Public Law Duty and Cross-Undertaking for Losses to Third Parties

1 03 2013

The Financial Services Authority (a company limited by guarantee) (Respondent) v Sinaloa Gold plc and others (Respondents) and Barclays Bank plc (Appellant) [2013] UKSC 11

Affirming the Court of Appeal’s decision reported at [2011] EWCA Civ 1158, see Patten LJ at [55], the Supreme Court has unanimously dismissed the appeal in this case. The court held that there is no general rule that an authority such as the Financial Services Authority (FSA), acting pursuant to a public law duty, should be required to give a cross-undertaking in respect of losses incurred by third parties. Equally, on the facts of this case, no particular circumstances existed whereby the FSA should be required to give such a cross-undertaking. For the full details of this case in the Court of Appeal and High Court (which held that the FSA was required to give a cross-undertaking in respect of losses incurred by third parties), the preview to this case is available here.

Just to recap briefly, cross-undertakings are a critical feature of a freezing (formerly Mareva) injunctions. Usually, applicants must give a cross-undertaking in damages to the court. This is to compensate respondents and any affected third parties in the event  the court decides that the applicant was not entitled to injunctive relief (a discretionary remedy). Where no cross-undertaking is given, the courts will refuse to grant an injunction. However, in situations where freezing injunctions are procured by public bodies (such as the FSA) pursuing law enforcement functions, the courts usually do not require such bodies to provide a cross-undertaking in damages to safeguard the respondent’s position. Lord Mance of Frognal gave the leading judgment and Lord Neuberger PSC, Lady Hale, Lord Clarke and Lord Sumption JJSC concurred with his Lordship.

Factual Background

Just to briefly recap the facts, in 20 December 2010, acting in pursuance of its public duties under sections 3 to 6 of the Financial Services and Markets Act 2000 (FSMA), the FSA made a without notice application for a freezing injunction against Sinaloa Gold and PH Capital Invest under section 380(3) of FSMA. It was alleged that both Sinaloa Gold and PH Capital were involved in promoting the sale of shares in Sinaloa without proper authorisation and an approved prospectus and that PH Capital Invest had breached FSMA in various other respects.

Schedule B to the injunction stated that the FSA gave no cross-undertaking in damages. However, under Schedule B, the FSA undertook to cover both costs and losses incurred by third parties as a result of the injunction. The undertaking in connection to third party losses was accidental and therefore the FSA applied to have it removed. Opposing the FSA’s application, Barclays Bank – with whom Sinaloa Gold plc had six bank accounts – intervened in the proceedings. The FSA’s application to have the undertaking removed was refused in the High Court. Upon appeal, however, Judge Hodge QC’s decision was reversed in the Court of Appeal (Mummery and Patten LJJ, Hedley J). The Court of Appeal’s ruling preserved the undertaking in respect of third party costs but eliminated the undertaking in respect of third party losses. Subsequently, Barclays appealed to the Supreme Court.

The Supreme Court

Lord Mance held that:

  • Whilst there is no continuing justification for the former blanket practice whereby the Crown was not required to give a cross-undertaking in any circumstances, a general distinction still exists between private claims and law enforcement actions (at [33]).
  • In a private claim, a claimant seeking an injunction will ordinarily be expected to give a cross-undertaking in damages to the defendant(s) and to third parties. This can be justified on the basis that such a claimant should be prepared to back its own interest with its own assets against the event that it obtains the injunction unjustifiably with the result that harm is caused to the interest of another (at [30]).
  • However, different considerations arise in relation to law enforcement actions, where a public authority is seeking to enforce the law in the interests of the public generally, often in pursuance of a public duty to do so, and enjoys only the resources which have been assigned to it for its functions (at [31]).
  • In these circumstances public authorities cannot generally be expected to back their legal actions with the public funds with which they are entrusted for the purpose of undertaking their functions (at [33]). Such a requirement may inhibit public officials from fulfilling their public duties for fear of exposing public funds to claims for compensation.
  • The position regarding the giving of any cross-undertaking cannot differ according to whether it is intended to protect a defendant or a third party (at [14] and [34]).
  • In both instances the cross-undertaking covers the loss caused by the grant of an injunction in circumstances where the person incurring the loss is essentially innocent (at [34]).
  • A pragmatic distinction can be drawn between an undertaking in respect of costs and an undertaking in damages. Public authorities should be able to enforce the law without being inhibited by the fear of cross-claims and the exposure of their resources, and this applies with particular force to any open-ended undertaking in respect of third party loss. It does not apply with the same force to a more limited cross-undertaking in respect of third party costs (at [35]).
  • There are no special circumstances why the FSA should be required to give a cross-undertaking in respect of losses suffered by third parties on the particular facts of this case. In a case such as the instant one, where the FSA takes positive action to shut down allegedly unlawful activity, it does not in the course of so doing assume any responsibility towards or liability for breach of a duty of care enforceable at the instance of third parties (at [37] – [38]).
  • The FSA enjoys a further power to freeze the assets of a permitted person, without making any application to a court, under Part IV of the FSMA. In the exercise of its powers under Part IV the FSA is excluded from any risk of liability by virtue of paragraph 19 of Schedule 1 to FSMA. There would therefore be an apparent imbalance were the FSA required to accept potential liability in cases such as the instant one concerned with the activities of unauthorised persons (at [37] – [38]).

Moreover, Lord Mance explained:

42. In the light of the factors identified in paragraphs 36 to 38, there is on any view no reason to move away from the starting position, which is that the FSA should not have to give any cross-undertaking in order to obtain an injunction under section 380(3). HHJ Hodge QC considered that such a cross-undertaking in favour of innocent third parties should be required “as a matter of course”, from the moment when any freezing order was first granted on an ex parte basis (para 66). The Court of Appeal was in my view right to disagree and substituted for the undertaking as originally given an undertaking in the limited form (i.e. excluding the italicised words) indicated in paragraphs 6 and 7 above. I would therefore dismiss this appeal.

Further observations

43. A further word is appropriate regarding the positions at the initial stage, where injunctive relief is sought on an ex parte (or ‘without notice’) basis, and at the later stage, when the matter comes before the court on notice to both parties as well perhaps as to third persons, such as Barclays. Normally, there would only be a very short period before an on notice hearing could occur, and normally one would expect any third person affected by an injunction to become aware of this risk, even if not given formal notice of the injunction by the FSA. Loss could in theory be sustained by either a defendant or a third person in that short period. But any cross-undertaking required as a condition of the grant of interim injunctive relief on a without notice basis would have to be in general and unqualified terms, and therefore be of the kind which could cause most concern to a regulator worried about risk and resource implications.

44. The present appeal concerns the position of the FSA at the without notice and on notice stages. The starting position at each stage should in my view be that no cross-undertaking should be required unless circumstances appear which justify a different position. Any inhibition on the part of a public authority about giving an undertaking is likely to be greater, rather than less, at a without notice stage. To require a blanket undertaking in favour of third parties at that stage would provide no incentive to third parties to come forward and identify any real concerns that they might have. The better approach is in my view to regard the starting position, that no cross-undertaking should be required, as being as applicable at the without notice stage as it is at the on notice stage. A defendant or a third party who is or fears being adversely affected by an injunction obtained under section 380(3) can and should be expected to come forward, to explain the loss feared and to apply for any continuation of the injunction to be made conditional on such cross-undertaking, if any, as the court may conclude should in all fairness be required to meet this situation.

45. Finally, whenever the court is considering whether to order an interim injunction without any cross-undertaking, it should bear in mind that this will mean that the defendant or an innocent third party may as a result suffer loss which will be uncompensated, even though the injunction later proves to have been unjustified. This consideration was rightly identified by Neuberger J in Miller Brewing at paragraph 40. 



One response

27 09 2015
Immigration Act 2014: Bank Accounts | United Kingdom Immigration Law Blog

[…] the FCA to be exempt from damages where it is carrying out its functions under the regulations (See post on Supreme Court’s decision in FSA v Sinaloa Gold & Ors [2013] UKSC 11 where Lord Mance JSC […]

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