Authors
Key takeaways
- The test for what constitutes a “good arguable case” in the context of freezing injunctions is not the same as the test in jurisdiction cases.
- In the context of freezing injunctions, the Niedersachsen test is still the correct test to apply. An applicant does not have to demonstrate that it has the better of the arguments relative to the respondent. Rather, it just needs to demonstrate that it had a good argument – one that is more than barely capable of serious argument but not necessarily one that a judge considers to have more than a 50 per cent chance of success.
- The test in jurisdiction cases is different and is the “three-limb” test set out by Lord Sumption in Brownlie v. Four Seasons [2017] UKSC 80. In short, it is a relative test that requires an applicant to demonstrate that it has the better of the arguments relative to the respondent.
- Notwithstanding these judgments, the law is in a state of confusion which the High Court has explained “cries out for a definitive answer from the Court of Appeal”.
Key principles arising out of Magomedov and Unitel SA
In order for an applicant to obtain a freezing order, it must demonstrate the following:
- First, that it has a good arguable case on the merits
- Second, there is a real risk of unjustified dissipation of assets
- Third, that it would be just and convenient in all of the circumstances to grant the freezing order
Two High Court decisions (Magomedov v. TPG Group Holdings [2023] EWHC 3134 (Comm) (“Magomedov”) and Unitel SA v. Unitel International Holdings BV and another [2023] EWHC 3231 (Comm) (“Unitel SA”)) have recently considered the case law on the first of these three requirements, namely, what does an applicant need to show in order to demonstrate that it has a good arguable case on the merit.
For many years, the leading authority on what an applicant needed to show to demonstrate that it had a good arguable case on the merits was Ninemia Maritime Corp v. Trave Schiffahrtsgesellschaft GmbH (“Niedersachsen”) [1983] 2 Lloyd’s Rep. 600. In this case, Mr Justice Mustill (as he then was) explained that a good arguable case was “one which was more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 percent chance to success” [para. 605]. This became known as the Niedersachsen test and was, until recently, generally accepted to be the test applicable in the context of freezing orders.
The Court of Appeal cast doubt on the Niedersachsen test in Lakatamia Shipping Co. Ltd. v. Morimoto [2019] EWCA (Civ) 2203, (“Lakatamia”) where Lord Justice Haddon-Cave appeared to treat the “good arguable case test” applied in the freezing order context the same as the “good arguable case” test applied in the context of jurisdiction. In particular, in paragraph 38 of the judgment, Haddon-Cave LJ referred to case law in the context of jurisdiction as well as in the freezing order context, which implied that the tests were the same.
The “good arguable case” threshold in jurisdiction cases was decided by the Supreme Court in Brownlie v. Four Seasons [2017] UKSC 80 and requires the applicant to show it has “the better of the argument” and satisfy a three-limb test (the Three-Limb Test).
Since Lakatamia, there have been differing judicial approaches in the High Court as to which “good arguable case” test is the correct one to apply for freezing injunctions; some judges have applied the Three-Limb Test in relation to jurisdiction gateways, while others have applied the Niedersachsen test.
The central question in Magomedov and Unitel SA was whether the Niedersachsen test remained good law or whether it had, in fact, been the intention of the Court of Appeal in Lakatamia to replace the Niedersachsen test with the Three-Limb Test.
Magomedov was the first of the two judgments to be handed down on 6 December 2023. In his judgment, Mr Justice Butcher held that the Niedersachsen test was still the correct test to apply in the context of freezing injunctions. In coming to his decision, Mr Justice Butcher made the following observations:
- The Three-Limb Test involved a relative assessment of the parties’ positions – i.e., it considered whether the applicant’s case was relatively stronger than the respondent’s case. Relative assessments have the potential to draw the parties and the court into the conduct of mini-trials because they encourage parties at a very early stage in the proceedings to bring forward every piece of evidence which might suggest that they have the better of the arguments (which is not the case if all that is required is for a set evidential threshold to be discharged). The conduct of mini-trials would place an even greater burden on the court, where the number and scale of urgent interlocutory applications is already causing strain.
- A relative test would put the merits bar too high to serve the interests of justice. Freezing orders are commonly sought in cases alleging fraud and dishonesty, and it may be difficult in those cases for an applicant to demonstrate, at an early stage in the proceedings and prior to disclosure, that it has the better of the arguments on the merits. Adopting a relative test could therefore deny victims of wrongdoing the interim protection that freezing orders are designed to give.
- In his judgment in Lakatamia, Haddon-Cave LJ explained at paragraph 33 that “the basic legal principles for the grant of a [worldwide freezing order] are well-known and uncontroversial and hardly need restating”, which suggested that he had not intended to effect any significant change in the test for freezing orders.
- The test of a “good arguable case” in relation to jurisdiction relates to the issue of whether there is an available gateway and is not a merits test. There is no reason why the test in relation to gateways should be applied as the merits test in relation to freezing orders.
Two weeks later, Mr Justice Bright handed down his judgment in Unitel SA in which he agreed with the conclusion that Mr Justice Butcher had reached. In his final observations, Mr Justice Bright agreed that the effect of adopting the Three-Limbed Test in freezing order cases would be to significantly lengthen the hearings. In particular, he explained that had the Three-Limb Test applied in Unitel SA, he would have permitted the parties to adduce oral evidence because the relative nature of that test meant that the parties must be permitted to answer it with the best available evidence to them. Mr Justice Bright explained that had oral evidence been adduced, the hearing would likely have taken four days, as opposed to two.
In his judgment, Bright J explained that “the law is in a confused state, which cries out for a definitive answer from the Court of Appeal” [para 37]. He also explained that if the issue of the meaning of a “good arguable case” in the freezing order context was determinative of the outcome of the application in Unitel SA, then he would feel bound to grant permission to appeal. Therefore, while both High Court judgments firmly rejected the contention that Lakatamia has changed this area of the law, it is highly likely that the issue will come before the Court of Appeal soon.
Client Alert 2024-075