The UK Supreme Court to Decide: Whither the Risk Free Injunction?

The United Kingdom Supreme Court recently granted permission to Barclays Bank plc to appeal the decision of the Court of Appeal that the Financial Services Authority (the "FSA") need not provide a cross-undertaking for damages in favour of third-parties impacted by an injunction requested by the FSA. This hearing promises to be closely watched by Canadian regulators and Courts alike, both of whom rely heavily on English injunction jurisprudence.



The FSA is the United Kingdom's regulator of financial services and markets, and derives its authority from the Financial Services and Markets Act 2000 (the "FSMA"). In December, 2010 the FSA brought proceedings against Sinaloa Gold PLC, PH Capital Invest and Mr. Glen Hoover (the "Defendants"). The FSA alleged that each of these defendants was involved in fraud involving the sale of Sinaloa shares. The FSA sought declaratory relief that the defendants breached various sections of the FSMA, an injunction restraining them from committing further breaches, and an order for the repayment of certain funds. The primary issue in this case is whether the FSA, as a public authority, is required to provide an undertaking for damages that might result to third parties as a result of the injunction.

Decisions Below

On December 17, 2010, the FSA made an application, without notice, for a freezing order against the Defendants. The judge granted this order. Appended to the order were various terms including at paragraph (1) that the FSA did not offer a cross-undertaking in damages. At paragraph (5), however, it was noted that the Applicant, being the FSA, would pay the reasonable cost of anyone other than the Defendants that incurred costs as a result of this order:

...including the costs of finding out whether that person holds any of the Respondents' assets and if the court later finds that this order has caused such person loss, and decides that such person should be compensated for that loss, the Applicant will comply with any the court may make.

On the return date for the continuation of the freezing order, December 31, 2011, David Richards, J, drew attention to the possible inconsistency between paragraph 1 and paragraph 5. Rather than address the inconsistency at the return hearing, he opted to continue the injunction to a later return date in the New Year. The FSA considered its position on the inconsistency, and determined that the FSA's practice had always been not to offer a cross undertaking for damages. In particular the FSA decided (as summarized by the Court at para. 8):

...the undertaking in favour of third parties had been included in orders sought in order to cover the costs incurred (e.g. by banks) in complying with the order. If the wording of the undertaking extended beyond that to include other losses then the FSA would seek to vary the undertaking so as to limit it to the costs of compliance.

The basis of this argument was Section 19 of Schedule 1 of the FSMA that provided that neither the FSA, nor a member of the FSA is to be liable in damages for anything done, or omitted to be done in the discharge of the FSA's duties.

The FSA wrote to Barclays, where certain of the Respondents held accounts, to inform it of this position. On January 24, 2011, HH Judge Hodge QC continued the freezing order. Barclays intervened to argue that the cross-undertaking in favour of third parties should be retained. The Judge agreed, and declined to vary the undertaking as requested by the FSA. Although the judge accepted that the exemption from liability in damages contained in s. 19 (discussed above) was a strong indicator dispensing with a cross-undertaking for damages, the Judge determined that s. 19 was not conclusive and that the balance of interests of the public against those of the innocent party came down to protecting the innocent party.

After a thorough discussion of the history of the cross-undertaking, The Court of Appeal sided with the FSA. The Court wrote at paragraphs 52 to 54 that:

...the pre-1947 practice of never requesting the Crown to give a cross-undertaking in damages was intended to recognize its ordinary immunity from liability in damages. As with the FSA, this was not because the immunity from suit prevented the court from requesting such an undertaking. It was simply that to impose such a condition was inconsistent with the immunity which it enjoyed. That same inconsistency exists in this case.

The logic of applying the same principle to third parties is compelling. If the refusal to impose a cross-undertaking is intended to give effect by analogy to the statutory immunity under paragraph 19, I cannot see why any distinction should be made between defendants and third parties when none is made in paragraph 19 itself. The exception for which Barclays contends cannot therefore be justified on any basis other than it would be unjust to deprive them as innocent parties of compensation for loss which in an ordinary case the claimant would undoubtedly be required to provide.

The judge thought that the adverse effect on third parties of freezing orders and other injunctions outweighed the general rule of practice or policy that in law enforcement proceedings no cross-undertaking should be required, but I disagree [...] Once one recognizes the grant of the injunctions in the present case as part of a law enforcement process the principle that no cross-undertaking should be required ought to apply without exception.

The Court of Appeal continued by observing that the FSA was willing to cover the costs of compliance with the injunction - just not other damages that might arise. The Court observed at paragraph 55 that there is a wide difference between the limited costs of complying with the order (i.e. by identifying assets) and the "blank cheque" that might go along with imposing the form of cross-undertaking for damages the trial judge required.

Potential Significance

Canadian Courts have long paid close attention to English injunction cases (most notably, of course, American Cyanamid). It is therefore more than likely that this case will receive significant attention from the Canadian Courts considering what undertaking (if any) should be provided by government agencies, companies or individuals when seeking an injunction. If upheld, this case may become authority for the argument that all a party seeking an injunction must provide is an undertaking for the costs of compliance, as apposed to an undertaking for (frequently very significant) damages. Depending on the Supreme Court's decision, seeking an injunction may become a much riskier proposition.

Case Information

The Financial Services Authority (Appellant) v. Sinaloa Gold PLC, PH Capital Invest, Glen Lawrence Hoover (Defendants) and Barclays Bank PLC (Respondent/Intervener), [2011] EWCA Civ 1158

Docket No: A3/2011/0318

Date of Decision: October 18, 2011

cross-undertaking for damages Financial Services and Markets Act 2000 Financial Services Authority fraud involving the sale of shares freezing order undertaking for damages to third parties as aresult of the injunction United Kingdom Supreme Court



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