Compensation under cross undertaking in damages: principles applied by High Court

18 January 2013

Earlier this week, the High Court considered a claim for compensation pursuant to a cross undertaking in damages in relation to a freezing order which was subsequently discharged. The court confirmed the principle previously set out in Hoffmann-La Roche & Co v Secretary of State [1975] AC 295 at 361; that damages in injunctive proceedings should be assessed in the same way as damages for breach of contract.

The case of Abbey Forwarding Ltd (in Liquidation) and another v Richard John Hone and others [2012] EWHC 3525 (Ch) concerned a claim brought by HMRC against a company (‘Abbey’) for outstanding VAT and excise duty. HMRC then successfully applied to have Abbey placed into provisional liquidation on the basis that it had actively participated in diversion fraud.

The liquidator immediately issued proceedings on behalf of Abbey against a number of its’ directors for breaching their fiduciary duty in allowing the company to become exposed to the HMRC liability. Abbey sought and obtained a freezing order against its directors and gave a cross undertaking.
At trial, Abbey's claim was dismissed and the freezing orders were discharged.

The defendants consequently sought compensation for general and aggravated damages and compensation for losses allegedly suffered as a result of the freezing orders.

The court upheld the principle established in Hoffmann; that compensation for such claims is assessed using the contractual basis for assessing damages.

The defendants argued that they had suffered loss as a result of the freezing order, as, amongst other things, it had prevented them from pursuing business opportunities that would have resulted in financial gain. 

The court considered the evidence and decided that, in respect of the majority of losses alleged, the liquidator was given no notice of the business opportunities and the potential loss in not pursuing these. It found that where the defendants had not notified the claimant and sought its consent in relation to an alleged loss, such loss was not foreseeable and was too remote to be recovered. The majority of the defendants' claims for specific losses therefore failed. 

 The court concluded that, in principle, there is no general bar to the award of general damages for emotional distress. However, the question of whether such an award is made in any given case is fact-sensitive. The court rejected the argument that damages for emotional distress should not be recoverable in the context of a commercial dispute. It was confirmed that the question for the court was not the nature of the dispute but the effect of a wrongly obtained order on an individual. 

This case provides very useful guidance of the factors that are most relevant when claims are pursued arising from a cross undertaking in damages. The courts have placed limitations on such claims but have probably struck a fair balance, given that losses claimed should be foreseeable and not too remote.

Katie Allard

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