The Mareva Injunction

A CLAIMANT’S priority is to obtain security for claims as soon as possible. The one thing any claimant wants to avoid is embarking upon lengthy and costly legal proceedings only to find out, once judgment has been obtained, that a defendant has already managed to arrange its assets in such a way that the claimant cannot enforce its judgment and make a recovery.

In shipping, the traditional way of obtaining security is to arrest a vessel, but arrest may not always be available, e.g., under English law, claims for unpaid insurance premiums, or under contracts for the sale of ships, are not arrestable. In these circumstances, the Mareva Injunction serves a useful role in England and other common law jurisdictions.

In practice, a Mareva can be obtained within a matter of hours

Until the mid-1970s, it was not thought possible in England to obtain security for a claim prior to obtaining judgment (apart from arrest), with the result that defendants had time to organise their assets to avoid enforcement of any subsequent judgment. Two decisions of the English Court of Appeal in 1975 (one of which gives its name to the Mareva) changed this by deciding that it was possible for the court to grant a pre-judgment injunction preventing the disposal of assets by a defendant. The principles upon which such injunctions or Marevas are granted have evolved over the years, and the present position is essentially as follows.

Nature of the Mareva

A Mareva does not, strictly, provide security for a claim. But it does prevent a defendant from dissipating or disposing of those of its assets which are the subject of the Mareva in such a way as to prevent the enforcement of any later judgment or arbitration award. This is reflected in the fact that a Mareva will normally allow a defendant to use its assets to pay for reasonable living expenses and, possibly, continue trading in the normal course of business. It removes the risk of the assets being dissipated, but does not provide priority over other claimants.

Should another claimant obtain judgment first it may enforce that judgment against the assets caught by the Mareva - to the detriment of the claimant which obtained the Mareva in the first place. Essentially, once a Mareva is obtained, the substantive claim should be progressed to judgment as quickly as possible.

There is no right to a Mareva as it is a discretionary relief. It will only be granted if it is just and convenient in all the circumstances. An important factor in this regard is the effect that a Mareva would have upon third parties. If third party rights would be interfered with by the Mareva, it is unlikely that it will be granted, e.g., a Mareva may detain a ship and thereby prejudice an innocent charterer's rights under its charter party and cause cargo carried on board the vessel to be delayed.

The effectiveness of a Mareva lies in the fact that a defendant and third parties notified of the Mareva will be in contempt of court if they fail to comply with its terms or assist in its breach. The sanctions which can be imposed for contempt of court include a fine or even imprisonment of individuals involved.

Procedure

The key to an application for a Mareva is surprise. It is usually made and heard without giving notice to the defendant or any other party on an ex parte basis and normally before any writ is issued. If time is available, the application is supported by a sworn affidavit setting out the matters which need to be established. In cases of great urgency, which is not uncommon, the application may proceed on the basis of a draft affidavit (or even no affidavit) with an undertaking to swear it afterwards. The matters which must be made out in the application and supporting affidavit are as follows.

(1) The claimant has a good arguable case on the substantive claim.

This means that it must appear likely that the claimant will obtain judgment against the defendant. Further, as a Mareva is only ancillary to a substantive claim, a claimant must show that the claim has actually arisen at the time the Mareva is sought - it is not sufficient that the claimant anticipates having a claim in the immediate future.

Previously, it was also a requirement that the English courts had jurisdiction to determine the substantive claim. But this no longer applies and since April 1, 1997 it has been possible, subject to the court's discretion, to obtain a Mareva in order to assist a substantive claim which is proceeding or will proceed in any foreign court.

(2) The affidavit must identify assets of the defendants.

If no assets can be identified at all then there is no purpose for the Mareva and a court will not grant one. Normally, the assets will be within the court's jurisdiction, though it may be possible to persuade the court to extend the Mareva to cover assets outside its jurisdiction. However, such a Mareva will only be granted in very rare instances given its extra-territorial effect (the court will not want to interfere with the jurisdiction of a foreign court) and that the court will not want to grant an order which it cannot enforce. Where it is granted by the court it will only be directed at the defendant and third parties which are susceptible to the court's jurisdiction. It may be better to seek separate relief in that foreign jurisdiction.

(3) A risk that the defendants' assets will be "dissipated" and that any judgment or arbitration award may go unsatisfied.

Risk of dissipation will not normally be established where a defendant is only going about its normal business and is not organising (and is not giving any indication of intending to organise) its assets in such a manner as to defeat the ability of the claimant to obtain satisfaction of any judgment or award it may subsequently obtain. For example, if the asset in question is a ship which is being utilised in the normal course of trade under a long-term charter, the risk of dissipation and default is unlikely to be established.

(4) The affidavit must make full and frank disclosure of all material matters in the knowledge of the claimant.

As a Mareva application is made without the defendant being present and may seriously affect the defendant, the claimant must ensure that all material matters are before the court at the time of the application. This means that the claimant must alert the court to matters which are not only favourable to its case, but also unfavourable. If there is a failure to make full and frank disclosure, the court is likely to set aside the Mareva.

In practice, a Mareva can be obtained within a matter of hours. It will usually set a monetary limit on the value of assets caught by it and may also require the defendant to disclose on affidavit all its assets. Once the order is granted by the judge, the next step is to give notice to the defendant and also to relevant third parties, e.g., banks or insurance brokers which hold moneys on account of the defendant; or, in the case of a vessel, the ship's agents, harbourmaster and Customs & Excise.

Undertaking to pay damages

The court will only grant a Mareva if the claimant is prepared to give certain undertakings. The most important of these is one to pay compensation in the event that the court subsequently finds that the Mareva has caused loss to the defendant and that the defendant should be compensated for that loss (e.g., where the Mareva is subsequently set aside). The court may also require a claimant to support this undertaking with security (e.g., payment into court or bank guarantee), though this is unlikely if the merits of the case are strong or the claimant is of substantial financial stature.

Another important undertaking is that to pay the reasonable costs incurred by any third parties notified of the Mareva in complying with its terms and, further, to compensate them for any losses suffered in consequence of the Mareva if the court so orders.

These undertakings to pay damages are to be contrasted with the situation where a vessel is arrested. Under English law, an arresting party will only be liable for damages suffered by the owners of the arrested ship if the arrest was effected in bad faith. If a Mareva is subsequently set aside (e.g., because of a failure to give full and frank disclosure) bad faith does not necessarily have to be shown in order to trigger the undertaking in damages.

Summary

To summarise, a Mareva is a useful tool in a claimants' armoury if used effectively. However, it must be used with caution given the potential exposure to which a claimant puts itself in giving the required undertakings to pay damages and in the knowledge that it does not provide a guarantee of "security" for the claim.

Michael Volikas is an assistant solicitor with Ince & Co. He spent four years at the firm’s Singapore office, returning to London in October 1996.