Freezing Injunctions: The double-edged sword of commercial litigation

Power and Peril: Understanding Freezing Injunctions

Lord Justice Donaldson famously described the freezing injunction as one of the law’s two “nuclear weapons” (alongside search orders). But like any powerful weapon, its deployment requires careful consideration, precise timing, and meticulous preparation.

A freezing injunction allows a claimant to apply to court without notice to prevent a defendant from disposing of or dealing with their assets. Once granted, it creates an immediate financial stranglehold – banks freeze the defendant’s accounts, leaving them access only to limited funds for living and legal expenses.

However, this power comes with significant responsibilities and challenges. The courts won’t grant such a draconian remedy without compelling evidence and careful consideration. The consequences of getting it wrong can be severe – applicants who obtain freezing orders wrongfully may face substantial damages claims under their cross-undertaking.

The Three Essential Requirements

To obtain a freezing injunction, applicants must satisfy three key requirements:

1. A “Good Arguable Case” on the merits
2. A Real Risk of Dissipation – objective evidence that a future judgment would be frustrated by unjustified asset dissipation
3. Just and Convenient – showing that granting the order would be appropriate in all circumstances

Landmark Clarification: The Dos Santos Decision

The recent Court of Appeal decision in Dos Santos v Unitel (2024) has provided crucial clarity on what constitutes a “good arguable case.” This decision resolved a significant split in authority that had been causing uncertainty for practitioners.

The Competing Tests

Two competing tests had emerged:

1. The Niedersachsen Test: A case “more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50% chance of success”
2. The Lakatamia Shipping Test: Requiring the applicant to have “the better of the argument” (based on the three-limb test from Brownlie used in jurisdictional cases)

 The Court’s Decision: A Deep Dive

The Court of Appeal, through Sir Julian Flaux C, delivered a comprehensive analysis that firmly endorsed the Niedersachsen test. The court’s detailed reasoning reveals several key insights:

1. Context is Crucial: The court emphasised that while “good arguable case” appears in both freezing injunctions and jurisdictional cases, the context fundamentally differs. In freezing injunctions, it’s a merits threshold where the court will later determine the full merits at trial. In jurisdictional cases, the gateway decision is final and won’t be revisited.
2. Practical Reality: The court recognised that at the early stage when freezing orders are typically sought, it would be impractical and potentially prejudicial to require judges to determine which party has “the better of the argument.”
3. Alignment with Other Injunctions: Significantly, the court effectively aligned the test with the American Cyanamid “serious issue to be tried” standard used in other interim injunctions. This provides welcome consistency in the interim remedies landscape.
4. Commonwealth Perspective: The court noted that the overwhelming weight of Commonwealth authority (except Canada) supports the Niedersachsen approach, providing additional confidence in this interpretation.

Practical Impact

This decision has several important implications for practitioners:

1. Clear Standard: The threshold for showing a good arguable case is now definitively established as the more accessible Niedersachsen test
2. Alignment with Other Injunctions: The court recognized that the “good arguable case” test is effectively the same as showing a “serious issue to be tried” in other interim injunctions
3. Focus on Evidence: While the merits threshold may be lower than previously thought by some, this emphasizes the importance of the other requirements, particularly evidence of dissipation risk

Strategic Considerations

When preparing a freezing injunction application:

1. Evidence Gathering: Focus on:

• Solid evidence for your underlying case
• Clear documentation of dissipation risk
• Supporting evidence for any cross[1]undertaking in damages

2. Timing is Critical:

• Act swiftly when dissipation risk is identified
• Ensure you have enough evidence before moving
• Consider whether the element of surprise is necessary

3. Risk Assessment:

• Evaluate the strength of your evidence against the Niedersachsen test
• Consider potential damage to the defendant and your liability under the cross-undertaking
• Assess whether alternative remedies might be more appropriate

Looking Forward

The Dos Santos decision provides welcome clarity for practitioners. However, freezing injunctions remain an exceptional remedy that requires careful consideration and preparation. The lower merits threshold confirmed by the Court of Appeal doesn’t make them any less “nuclear” – it simply provides clearer guidance on one aspect of this powerful but challenging remedy.

The Costs Implications: A New Approach

The Dos Santos decision also provided important clarity on costs. Unlike standard interim injunctions where costs are often reserved for trial, the Court of Appeal confirmed that unsuccessful respondents who “fight tooth and nail” against freezing injunctions should expect to pay the applicant’s costs immediately.

This marks a significant departure from the approach to American Cyanamid[1]style interim injunctions, where costs are typically reserved. The court’s reasoning highlighted a crucial distinction: even if the underlying claim ultimately fails at trial, this doesn’t necessarily mean the freezing order was wrongly granted. If the three criteria were met at the time of the application, the order was properly made regardless of the final outcome.

This costs guidance adds real teeth to freezing injunctions and creates important strategic considerations for respondents. Fighting a freezing order application “tooth and nail” now carries significant cost risks, potentially encouraging more focused responses that target specific weaknesses rather than wholesale opposition.

Success in freezing injunction applications still requires meticulous preparation, strong evidence of dissipation risk, and careful consideration of the potential consequences. However, the clarified legal test and costs approach should help practitioners better advise their clients on both the prospects of success and the financial implications of their strategic choices, while maintaining appropriate respect for this powerful tool’s exceptional nature.

Article by Callum Reid-Hutchings and William Rees  (Zaiwalla & Co) – First published with ThoughtLeaders4 FIRE Magazine