UK ruling clarifies ‘good arguable case’ threshold for freezing injunction

In England and Wales, a party must meet several requirements to be granted a WFO, including being able to demonstrate that they have a good arguable case in respect of the underlying substantive claim. Before the recent judgment, the threshold to be applied to the “good arguable case” test in the context of WFOs had become uncertain, and was being conflated with the test of the same name to be applied when seeking to serve a claim form out of the jurisdiction. The court has now clarified that the correct interpretation of the test was in a 1983 case, involving the ship “The Niedersachsen”, and that this lower threshold is to be applied when considering the granting of a WFO.

The latest case concerns a WFO made by the High Court of England and Wales against Ms Dos Santos, an entrepreneur and daughter of the former president of Angola. The WFO was sought by Unitel, Angola’s largest mobile telecoms company, which was founded by Dos Santos and where she served as a director from its incorporation until 2020. The dispute centred around Unitel’s loans to Unitel International Holdings (‘Unitel International’), a company owned and controlled by Dos Santos, as Unitel International defaulted on the repayments. Unitel applied for a WFO against Dos Santos’ assets to prevent her from moving them out of the jurisdiction.

Dos Santos challenged the granting of a WFO. The main question before the Court of Appeal was to determine the correct meaning to be applied to the “good arguable case” test and, on that basis, whether the High Court judge was right to find that Unitel had a good arguable case.

The Court of Appeal upheld the lower court’s decision that Unitel had a good arguable case such that, as in the Niedersachsen case, its claim was more than barely capable of serious argument. Dos Santos was ordered to pay the costs of the application which challenged the granting of the WFO.

The correct interpretation

The threshold test set by the Niedersachsen case is that the underlying substantive claim must be “more than barely capable of serious argument but not necessarily one which the judge considers would have a better than 50% chance of success”.

This is in contrast to the Supreme Court’s three-limb test in the 2017 Brownlie case, which is applied to decide whether a claim falls within a jurisdictional gateway in order for the claim form to be served out of the jurisdiction of England and Wales. This test requires that there must be a plausible evidential basis for the application; the court must take a view of any issues of fact on the material available; and, as a fallback provision, there is a good arguable case if there is a lack of evidential material.

The Niedersachsen test applies a relatively low merits threshold on the reliability of the evidence available to the court. This is appropriate in the context of WFOs because the application for a WFO is a “purely factual question” as a precursor to the trial judge deciding the merits of the evidence at trial.

On the other hand, the jurisdictional gateway test has a substantive merits threshold, and considers whether the case can be heard in a different jurisdiction. This is an issue which will not be revisited at trial so is an evidentiary question.

Tom Aries of Pinsent Masons said that the Unitel judgment serves to distinguish the two interpretations. “Having one phrase with two meanings has caused much confusion. The court’s decision to clarify the ‘good arguable case’ test for freezing injunctions and the jurisdictional gateway test is clearly sensible,” he said.

The nature of the Niedersachsen test makes it expeditious in comparison to the jurisdictional gateway test. The latter’s higher threshold means that parties must provide evidence that demonstrates that their prospects are higher than 50%. This could lead the parties and judge to be drawn into “mini-trials” at the interim stage because a relative assessment of the parties’ positions may require expert evidence. The judge acknowledged that this would put the “merits bar too high to serve the interests of justice” as it may be difficult for applicants to demonstrate their prospects prior to disclosure.

In recognising the burden this lengthier approach may have created, Aries said that “an approach that may have seen mini-trials before a WFO was granted would likely have only increased the risk that assets are dissipated before they can be ringfenced, defeating the purpose of seeking the WFO in the first place. It is therefore right that applicants who already face substantial burdens to obtain a WFO should not also have to face the more stringent gateway test threshold. Also, the respondent to the WFO has the benefit of costs protection – a cross-undertaking in damages – should it be determined, at a later date, that the WFO should not have been granted; such cost protection includes, in certain situations, a payment into court by the claimant, which provides protection for the respondent”.

The costs of freezing order applications

The judgment is also an important one as to costs. The Court of Appeal’s judgment reaffirms the current law as to the award for a party’s costs of the interim application.

Historically, the court will usually “reserve” the costs of the ‘return date’ hearing – at which a WFO is normally challenged by the respondent – to the trial judge, which could be determined years later. However, following this judgment, parties will be more willing to seek their costs, or part of their costs to be paid “forthwith” on return date hearings, if the respondent challenges the granting of the WFO, even if that challenge is a reasonable one. Civil fraud and asset recovery expert Alan Sheeley of Pinsent Masons, said that the court’s decision “highlights the importance of strategic legal planning in both seeking and defending WFOs”.

“It is extremely important to instruct an experienced civil fraud litigator if considering such nuclear tactics,” he said.

Dos Santos contested the application extensively in putting forward the Brownlie three-limb test as the correct interpretation of “good arguable case”. Consequently, the court decided to award costs against Dos Santos.

Future developments

The appeal court judges also discussed whether the test of a “good arguable case” in the context of a WFO should be assimilated with a “serious issue to be tried” as part of the test established by the 1975 American Cyanamid Co v Ethicon Ltd case. The American Cyanamid test applies generally to interlocutory injunctions, which stops someone from taking a certain action until a final decision is made by the court.

The American Cyanamid test provides guidelines for English courts to determine whether to grant an interim injunction and ensures that an interim injunction is granted fairly and only when necessary. Amongst other requirements, the court must be satisfied that there is a serious issue to be tried at the full trial of the case.

The Court of Appeal agreed that the two tests should be equated in the context of interlocutory injunctions. The judge also found that in other Commonwealth jurisdictions the Niedersachsen test has been applied for the granting of WFOs and, therefore, there is a certain consistency for this approach to “good arguable case”. There was also consideration given to the notion that, as the merits threshold set out in the Niedersachsen test is not substantively different to the merits threshold test to be applied in interlocutory injunctions, to avoid confusion, the expression “a serious issue to be tried” should now be used in the context of freezing injunctions. However, this was only a suggestion. Maddison Seed of Pinsent Masons said: “It remains to be seen whether the clarification to the ‘good arguable case’ test in WFOs will now be applied across different types of injunctions, but it seems likely. For now, though, this judgment provides a welcome clarification to the WFO remedy.”