High Court clarifies the application of the “reasonable legal expenses” proviso to a standard form freezing order

Facts of the Case:

The standard form freezing order in Annex 11 of the Commercial Court Guide (11^th Edition), and that at Annex A to Practice Direction 25A, both provide:

“This order does not prohibit the Respondent from spending £ a week towards its, her or his ordinary living expenses and also £ [or a reasonable sum] on legal advice and representation. [But before spending any money the Respondent must tell the Applicant’s legal representatives where the money is to come from.]”

In this case, the Applicant obtained a freezing order in which the “reasonable sum” wording and the proviso in square brackets in relation to source of funds (the “Source Proviso”) were both used.

The issue was whether, given this formulation, the Respondents had to tell the Applicant not only the source from which the funds used to meet legal expenses originated, but also the amounts spent.

The Applicant argued that the Respondents did have to specify the amounts spent on legal expenses: (i) based on the language used in the freezing order; (ii) when regard was had to the purpose of the relevant provisions; and (iii) as a matter of authority. The Respondents argued that the Applicant was wrong and that the “reasonable sum” wording with the Source Proviso do not have the effect contended for.

The Decision:

Foxton J found that a freezing order in which the “reasonable sum” wording and the Source Proviso are used does not oblige the respondent to notify the applicant of the amount they spend on legal expenses in the case. He took the Applicant’s arguments in turn as follows.

First, as regards the language used, the effect contended for by the Applicant: (i) was not expressly stated in the freezing order; (ii) could not be implied due to the general principle that injunctions must be expressed in unambiguous language so that a respondent knows exactly what is forbidden or required (given the risk of contempt proceedings); and (iii) does not follow from the wording of the Source Proviso, as the obligation to state “where the money is to come from” does not necessitate the amount of money to be identified as well. 

Second, as regards the purpose of the wording, in view of the abovementioned general principle this is: (i) to ensure that the source is from assets disclosed in accordance with the respondent’s disclosure obligations; and (ii) (particularly if the freezing order is a worldwide freezing order) to put the applicant in a position to take steps if it becomes apparent that the respondent is using assets which would otherwise be more amenable to execution to meet its legal fees, while leaving assets which it would be more difficult to enforce against untouched.

Last, as regards authority, Foxton J disagreed with the decision relied upon by the Applicant (Cantor Index Ltd v Lister [2002] CP Rep 25) and found that the principal purpose of the legal expenses exception is as a means of ensuring that the respondent can meet the expenses of the underlying proceedings in which the applicant seeks judgment against them and in any ancillary proceedings, rather than providing a means of accessing legal advice or conducting litigation generally. That said, legal expenses incurred in other matters might still be excepted pursuant to the ordinary course of business or ordinary living expenses provisos.

Analysis and Practical Advice:

Prior to Foxton J’s decision, respondents to freezing orders containing the “reasonable sum” wording and Source Proviso would often on notification of such expenditure be asked by the applicant to provide a corresponding scope of work in order that, the applicant would say, the applicant could ensure that such sum was reasonable. In practice, respondents would often provide at least some information so as to mitigate against the risk of the applicant later saying that the spending was a breach of the freezing order. Inevitably such exchanges could become a contentious distraction from the main proceedings, and ironically increase the amount of legal expenditure further as a result. 

Foxton J’s decision does away with all of that, although he was of the view that there would still be some (admittedly lighter) controls on costs being spent pursuant to the legal expenses proviso to ensure reasonableness, namely: (i) the occasions in litigation where an applicant sees a respondent’s costs and is able to form a view on them, such as costs budgeting and contested hearings; (ii) the respondent’s solicitor themselves, who as an officer of the Court and in view of their professional obligations should not be charging for unnecessary work or unreasonably high fees; and (iii) that if the respondent’s solicitor were to act otherwise, they would arguably be in contempt of Court as knowingly being a party to an arrangement with the respondent which has put the respondent in breach of the freezing order.

The decision also limits the respondent’s use of the legal expenses proviso to expenditure on the underlying proceedings and any ancillary proceedings. In order to pay legal expenses in other unrelated proceedings, that expenditure would need properly to fall within either the ordinary course of business or ordinary living expenses provisos. Failing that, a respondent would need to seek the applicant’s consent or the Court’s permission in order to pay those expenses whilst remaining compliant with the terms of the freezing order.

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