cross-undertaking in damages

The cross-undertaking in damages is a promise to the court (with the status of a court order) given by a claimant to pay damages subsequently due to the defendant or a third party as compensation if it eventuates that interim relief obtained by the claimant (such as an interim injunction) was not justified. The cross-undertaking is given as part of the price for interim relief, and is given by the claimant as a condition of being granted interim relief. The cross-undertaking as to damages also applies where the defendant undertakes not to do the acts complained of pending the trial (a difference in form to an injunction, but the same in effect), which would dispense with the requirement for the Court to issue an injunction.

Reasons for the Undertaking in Damages

When a claimant applies for an interim injunction, the court does not know whether the claimant or defendant(s) will be successful at the trial. This is because the evidence in support of the application for the injunction will focus on the grounds for giving the injunction, rather than resisting it (but note the duty of the claimant to give full and frank disclosure to the Court in without notice applications). The evidence will not be focussed on the defendant's side of the story, which if known to the Court may exonerate the defendant from liability and mean that a grant of a freezing injunction, search order or other relief was not justified. The Court does not have the complete picture as at the date of the application.

The Court will require the claimant to give an undertaking in damages as a condition of granting an interim injunction. This undertaking is designed to protect respondents if it eventuates that the interim injunction was wrongly made. If

1. the injunction is set aide earlier than the trial;
2. the claimant is not successful at the trial; or
3. the claimant decides to dissolve the injunction, the respondent may have suffered loss by being unjustly restrained by the injunction from doing acts which it was otherwise entitled to do.
   
   It may also be that the defendant has not suffered any loss, in which the case the undertaking would not be called upon. The undertaking provides a remedy to the defendant to recover losses suffered as a consequence of the grant of the injunction in the first instance.

When a claimant applies for a freezing order, the breadth of the undertaking is widened to third parties. The reason for this is that companies and banks may necessarily incur costs complying with the terms of the freezing order.

Giving the Cross-Undertaking

At the hearing of the application for an interim injunction, the claimant will be required to present evidence setting out its ability to honour the cross-undertaking in damages, and almost invariably be required to fortify (that is, provide security) to the Court for the undertaking.

Where the claimant does not have any assets in the jurisdiction, the court is likely to require that assets are brought into the jurisdiction to fortify the cross-undertaking. Although the form of security is a matter for the Court to be satisfied, bank guarantees, payments into court or undertakings by financially sound third parties are usually accepted.

Enforcement of the Undertaking as to Damages

Court have a discretion whether to enforce a cross-undertaking in damages and order an inquiry as to damages. It can refuse to do so if the party seeking enforcement has behaved inequitably. Where the injunction is dissolved or found to be wrongly made, and the defendant wishes to enforce it, the damage suffered by the defendant is assessed the way damages are usually assessed, in an inquiry as to damages.

The assessment is made upon the same basis as that upon which damages for breach of contract would be assessed, if the undertaking had been a contract between the claimant and the defendant to the effect that the claimant would prevent the defendant from doing that which it was restricted from doing by the terms of the injunction.

The defendant must show that the giving of the undertaking was the exclusive cause of the loss on a prima facie basis, as well as satisfying the 'but for' test applied in the assessment of damages in contractual claims for damages.

Not every conceivable or theoretical cause of the damage must be dealt with by the defendant. The award of damages will nevertheless be compensatory and not punitive. Applying the contractual standard for assessments of damages in undertakings cases, causation, remoteness and quantum, mitigation of damage also apply.

Where a freezing order is made, it may be that the defendant could not obtain credit facilities, effects on the ability of a company to trade, indeed companies have been known to cease to trade already as a result of the imposition of freezing orders. Damages for emotional distress are available only in exceptional cases, as are aggravated damages.

Accordingly, the Court will first decide whether the undertaking will be enforced. It does so by considering the circumstances in which the injunction was obtained, whether the claimant was successful at the trial and the conduct of the defendant, to determine whether the claimant will be called upon to honour the undertaking. If the Court decides that the undertaking will be enforced, the Court will proceed to assess the loss on the evidence before it.

General damages are available in cases of wrongly made freezing orders and search orders.

Standard Cross-Undertakings

The standard cross-undertaking included in freezing orders are:

If the court later finds that this order has caused loss to the Respondent, and decides that the Respondent should be compensated for that loss, the Applicant will comply with any order the court may make.

The Applicant will pay the reasonable costs of anyone other than the Respondent which have been incurred as a result of this order including the costs of finding out whether that person holds any of the Respondent's 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 order the court may make.

In Search Orders:

If the court later finds that this order or carrying it out has caused loss to the Respondent, and decides that the Respondent should be compensated for that loss, the Applicant will comply with any order the court may make. Further if the carrying out of this order has been in breach of the terms of this order or otherwise in a manner inconsistent with the Applicant’s solicitors’ duties as officers of the court, the Applicant will comply with any order for damages the court may make.