When the Mareva Fails – Recourse against Third Parties

The Mareva, or freezing injunction has for many years now been a ‘stable and sharp knife’ in a litigator’s drawer, the potency of which was amply recognized by Donaldson LJ as “one of the law’s two ‘nuclear weapons’“ in Bank Mellat v. Nikpour (Mohammed Ebrahim) [1985] FSR 87 CA, the other being the Anton Piller order. His Lordship’s description is a fair one: the Mareva is intrusive in terms of interference with the Defendant’s propriety rights and potentially oppressive due to its pre-judgment and ex parte nature, as well as the penal notice of contempt of Court in the event of the breach of the order. 

Coupled with orders to disclose assets, the Mareva injunction is inevitably high on the menu of options presented to clients when faced with a potentially questionable Defendant. The advent of internet and email fraud cases has also seen urgent Marevas increasingly deployed to secure and recover monies before they travel beyond the reach of an unlucky transferor.

Yet with the speed at which international fund transfers can now be effected, even an urgent Mareva often comes too late to secure assets. In the event that the Mareva has been obtained in time, a Plaintiff still needs to contend with issues such as multi-entity and potentially complex corporate structures, fund transfers and beneficial ownerships; the Mareva also has to be served on the right entities (particularly banks) and those entities have to effectively implement the terms of the order. A failure or omission at any of these levels could mean the ‘nuclear option’ ends up a damp squib. 

The recent case of Grasberg Capital Asia Ltd v. Bank of Communications Ltd [2017] HKCFI 2013 (13 November 2017) (‘Grasberg’) revisits some of these issues: namely the extent of the duty owed by a recipient (in this case, a third-party bank which held funds purportedly beneficially owned by the Defendant) to give effect the order, as well as the more practical question of civil liability when the Mareva fails to prevent dissipation.

The origins, effect and scope of a Mareva injunction

The Hong Kong Court of First Instance is empowered under s. 21L(1) of the High Court Ordinance (Cap. 4) to “grant an injunction … in all cases in which it appears to the Court of First Instance to be just or convenient to do so”.

Although the existence of such wide-ranging provision was traceable to the 19th century (s. 21L(1) being a materially faithful reproduction of s. 25(8) of the Judicature Act of 1873), the Mareva as we know it today has its roots in the one-page judgment of Lord Denning MR (as he was then), in Nippon Yusen Kaisha v. Karageorgis and another[1975] 3 All ER 282 (22 May 1975). Relying on s. 25(8) of the Judicature Act, his Lordship granted an injunction in favour of a ship owner against charterers, in respect of the funds that the charterers held with certain banks in London, such that “[o]n notice being given, the banks, of course, will not part with the money.”

One month later (23 June 1975), Lord Denning MR, in Mareva Compania Naviera SA v. International Bulkcarriers SA [1980] 1 All ER 213, granted another asset-freezing injunction in favour of ship owners against charterers:

“There is money in a bank in London which stands in the name of these charterers. The charterers have control of it. They may at any time dispose of it or remove it out of this country. If they do so, the shipowners may never get their charter hire… I think this court ought to grant an injunction to restrain the charterers from disposing of these moneys now in the bank in London until the trial or judgment in this action.”

Thus, the Mareva was born – to freeze assets for the benefit of Plaintiffs should they succeed in their action, and correspondingly prevent Defendants from frustrating a judgment by disposing of assets in anticipation of litigation going against them.

The judicial language ordering a Mareva injunction has developed since the eponymous case and Practice Direction 11.2 sets out the standard form which is widely used. The typical order given in a Hong Kong case is broadly worded, prohibiting the removal, disposition, or diminishment in value of assets (whether in the Defendant’s own name, or solely or jointly owned) up to a specified value; if possible, specific assets may be particularised. Discovery orders, requiring disclosure of assets above a certain amount, are also generally tacked-on.

The scope of Mareva injunctions has also expanded, and the Hong Kong Court has jurisdiction to grant a “worldwide” Mareva to freeze assets located both locally and abroad, in support of Hong Kong proceedings or foreign proceedings (albeit it would be unusual to obtain a worldwide injunction in Hong Kong in support of foreign proceedings). This renders the Mareva injunction a potentially potent tool in cross-border disputes, albeit more so where the Defendant has some sort of Hong Kong nexus or assets, so that the order fastens directly.

Some practical considerations and the Grasberg case

The elephant in the room, at least for present purposes, is how a Mareva is enforced in practice and who carries the can when things go wrong.

The effectiveness of a Mareva injunction depends on adherence to the order by persons and entities which hold the assets subject to the order. This includes third-party banks at which the Defendant holds funds. 

The judicially-approved standard form in Practice Direction 11.2 mentioned above (which is identical to paragraph 16 of Appendix 11 to the Commercial Court Guide of England and Wales) unequivocally extends the penal consequences for breach of the order to a bank, or other third party:

“THIRD PARTIES

(1) Effect of this Order. It is a contempt of court for any person notified of this Order knowingly to assist in or permit a breach of this Order. Any person doing so may by imprisoned, fined, or have his assets seized.”

However, what civil recourse, if any, does the Plaintiff actually have against a third party in the event that the third party has failed to effectively enforce the order?

In Grasberg, the Plaintiff obtained a Mareva injunction against the Defendant and served the injunctive order on the bank at which certain of Defendant’s assets were held (the ‘Bank’). It appears that the Defendant was nonetheless able to make certain withdrawals from various accounts held at the Bank, which were in the names of companies beneficially owned by the Plaintiff (the ‘Accounts’). The Plaintiff consequently brought a tortious claim alleging that the Bank had breached the duty owed towards the Plaintiff to take reasonable care in complying with the Mareva injunction, thereby causing the Plaintiff economic loss. The issue before Master Chan of the Court of First Instance was whether to strike out the Plaintiff’s tortious claim against the Bank for want of duty of care at common law.

The learned Master found that there was no such duty of care and concluded (relying on the opinions of the House of Lords in Her Majesty’s Commissioners of Customs and Excise v. Barclays Bank Plc [2006] UKHL 28 (‘Barclays’)) that it would not be fair, just and reasonable to impose such duty on the bank. Master Chan observed that unlike in Barclays (where the House of Lords in any event found in favour of the bank, reversing the unanimous judgement of the Court of Appeal), that the broadly drafted Mareva injunction in Grasberg did not even specify the account numbers of the Accounts.

The learned Master unequivocally followed and cited with approval the law Lords’ speeches in Barclays. It is therefore worth examining the reasoning in that case, noting that although the House of Lords reached the unanimous outcome that the Bank owed no duty of care towards the Plaintiff, each of the five law Lords sought to advance an individual opinion, possibly due to a perceived need to justify reversal of the Court of Appeal’s judgment. Rather than going over each law Lord’s reasoning in turn, we have drawn out the common themes that emerge from the different speeches:

a) No voluntary assumption of responsibility by the Bank: the Bank does not assume any responsibility towards the Plaintiff as the referee in Hedley Byrne & Co Ltd v. Heller & Partner (but for the disclaimer) had assumed, as any responsibility requiring compliance on the part of the Bank arising from the Mareva injunction is “thrusted upon” the Bank – the relationship between the Bank and the Plaintiff is nowhere being “equivalent to contract” as required for a duty of care to arise under Hedley Byrne & Co Ltd v. Heller & Partner, given that “the essence of any contract is voluntariness and the Bank’s position was wholly involuntary”;

b) No reliance on the Bank: the Plaintiff, if wishing to freeze the Defendant’s bank account, cannot do so without the Court’s assistance, which in turn means that having frozen the Defendant’s bank account and notified the Bank, the Plaintiff may “expect”, but not “rely on”, the Bank to respect the Mareva order and, instead, “relies on the Court ensuring that the [B]ank does not flout its order and punishing the [B]ank for contempt if it does” – such reliance on the Court being “the only remedy that the law provided”;

c) Intended compliance by the Bank in favour of the Court: the Mareva “jurisdiction … is enforceable only by the Court’s power to punish those who break its orders” and the fact that the “documentation issued by the Court does not hint at the existence of any other remedy” means that “the only duty owed by a notified party is to the Court” – in any event, if the Mareva order is taken to be akin to a statutory duty, then the situation is “comparable with the question whether a statutory duty can generate a common law duty of care … [and t]he answer is it cannot: see Gorringe v. Calderdale Metropolitan Borough Council [2004] 1 WLR 1057”, as the Mareva order “carries its own remedies and its reach does not extend any further”;

d) A higher degree of blameworthiness is required on the Bank’s part: in contrast to the Defendant’s duty of compliance under the standard form Mareva order, which is one of strict liability, the Bank cannot breach the Mareva order without first having attained a higher degree of mens rea, namely “knowingly to assist” – indeed, “it would a strange and anomalous outcome if an action in negligence lay against a notified party who allowed the horse to escape from the stable but not against the owner who rode it out.”

Both the House of Lords and the learned Master struck out the respective Plaintiffs’ claims as disclosing no reasonable cause of action for want of duty of care.

What then for the Plaintiff?

The law, as it stands today, is reasonably clear: a recipient bank does not owe a duty to a Plaintiff to ensure enforcement of a Mareva injunction.

It is still open to a Plaintiff to commence committal proceedings against, say, a director of the bank, in respect of failure to ensure enforcement. That said, such proceedings, even if successful, may be of cold and very little monetary comfort to the Plaintiff. In cross border disputes, where the party holding the assets may not even be in Hong Kong, the commencement of committal proceedings are likely to be of even more limited practical effect.

A ray of hope for a Plaintiff in such a situation is offered by the observations of Lord Bingham in Barclays, where his Lordship states that the power to punish for contempt could not have been a mere “paper tiger [as] illustrated by the judgment of Colman J in Z Bank v D1 and others [1994] 1 Lloyd’s Rep 656”. In that case, the Court granted an order of sequestration of assets against a bank that exhibited a high degree of negligence in complying with a Mareva order, although suspended the sequestration order for 14 days, pending the bank’s reconstitution of the funds that had been allowed to be depleted contrary to a Mareva order.

It is notable also that Lord Walker, who is one of the current non-permanent judges of the Hong Kong Court of Final Appeal, appeared to be the least sympathetic law Lord towards the bank in Barclays, noting:

“[I]f this issue affected only banks, I would be slow to conclude that there could never be liability for carelessly failing to comply with a freezing order. Banks are already subject to strict regulation and potential sanctions in connection with money-laundering and similar activities. They are enjoined to know their customers. … There is a public interest in banks responding with particular care, promptness and vigilance to any freezing order obtained by HM Revenue and Customs.” 

Jurisdictions: 

Freshfields Bruckhaus Deringer, Senior Associate

Jonathan has a broad practice, spanning international regulatory and internal investigations, cross border litigation and arbitration. His sector focus includes financial institutions, pharmaceuticals, private equity and consumer products, and he has advised on a wide-range of issues in these areas.

Freshfields Bruckhaus Deringer, Knowledge Lawyer

Peter is a solicitor practicing in general civil litigation. Peter is a former member of the Hong Kong Bar Association and holds his doctorate in Economics from the University of Texas at Austin. He is also active in Freshfields’ pro bono matters in relation to asylum and LGBT issues.