Interim injunctions: Court of Appeal clarifies merits threshold test and general rules on costs (England & Wales)

Key Takeaways

1. To obtain a non-proprietary freezing order, an applicant needs a “good arguable case” on their underlying claim, meaning “one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success” (per The Niedersachsen[1]). The focus is on the strength of the applicant’s case, without weighing it against the respondent’s.

2. This “good arguable case” test differs from one the Court uses when granting permission to serve documents outside the jurisdiction, where the Court looks at who has the better of the argument as to whether the claim falls within a jurisdictional gateway (per Brownlie[2]). This comparative approach had been imported into the freezing orders context, causing confusion as discussed in an earlier briefing.

3. There is no difference between the “good arguable case” test for a non-proprietary freezing order, and the “serious issue to be tried” test from the American Cyanamid[3] case for most interim injunctions
   (“American Cyanamid Injunctions”). Both refer to a case which has a “real prospect of success”, meaning it can survive a summary judgment application.

4. It would be clearer if the merits threshold tests for non-proprietary freezing orders and American Cyanamid Injunctions were both labelled “serious issue to be tried”, to avoid confusion with the jurisdictional “good arguable case” test.

5. Costs for contested return hearings on non-proprietary freezing orders should usually go to the successful party, unlike for American Cyanamid Injunctions, where costs should usually be reserved to the trial judge.

Facts of the Case

The respondent (“R”) alleged that its former director (“A”) breached her duties by causing R to make uncommercial loans to a company she owned. R obtained an ex parte worldwide non-proprietary freezing order (the “WFO”) against A. At the return hearing, Bright J continued the WFO to judgment or further order, finding that:

• The “good arguable case” merits threshold test on non-proprietary freezing orders should be the absolute test per The Niedersachsen rather than the relative test per Brownlie, which R had satisfied (and would have satisfied on either basis, along with the other limbs of the test for the relief sought); and

• A should pay R’s costs of its continuation application and the return hearing.

A appealed, arguing that Bright J should have applied the Brownlie test, which R would not have met, and that costs should have been reserved to trial.

The Decision

Flaux C (with Popplewell and Falk LJJ agreeing) held:

• Standard for “good arguable case”: what constitutes a “good arguable case” is the absolute test per The Niedersachsen, not the relative test per Brownlie, because:

• Lord Denning MR’s adoption in an early freezing order case of the relative test from the jurisdictional context was at a time when freezing orders were inapplicable to English defendants, and the law had since evolved in both areas;

• The Brownlie test focuses on whether a claim falls within a jurisdictional gateway, not the merits of the claim. This issue will not be revisited at trial, so it is appropriate to apply a higher standard when determining it;

• It is invidious for the Court at the early stage at which a freezing order is sought to determine who has the better of the argument, and would risk turning return hearings into ‘mini-trials’;

• The weight of authority supports The Niedersachsen test, approved by the Court of Appeal in The Niedersachsen itself, whereas the use of the Brownlie test was a relatively recent misunderstanding; and

• A number of Commonwealth jurisdictions use The Niedersachsen test, with Canada an outlier (applying a stricter test of “strong prima facie case”).

Furthermore, on either test, Bright J was right to find that R would satisfy that test.

• Adverse costs order: the Court should generally award costs to the successful party after a contested interlocutory or procedural application, rather than reserving them for the trial judge, although the Court has a discretion to do otherwise. However:

• For American Cyanamid Injunctions, costs are often reserved for trial because the injunction is based on the balance of convenience, allowing a party to act on a right or obligation not yet proven. If the right or obligation is established at trial, the injunction becomes final, but if the claim fails then it can be said that the injunction should not have been granted. It is, therefore, appropriate to let the trial judge decide whether the claimed right or obligation has been established, before making a costs order on the interim injunction which secured it on an interim basis; but

• In contrast, non-proprietary freezing orders aim to prevent the unjustified dissipation of assets against which a judgment might be enforced, rather than temporarily securing a claimed right or obligation. Even if the claimant fails at trial, it does not mean that the freezing order was wrongly granted, and therefore the judge at the return hearing ought generally to award the successful party its costs.

Popplewell LJ (with Flaux C and Falk LJ agreeing) held:

• The merits threshold test for a non-proprietary freezing order should be the same as an American Cyanamid Injunction, namely whether there is a “serious issue to be tried”, meaning the claim has a real prospect of success;

• There is no real difference between The Niedersachsen and the American Cyanamid merits threshold tests, and no justification for distinguishing between them; and

• It would be clearer to label the merits threshold test for all forms of interim injunction as “serious issue to be tried”, to avoid confusion with the jurisdictional “good arguable case” test.

[1] Ninemia Maritime Corp v Trave Schiffahrts GmbH & Co KG (The Niedersachsen) [1983] 1 W.L.R. 1412.

[2] Brownlie v Four Seasons [2017] UKSC 80.

[3] American Cyanamid Co (No 1) v Ethicon Ltd [1975] UKHL 1.