Energy Venture Partners Ltd v Malabu Oil and Gas Ltd

Factual and Procedural Background

This appeal concerns an Order made by Hamblen J in the Commercial Court on 13 January 2012 requiring the Appellant to provide fortification of its cross-undertaking in damages. The principal litigation in which this interlocutory order was made has concluded, with the Appellant largely successful and recovering 90% of its reasonable costs of fortifying the cross-undertaking. The appeal raises, for the first time at appellate level, the appropriate test for determining whether fortification should be ordered. The Appellant is a British Virgin Islands company involved in oil and gas transactions related to Nigeria, directed and owned solely by a Nigerian national. The Respondent is a Nigerian company awarded a 100% ownership interest in an oil prospecting licence (the OPL Assets) by the Nigerian Federal Government in 1998.

The underlying claim concerned the Appellant's entitlement to commission fees under an oral variation of a written exclusivity agreement, relating to the sale of the OPL Assets. The Appellant alleged wrongful exclusion from the transaction between the Respondent and the Nigerian Federal Government, which involved settlement agreements (the First and Second Resolution Agreements) and payments exceeding US$1 billion made into an account held by the Nigerian Federal Government with JP Morgan Chase Bank in London.

In July 2011, the Appellant obtained a Worldwide Freezing Order against the Respondent's assets up to US$215 million, with subsequent hearings modifying the order and requiring the Appellant to fortify its cross-undertaking initially with a guarantee of US$150,000. Following payment of US$215 million into court, the Respondent applied for further fortification, arguing losses caused by being deprived of use of the funds. Hamblen J granted the application, ordering fortification based on the US Prime Rate borrowing cost. The Appellant appealed this decision.

Subsequent proceedings included applications to set aside the fortification order based on fresh evidence alleging the Respondent was a conduit for unlawful payments. These applications were dismissed, with the court finding the new evidence insufficient to revoke the order. The substantive trial concluded with the Appellant awarded a quantum meruit sum of US$110.5 million plus interest, and the remainder of the sums in court paid to the Respondent. Both parties sought permission to appeal the substantive judgment, which was ultimately refused, and the Respondent confirmed it would not seek to enforce the cross-undertaking in damages.

The appeal against the fortification order proceeded but was dismissed, with the court rejecting the Appellant's late application to adduce fresh evidence and adjourn the appeal.

Legal Issues Presented

1. Whether Hamblen J applied the correct legal test for deciding whether fortification should be ordered in respect of a cross-undertaking in damages;
2. If the correct legal test was applied, whether the Appellant should have been ordered to provide fortification;
3. If fortification was appropriate, whether the amount of fortification was correctly assessed by reference to a borrowing rate of interest.

Arguments of the Parties

Appellant's Arguments

• No additional fortification should be ordered or at least not without disclosure explaining the use of the US$800 million paid to the Respondent and banking difficulties securing payment under the Resolution Agreement.
• The Respondent might be liable to pass on the US$215 million to a third party, negating any claim for borrowing costs or deposit interest forgone.
• Since the Respondent had use of approximately US$800 million, it had no need to borrow the additional US$215 million.
• No evidence showed the Respondent actually needed or would borrow US$215 million to cover the funds held in court.
• Initially contended that a party seeking fortification must establish on the balance of probabilities both the occurrence and extent of loss caused by the injunction, though this was not pursued at the hearing.

Respondent's Arguments

• The US$215 million in court belonged to the Respondent, which suffered loss by being prevented from exercising ownership rights over the money.
• The loss should be assessed on the basis of the likely borrowing cost, specifically the US Prime Rate, as the cost of borrowing on the international market.
• It had a good arguable case for fortification, satisfying the test that the court should make an intelligent estimate of likely loss, that there is a sufficient risk of loss, and that the loss is caused by the injunction.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Harley Street Capital v Tchigirinski [2005] EWHC 2471 (Ch)	Three requirements for fortification: intelligent estimate of loss, sufficient risk of loss, and loss caused by injunction.	Principles adopted by Hamblen J and affirmed by the Court of Appeal as appropriate to determine fortification.
Re: DPR Futures Limited [1989] 1 WLR 778	Basis for assessing risk and loss in freezing order contexts.	Used to derive the requirements for fortification.
Sinclair Investment Holdings v Cushnie [2004] EWHC 218 (Ch)	Requirement for sufficient risk of loss and approach to causation in fortification applications.	Adopted for the standard of proof and risk assessment in interlocutory applications.
Air Express v Ansett [1981] 146 CLR 249	Causation test for damages under cross-undertaking: causa sine qua non and foreseeability.	Applied to confirm that loss must be caused by the injunction for fortification to be ordered.
Tharros Shipping Co Ltd v Bias Shipping Limited [1994] 1 Lloyds LR 577	Affirmation of causation and discretion in enforcing cross-undertakings.	Supported the principle that loss must be caused by the injunction to warrant fortification.
Smith v Day (1882) 21 ChD 421	Measure of damages for breach of cross-undertaking analogous to contract damages.	Referenced in assessing damages payable under cross-undertaking.
Mamidoil-Jetoil Greek Petroleum Company v Okta Crude Oil Refinery AD [2003] 1 Lloyd's Rep 1	Appropriate interest rate for loss of use of money in US dollars is borrowing cost.	Applied to determine the appropriate interest rate (US Prime Rate) for fortification.
Jirehouse Capital v Beller [2008] EWHC 725 (Ch)	Requirement for an intelligent estimate of loss and sufficient risk to order fortification.	Confirmed that proof on balance of probabilities is not required and that fortification depends on a good arguable case.
Bloomsbury International Limited v Holyoake [2010] EWHC 1150 (Ch)	Distinction between harm caused by litigation and harm caused by freezing order.	Used to illustrate difficulties in causation assessment at interlocutory stage.
Fortress Value Recovery Fund v Blue Skye Special Opportunities [2012] EWHC 1486 (Comm)	Application for increased fortification requires sufficient evidence of loss.	Referenced for evidential standards in fortification applications.
Tibbles v SIG plc [2012] 1 WLR 2591	Test for variation or revocation of court orders based on material change of circumstances or misleading of the court.	Applied by Field J in considering an application to set aside the fortification order.

Court's Reasoning and Analysis

The Court analysed the principles governing fortification of cross-undertakings, endorsing the tripartite test derived from Harley Street Capital v Tchigirinski and related authorities: (1) the court must make an intelligent estimate of the likely loss; (2) the applicant must demonstrate a sufficient level of risk of loss to require fortification; and (3) the loss must be caused by the injunction.

The Court emphasized that fortification requires only a good arguable case on risk and causation, not proof on the balance of probabilities, to avoid wasteful satellite litigation. The Court rejected the Appellant’s initial submission that fortification requires proof of actual loss on the balance of probabilities.

Hamblen J’s decision to require fortification was upheld because the Respondent demonstrated a good arguable case that it suffered loss by being deprived of use of the US$215 million paid into court, which was money belonging to it. The Court found it irrelevant whether the Respondent would actually borrow funds to replace the frozen money or whether it had an obligation to pass the money to third parties; the loss was properly measured by the cost of borrowing an equivalent sum.

The Court also accepted that the appropriate rate for calculating fortification in this commercial dispute was the US Prime Rate, reflecting borrowing costs in US dollars. The Court considered and rejected the Appellant’s argument that the Respondent’s status as a non-trading company or conduit for corrupt payments displaced this default rule, finding the evidence insufficient to establish such a status or to justify departing from the borrowing cost measure.

Regarding the application to adduce fresh evidence and seek an adjournment, the Court found the delay unjustified and the fresh evidence insufficient to alter the conclusion that fortification was appropriate. The Court stressed the importance of prompt applications to vary or set aside interlocutory orders and the undesirability of reopening settled questions absent compelling circumstances.

Holding and Implications

The Court DISMISSED the appeal against the order requiring fortification of the cross-undertaking in damages.

The direct effect is that the Appellant remains bound to provide fortification as ordered, assessed at the US Prime Rate borrowing cost. The Court confirmed that fortification applications require only a good arguable case on risk and causation, not proof on the balance of probabilities, thus limiting interlocutory satellite litigation. No new precedent was established beyond affirming established principles and their application in this commercial context.

Costs were awarded such that the Respondent will pay the Appellant’s costs incurred until October 2013, and the Appellant will pay the Respondent’s costs thereafter on the standard basis. The Court declined to order indemnity costs despite entertaining the appeal due to the principled nature of the issue.