WORLDWIDE FREEZING INJUNCTIONS: PROTECTION FOR THIRD PARTIES

Ian Geering QC and Matthew Parker, 3 Verulam Buildings

In Bank of China v NBM LLC [2001] All ER (D) 267 (Dec), the Court of Appeal (Tuckey, Jonathan Parker and Pill LJJ) addressed the jurisdictional scope of the worldwide freezing injunction.

In particular, the court considered the extent to which a third party with notice of the order should be affected by its terms.

The existing standard form freezing injunction contains express provision that it should be of no effect on a third party outside the jurisdiction of the court until it is declared enforceable, or is enforced by a court in the relevant country.The purpose of this proviso, which was included following the Court of Appeal's decision in Babanaft International Co SA v Bassatne [1989] 1 All ER 433, is to ensure that the courts in this country do not assume exorbitant jurisdiction over the actions of third parties in relation to property outside the jurisdiction.

The “Babana ft proviso” is subject to the further provision (introduced following the Court of Appeal’s decision in Derby & Co Ltd v Weldon (No 2) [1989] 1 All ER 1002 that persons who are subject to the jurisdiction of the English court and are given written notice of the order are obliged to prevent acts or omissions outside the jurisdiction which breach the terms of the order, if they are able to do so (the “Derby v. Weldon proviso”).

It was over the final words of the Derby v. Weldon proviso that the dispute arose in Bank of China. The claimant bank had obtained a worldwide freezing injunction in aid of proceedings in the United States against various defendants for alleged misappropriation of funds. The order was served on UBS, a Swiss bank with an English subsidiary and a branch in London. UBS was not a party to the proceedings but was served because two of the defendants allegedly had an historical relationship with it in Zurich and the Cayman Islands. UBS sought express confirmation that the order should not prevent it, in respect of assets outside the jurisdiction, from complying with what it reasonably believed to be its contractual and other obligations under the laws of the country in which any assets might be situated or the proper law of any bank account in question. 

This form of wording, known as the Baltic proviso, had first been proposed in 1993 in the end of year statement of Saville J (the judge then in charge of the Commercial Court) and had been adopted by Clarke J in Baltic Shipping v Translink [1995] 1 Lloyd’s Rep 673. The Commercial Court Guide (paragraph F19.10) currently indicates that the standard form freezing injunction 'may in some cases appropriately incorporate' such wording.

While the claimant accepted that the injunction did not require UBS to act contrary to the criminal law of the country in which any assets were located or to an order of the court in that country, it maintained that the applicant was not entitled to rely upon its civil obligations under the relevant local law as a reason for permitting a breach of the order.  Steel J rejected that argument, allowing the application and amending the order accordingly ([2001] 4 All ER 954).

The Court of Appeal dismissed the claimant’s appeal. Third parties should normally be granted the protection sought by the applicant and the standard form freezing injunction should be amended accordingly.  To require a bank to act in breach of its civil obligations in a foreign jurisdiction would be to assume exorbitant jurisdiction and would not be consistent with the interests of comity.  That the bank had chosen to do business in this country did not affect that position.

The court also rejected the argument that a bank which was unwilling to breach its mandate in respect of a transaction outside the jurisdiction should apply to the local court for relief. The onus was upon the party which had obtained the freezing injunction to take appropriate steps to have it enforced in the local courts.  Furthermore, the bank should not be required to rely upon the claimant’s undertaking in damages, which might not provide adequate compensation for damage to reputation or regulatory consequences abroad.  The bank might also be forced into litigation abroad with its customer or be faced with arguments from the party that had obtained the injunction as to whether any particular loss fell within the terms of the undertaking.

While the Baltic proviso should normally be inserted in a standard form freezing injunction, the Court of Appeal allowed for the possibility that it might not be appropriate in the circumstances of a particular case. If there was reason to doubt the third party’s ability or willingness to form a reasonable view as to its obligations in a foreign jurisdiction, for example, that might be a reason not to include the normal provision.

It is, of course, vital for a party obtaining a worldwide freezing injunction to bear the effect of these provisions in mind and, in particular, to take appropriate steps to enforce the order in any local jurisdiction in which assets may be located in order to obtain the maximum possible protection.