Banks’ suspension of customer accounts for suspected fraud: High Court refuses interim order to unfreeze

In the context of a breach of contract claim brought by a customer against a bank for freezing their account on the basis of suspected fraud or criminal activity, the High Court has dismissed the customer’s application for an interim mandatory injunction to compel the bank to unfreeze the account: Harvey v Santander UK plc [2023] EWHC 2947 (KB).

This decision continues a trend of the court upholding banks’ decisions to exercise their contractual rights to freeze a customer’s account without notice in circumstances where they suspect fraud or criminal activity (see our previous blog posts here and here).

The decision considers the common law principles that the court will take into account in considering whether to grant an interim mandatory injunction application brought under CPR Part 25 by a customer against a bank. The court will generally approach these injunctions with caution and they are typically granted only in clear-cut cases where the court has a high degree of assurance that the party seeking the injunction will succeed at trial. This is because mandatory injunctions can significantly alter the status quo and may impose substantial burdens or obligations on the party against whom they are issued.

In the present case, the court was not satisfied that this was a case in which an interlocutory mandatory injunction should be granted because it did not feel a high degree of assurance that the customer would succeed in satisfying a court at trial that the bank had not been exercising its contractual rights to freeze the account, to close it and to decline to execute the customer’s instructions. Further, the court was concerned that if it were to grant the injunction and at trial it was proved that it was wrong to do so, then damages would be an inadequate remedy for the bank because it may face regulatory and/or criminal sanctions and/or potential actions from third parties who might claim the funds were misapplied.

For more detail, see our Banking Litigation Notes blog post.

When will a fraud victim’s settlement of its onward liability affect the amount recoverable from the fraudster?

A recent Court of Appeal decision highlights the principles a court will apply when deciding whether a benefit received by a victim of fraud reduces its recoverable loss. The court in this case decided that the claimant’s damages for an unlawful means conspiracy could be reduced to reflect any benefit it had obtained by negotiating a settlement limiting its onward liability to a third party – although on the facts no such benefit had been obtained: ED&F Man Capital Markets Ltd v Come Harvest Holdings Ltd and others [2022] EWCA Civ 1704.

A victim of fraud is entitled to damages in a sum that represents all the losses directly flowing from the transaction caused by the fraud. A benefit received by a claimant may be taken into account in assessing damages if it resulted from that transaction, as distinct from some independent separate dealing. In a fraud scenario involving a chain of events, that question will turn on how broadly the court defines the fraudulent transaction.

While each case will depend on its facts, the Court of Appeal’s decision in this case confirms that the court should consider the context and substance of the transactions in question rather than purely their legal form when deciding whether they are separate dealings. It also suggests that the relevant factors may include whether a transaction could be expected to have been within the contemplation of the fraudsters and so could be considered part and parcel of the fraudulent scheme.

The question of when a benefit will be taken into account in assessing damages may be an important factor for a victim of fraud to consider as part of its overall strategy to deal with the fallout of the fraud – including when contemplating any settlement of its own potential liability to third parties affected by the fraud.

Update: On 10 July 2023, the Supreme Court refused the defendant permission to appeal from the decision that no relevant benefit had been obtained by the claimant.

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Court of Appeal considers damages for deceit in the context of contractual warranties

A recent Court of Appeal decision is a useful reminder of the principles the court will apply when assessing damages for deceit / fraudulent misrepresentation in the context of corporate acquisitions and other asset purchases: MDW Holdings Limited v James Robert Norvill, Jane Rosemary Norvill and Stephen John Norvill [2022] EWCA Civ 883.

The decision illustrates that, while in some cases the amount of damages recoverable in respect of false warranties will be the same under both a claim for the tort of deceit and a contractual claim for breach of warranty, that will not always be the case.

In particular, in cases where the claimant would still have entered into the transaction (albeit at a lower price) if it had known the true position, tortious damages for deceit will usually be the difference between the price paid and the price the purchaser would have paid (as distinct from the objective true value of the asset, which is the relevant comparator in tort claims where the transaction would not have proceeded and in contractual warranty claims).

Those differences should be borne in mind by potential claimants when deciding which causes of action to plead and assessing what evidence they will need to adduce in support of the damages claim.

Background

Full details of the claim are set out in this post on our Litigation Notes blog.

Essentially, it concerned seller’s warranties in a share purchase agreement in a corporate acquisition, including as to the company’s compliance with certain laws and regulations. The High Court found the seller liable for breach of warranty and deceit / fraudulent misrepresentation.

The judge applied the orthodox principle that damages for breach of warranty should be assessed by reference to the difference between the value of the company if the warranties had been true (the “Warranty True Value”) and its actual value given their falsity (the “Warranty False Value”).  The same measure was applied to the deceit finding, given the parties’ agreement that the contractual and tortious measures of damages would produce the same result in this case (on the basis of a shared assumption that the price paid reflected the company’s value if the warranties had been true).

The primary appeal concerned the seller’s argument that the damages should be reduced to reflect the fact that certain risks that the court found had lowered the true value of the company at the date of sale had not in fact subsequently materialised.  The Court of Appeal rejected that, holding that damages should not ordinarily be reduced on account of such post- transaction developments except in limited circumstances. (For discussion of this aspect of the decision, see the separate blog post mentioned above).

However, the purchaser also cross-appealed on the basis that the High Court had found, contrary to the parties’ shared assumption, that the company’s value if the warranties had been true was in fact less than price paid. The purchaser argued that this meant that the contractual and tortious measures of damages would not necessarily produce the same result, so that (i) given the deceit finding, the judge ought to have then applied the tortious measure (ii) under that measure, damages should be the difference between the price paid and the Warranty False Value, rather than the (smaller) difference between the Warranty True Value and the Warranty False Value.

Decision (re deceit)

The Court of Appeal accepted that it was open to the purchaser to contend on appeal for assessment on the tort basis, noting that that had been included in its pleaded case.

The court proceeded to consider the position under the orthodox principle that tortious damages must put the claimant in the position it would have been in had it not suffered the relevant wrong.

The court recognised that where a claimant has been induced by deceit to purchase an asset that it would not otherwise have purchased, damages will usually be the difference between the price paid and the actual value of the asset (plus any damages for consequential losses). If, however, in the absence of deceit the claimant would have proceeded with the purchase, the tortious measure requires damages to be assessed by reference to the difference between the price paid and the price that the purchaser would have paid had it known the truth.

The first instance judge had made no finding as to what the purchaser would have done if it had known the truth. As a result, the court allowed the purchaser’s cross-appeal and remitted to the High Court the question of whether the purchaser was entitled to additional damages for deceit.

Jan O'Neill
Jan O'Neill
Professional Support Lawyer, London
+44 20 7466 2202

 

Court of Appeal rejects novel argument that fraud victims should give credit for the “time value” of cash received as part of a fraudulent transaction

In the context of a claim by a fraud victim seeking damages for consequential loss of investment opportunity, the Court of Appeal has rejected an argument by the fraudster that the victim was obliged to give credit not only for the cash they received as part of the relevant fraudulent transactions, but also for the “time value” of that money in the period between the transactions and the trial: Tuke v Hood [2022] EWCA Civ 23.

The Court of Appeal referred to the classic modern statement of the applicable principles when assessing damages for deceit in Smith New Court Ltd v Scrimgeour Vickers [1997] AC 254. Smith New Court confirmed that the time at which credit is to be given for the benefits received by the innocent party is normally the date of the fraudulently induced transaction (although this is not an inflexible rule and a different date may be adopted if taking the date of the transaction would under-compensate the victim). The Court of Appeal noted that Smith New Court did not say anything about the innocent party having to give credit for benefits received against claims for consequential losses.

The suggestion in the present case that the victim would be overcompensated unless they gave credit for the time value of the money received was a novel one. The Court of Appeal found it to be fundamentally misconceived and contrary to principle. In the court’s view, a claimant would not be fully compensated if they were required to give any credit for the time value of the money received.

For more detail see this post on our Banking Litigation Notes blog.

Court of Appeal confirms test for fortification of cross-undertaking in damages

The Court of Appeal has upheld an order requiring the claimant to fortify its cross-undertaking in damages after it obtained a worldwide freezing order against the defendant: Energy Ventures Partners Ltd v Malabu Oil & Gas Ltd [2014] EWCA Civ 1295.

This is the first time that the appropriate test to be applied by the court when deciding whether to order fortification has been considered at appellate level. The Court of Appeal identified three requirements which a defendant must satisfy to be granted an order of fortification:

  1. the court must be able to make an intelligent estimate of the likely amount of any loss which might result from the injunction;
  2. the applicant must show a sufficient level of risk of loss to require fortification; and
  3. the court must be satisfied that the loss has been or is likely to be caused by the grant of the injunction.

The relevant standard is to show a good arguable case; the court will not require proof on the balance of probabilities.

Although this decision does not change the law, it provides helpful confirmation of the applicable test. A party thinking of applying for an interim order which will deprive the opponent of the use of significant sums of money should think carefully about the level of damage the opponent might suffer as a result, whether the applicant can show it would be able to pay that amount if called upon to do so, and accordingly whether fortification is likely to be required. Frances Furnivall considers the decision further below. Continue reading