldwide: When Is A Statement Made "without Prejudice" Not "without Prejudice"?

Co-Author by Keshav Rikhi, Trainee Solicitor

A freezing injunction is a powerful tool available to the English court which will only be granted when the court is persuaded that stringent tests have been satisfied. One of these tests is that any applicant applying for a freezing injunction must demonstrate there is a "real risk" of dissipation of the respondent's assets. This real risk must be demonstrated by "solid evidence"; "mere inference" is insufficient.

But what happens when the evidence of the "real risk" of dissipation, or some of it, arises in without prejudice communications between the parties? Can the applicant present such evidence to the court and rely on it in an application for a freezing injunction?

Further, can a party apply for a freezing injunction against assets of parties that were not, or will not be, defendants to the substantive claim?

These were the issues that the English High Court had to resolve in the recent case of Motorola Solutions Inc and others v Hytera Communications Corporation Ltd and others. ¹

Factual background

Motorola Solutions, Inc. and Motorola Solutions Malaysia (together, "Motorola") applied for a freezing injunction in England in support of proceedings they had brought in Illinois, United States, against various companies of the Hytera group of companies ("Hytera"), of which the Chinese-headquartered parent was Hytera Communications Corporation Ltd, ("Hytera China"). In the US proceedings Motorola alleged that Hytera infringed Motorola's copyright and misappropriated its confidential trade secrets to build competing two-way digital mobile radio products.

Motorola stated that during settlement meetings held in October and November 2019 Hytera communicated its intention to remove assets from jurisdictions which were likely to be amenable to enforcement of a judgment in favour of Motorola so as to frustrate the enforcement of an "unacceptable" judgment. Motorola was told that Hytera had already taken steps to move assets and cash from its overseas subsidiaries ² by (amongst other methods): undercapitalising subsidiaries outside of China; revise Hytera's Treasury policies, e.g. to change entities in its contracts to be paid to a Chinese entity; move assets out of countries where enforcement was easier; if necessary, to "retreat" further to jurisdictions where enforcement was more difficult (being China, Russia and Africa) (the "Hytera Statements"). ³

In response Hytera argued that it had said that in response to any "unacceptable" judgment and subsequent enforcement against its assets in Western jurisdictions, it would have to "retreat" to its key profitable markets of, amongst others, China, Russia and Africa. That is, Hytera did not threaten to repatriate assets in order to prevent enforcement over those assets; such repatriation would be a commercial response to the US judgment. ⁴

The jury in the US proceedings returned a verdict in favour of Motorola awarding sums of US$ 345,761,156 in compensatory damages and US$ 418,800,000 in punitive damages. On 5 March 2020 the Illinois court entered judgment against Hytera in respect of the sums awarded by the jury, however execution of that judgment had at the time of the judgment in the English proceedings been delayed by the COVID-19 pandemic.

Following the US judgment, Motorola applied in England both for a domestic freezing injunction against Hytera's assets located in the jurisdiction in the sum of US$ 345,761,156 (the amount awarded in compensatory damages), and for an order to provide information, pending execution of the US judgment. Motorola accepted it could not seek a freezing injunction in England in respect of the more significant punitive damages. The application was brought against the companies against which the US judgment had been obtained, as well as against two UK subsidiaries of the Hytera group of companies that were not a part of the main proceedings in the US, namely Project Shortway Limited ("Shortway") and Sepura Limited ("Sepura"), but which held valuable assets that Motorola argued would be available to satisfy the US judgment.

Motorola's application therefore faced two significant hurdles. First, whether the Hytera Statements were admissible as evidence to satisfy the test that there was a "real risk" of dissipation of assets; the judge, Mr Justice Jacobs noted that if the Hytera Statements were not admissible it was "less clear" ⁵ that Motorola would satisfy that test. Second, whether the English court would grant a freezing injunction against Shortway notwithstanding it was not a party to the US judgment. (Whilst Sepura was likewise not a party to the US proceedings, it had given undertakings which meant that Motorola did not pursue this argument against it.)

Motorola argued that, first, the statements made in settlement meetings were admissible under the "unambiguous impropriety" exception to without prejudice privilege; and, second, the assets in England held by Shortway were subject to the Chabra ⁶ jurisdiction of the English court.

The "unambiguous impropriety" exception to without prejudice privilege

There was no dispute that the Hytera Statements were made in the context of what English law regarded as "without prejudice" communications. The general rule is that statements made "without prejudice" may not be disclosed in a public forum or open correspondence unless all parties to the communications so consent. The underlying purpose to without prejudice privilege is that parties should be encouraged to resolve disputes – so "without prejudice" communications should remain confidential as between the parties to protect a party from being embarrassed by an admission made purely in an attempt to achieve a settlement. It is only in limited exceptions that statements made in without prejudice communications may be accepted into evidence – one of these being that a without prejudice statement can be admitted as evidence of "unambiguous impropriety".

The Court of Appeal has held that this is a narrow exception which can only be applied in clear cases of abuse of the "without prejudice" privilege ⁷. Generally speaking, the statement must be more than just untruthfulness and should be more akin to a threat of undertaking some wrong. The case of Dora v Simper and Others ⁸ ("Dora"), which involved a threat to dispose of assets so as to deprive a successful claimant of the fruits of the judgement, established that such a threat falls within the concept of unambiguous impropriety – at least, Jacobs J found, if the clear implication of the threat is that this will be accomplished by improper means. ⁹

Applying Dora, Jacobs J noted that the allegations of whether the Hytera Statements were made was a question of fact for the judge at trial and that at this interlocutory stage the Court should therefore consider whether, if made, the Hytera Statements would amount to unambiguous impropriety. ¹⁰ Jacobs J held that, again applying Dora, the threat to remove assets to deprive Motorola of the benefit of a successful judgment, if proved, would constitute unambiguous impropriety. ¹¹ Jacobs J was also persuaded by the fact that the statements made were significant in the context of serious dishonesty, namely the theft of Motorola's intellectual property.

Jacob J's findings that the Hytera Statements fell within the "unambiguous propriety" exception was crucial to his determination of whether there was a real risk of dissipation of Hytera's assets. He found that the Hytera Statements were of themselves sufficient to give rise to the conclusion that there was a real risk of dissipation, especially when seen in the wider context. However Jacobs J did not consider that Hytera's other conduct, taken on its own, would have justified the conclusion that there was a real risk of dissipation of assets. For example, Jacobs J pointed to factors against a risk of dissipation such as the fact that Hytera was a multi-national company with subsidiaries in "respectable jurisdictions". ¹²

Can freezing injunctions be ordered against parties that are not defendants in the underlying action? The Chabra jurisdiction

An applicant for a freezing injunction is normally applying to freeze assets of a defendant or potential defendant to the underlying claim. But in this case Motorola was seeking a freezing injunction against two subsidiaries of the Hytera group of companies, Shortway and Sepura Limited. Motorola sought to argue that the court could grant a freezing injunction against Shortway on the basis of TSB Private Bank v Chabra. ¹³ Sepura had already entered into undertakings that meant Motorola did not pursue this argument against it.

The Chabra jurisdiction ¹⁴ may be exercised by the English court where "there is a good reason to suppose that assets held in the name of a defendant against whom the claimant asserts no cause of action (the NCAD) would be amenable to some process, ultimately enforceable by the courts, by which the assets would be available to satisfy a judgment against a defendant whom the claimant asserts to be liable upon his substantive claim (the CAD)"; and where "it is just and convenient to do so."

Motorola therefore needed to persuade the court that there was good reason to suppose that the assets of Shortway (as the NCAD) would be amenable to some process enforceable by the court to satisfy the judgment against Hytera China (as the relevant CAD).

The English court had previously noted that a "common example of assets falling within the Chabra jurisdiction is where there is good reason to suppose that the assets in the name of the NCAD are in truth the assets of the CAD", such as where the NCAD holds the assets as nominee or trustee for the CAD as ultimate beneficial owner. ¹⁵ Hytera therefore argued that it could not be said that Shortway held assets as nominee or trustee for Hytera China.

However, Jacobs J held that the test is not limited to situations where the NCAD (here, Shortway) is a nominee of the CAD (here, Hytera). Indeed, as explained in Gee: Commercial Injunctions (which Jacobs J referred to and accepted) "[e]ven if a company is not a nominee, the defendant has access to the company's assets through distributions made to him as a shareholder or through placing the company in liquidation. The same might be done after a judgment by a receiver appointed over the shares in aid of enforcement of the judgment, and this route can be protected by a Mareva injunction". ¹⁶

In the present case, there was no dispute of Hytera China's ultimate ownership (via a chain of shareholdings) of Shortway. Jacobs J found that there would be no difficulty in principle of envisaging receivers being appointed along the chain in aid of enforcement of Motorola's judgement, with the consequence that ultimately Motorola would have access to Shortway's assets. In light of this, the Court had jurisdiction to order the freezing injunction against Shortway.

Conclusion

This judgment provides a useful reminder of one of the limited exceptions to without prejudice privilege. Parties should be mindful that just because statements are made in the context of without prejudice communications does not mean that the types of statements falling within the limited exceptions to without prejudice privilege can not be used in evidence before the court.

It also reinforces the potentially wide-ranging jurisdiction of an injunction issued by the English courts. Parties considering applying for a freezing injunction should bear the Chabra jurisdiction in mind as a potentially powerful tool in situations where a respondent company has assets in a variety of subsidiaries which could be available for enforcement of a potential future judgment.

Footnotes

1 [2020] EWHC 980 (Comm) (24 April 2020) ("Motorola").

2 Paragraph 27 of Motorola.

3 Paragraph 38 of Motorola.

4 Paragraph 40 of Motorola.

5 Paragraph 36 of Motorola.

6 TSB Private Bank v Chabra [1992] 1 WLR 231.

7 See for example, Berry Trade v Moussavi [2003] EWCA Civ 1630, cited in Motorola at paragraph 44.

8 [1999] EWCA Civ 982.

9 Paragraph 54 of Motorola.

10 Paragraph 61 of Motorola.

11 Paragraph 68 of Motorola.

12 Paragraph 36 of Motorola.

13 [1992] 1 WLR 231.

14 The relevant principles for Chabra relief were set out in PJSC Vseukrainskyi Aksionernyi Bank v. Maksimov [2013] EWHC 422 (Comm) at paragraph 7.

15 See PJSC Vseukrainskyi Aksionernyi Bank v. Maksimov [2013] EWHC 422 (Comm) at paragraph 7(4).

16 Gee: Commercial Injunctions 6^th Edition, paragraph 13-010, quoted at paragraph 97 of Motorola.

Originally published May 20, 2020

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