Freezing injunctions: insuring the risk in cross-undertakings in damages

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Lord Justice Donaldson famously described the freezing injunctions which could be made by the courts of England and Wales as a "nuclear weapon". A freezing injunction (previously known as a Mareva injunction from the case in which one was first granted) is a crucial tool used to stop another party from dissipating their assets before, during or after court or arbitral proceedings to enforce a claim for a contractual sum or damages. It can also have tactical advantages. For example, a respondent party may be encouraged to provide security to avoid having their assets frozen (a freezing injunction does not provide security).

Freezing injunctions are particularly important in fraud cases where there is often a high risk of assets being dissipated by the defendant in an attempt to become "judgment proof".

The fact that freezing injunctions are not available in all legal jurisdictions makes the jurisdiction of the courts of England and Wales particularly attractive for claimants wishing to utilise them.

Duties to the court

An applicant is bound by a number of onerous duties to the court. The most significant is the cross-undertaking in damages. This is an undertaking to the court that the applicant will compensate the defendant party if it is later found that the freezing order should not have been granted. The cross-undertaking may also need to be fortified by the applicant by providing security – making a payment into court, for example.

The cross-undertaking therefore introduces a significant financial risk for an applicant. The risk that the court later decides the freezing order should not have been granted may be quite high due to the urgency with which injunction applications usually need to be made. Moreover, freezing injunction applications are generally made early in the proceedings or before proceedings have started and are therefore often made on the basis of limited information. Therefore, if an order for a cross-undertaking is obtained against a defendant, applicants will need to consider whether they can take the financial risk that damages and/or adverse costs may later become payable and, if required, whether they are able to fortify the cross-undertaking – both of which can be practical hurdles to obtaining a freezing injunction.

Recent developments – insuring against the risk of cross-undertakings in damages

We have seen a rise in funding options for legal costs in court and arbitral proceedings, including a range of insurance options and third party funding. However, insurance to cover cross-undertakings in damages has only recently been brought to the market. This is a welcome development as it removes a potential barrier to obtaining a freezing injunction by enabling an insured applicant to provide assurance to the court that they have sufficient funds to pay any damages later ordered.

Summary of the law

• Key conditions to apply are:
  • a demonstrable risk that the other party will dissipate their assets;
  • an underlying cause of action, i.e. a contractual claim for a sum of money (proceedings should either have started or be started immediately after); and
  • a good arguable case.
• It remains at the court’s discretion whether it is just and convenient to grant a freezing injunction.
• An applicant must apply without delay.
• Can be granted against, amongst other items:
  • a sum of money in a bank account;
  • specific items (e.g. company shares, property, cars or boats); or
  • in exceptional circumstances, all of an inpidual’s or company’s assets.
• An applicant owes ongoing duties to the court, including:
  • to give full and frank disclosure of all material facts to the court (including any new material facts which may arise); and
  • to progress the underlying proceedings promptly.
• Can be enforced outside of England and Wales once it has been recognised, registered and enforced in a local court (alternatively a "worldwide freezing order" can be sought).
• Non-compliance will be treated as contempt of court, which can lead to fines, seizure of assets, or even prison.