Membership of the Association of Litigation Funders (ALF) is not enough reassurance that a funder will pay up in the face of a large liability for costs, the High Court has ruled.
Mr Justice Nugee also suggested that funders and after-the-event (ATE) insurers consider making their arrangements more defendant friendly.
He made the comments in the latest stage of the Ingenious Litigation, very large claims by more than 500 investors seeking to recover losses suffered in film-investment schemes that were promoted as tax-efficient. However, HM Revenue & Customs did not accept that the schemes worked as intended, a view upheld by the tax tribunal.
There are three law firms acting for the investors – Stewarts Law, Peters & Peters and Mishcon de Reya – which have issued a number of claim forms against various Ingenious entities and associated individuals, and also intermediaries such as financial advisers.
The actions are being managed together and a selection of the claimants and defendants have in the first instance been directed to plead their cases.
Many of the Stewarts claimants, and all the Peters & Peters claimants, are backed by Therium.
Nugee J held that the claimants’ liability for adverse costs in a case of this nature should be several and not joint, relying on the ruling of the then Master of the Rolls, Sir Thomas Bingham, in the Court of Appeal in Ward v Guinness Mahon plc  1 WLR 894.
Nugee J said: “Costs as I have said are always discretionary, but on a question like this there is much to be said for uniformity of practice where possible, not only because like cases should as a matter of principle be treated alike but also because it helps the parties if costs are relatively predictable.”
He added that any liability for adverse costs should be apportioned pro rata rather than per capita “as a matter of fundamental equitable principles”.
The question was then whether Therium should give security for the costs of the Stewarts and Peters & Peters claimants – the Mishcon claimants have their own funder and “arrangements satisfactory to the defendants have been entered into with them”.
He said this was subject to Therium not having to provide security for the self-funding Stewarts claimants, subject to any exceptional circumstances.
“It is in theory possible that Therium might behave in such a way as to render itself potentially open to an order for costs even in relation to the self-funded claimants, but the circumstances would have to be fairly unusual.”
On quantum, the court said that given the nature of the some of the allegations – such as deceit and fraudulent misrepresentations – there was “a reasonable prospect” of the defendants recovering costs on an indemnity basis if they were successful.
The appropriate figure therefore was 75% of the estimated costs. “That is the figure adopted by Teare J [in Danilina v Chernukhin  EWHC 2503 (Comm)], and is also what I would myself have thought about right judging from what experienced litigation solicitors have told me in other cases that they would expect to recover on a detailed assessment on the indemnity basis.
“Costs on the standard basis are more variable, but Teare J’s range of 60% to 70% again seems to me not out of line with my own experience in other cases of what litigation solicitors say they expect to recover.”
Nugee J said he could not proceed on the basis that Therium would meet any order for costs.
He explained: “It is striking that no actual financial information about Therium has been adduced in evidence. The evidence is that if Therium had to put up cash, it would need to make a call on its investors. It is not clear from the evidence whether it has any right to call on its investors, or whether the investors’ response to that would be voluntary…
“Nor am I confident that its membership of the ALF, and the obvious pressure which that puts on it to comply with the ALF rules, is sufficient to give one enough confidence that if it were facing a large liability for costs at the end of the day, that the money would be forthcoming.”
The judge also had to decide whether the ATE policies would respond. “The fundamental difficulty is that an ATE policy, as recognised on both sides, is not designed as security for costs. It is designed as cover for the claimants.”
Nugee J highlighted a series of “difficulties” with the policies, including being voidable for fraud – he could not rule out the possibility of the trial judge expressing an adverse view of a claimant’s truthfulness – and other circumstances in which the insurers could exclude or terminate cover.
How the proceeds of the policies would be apportioned between the various defendants, where some sought security and other did not, could also be a problem.
“I have come to the conclusion, with some reluctance, that there is a real, and not a fanciful risk, that the ATE policies will not respond in full… There is real difficulty in adapting a policy that is written for one purpose into the quite different purpose of meeting an application for security.
“I suspect the problems that have been identified could be solved, and there may be something to be said for litigation funders and ATE insurers to seek to develop a form of policy that could both act as insurance for claimants and sufficient protection for defendants.”
The judge went on to attribute half of the value of the policies to the security sought, and after all the various deductions ordered Therium to pay security of just under £4m to four of the defendants, who had originally claimed £11m in security against estimated costs to the third case management conference of nearly £15m.
In an article on the ruling, Martin Chester, a partner at City firm Kennedys – which acts for one of the defendants that sought security – said ‘defendant friendly’ ATE policies could obviate the need for claimants and their funders to provide security for costs by being directly enforceable by defendants and contain stringent anti-avoidance provisions.
“Insurers offering ATE insurance should consider the merits of developing such products, which may attract a higher premium, and stand to provide greater protection to all parties to group litigation,” he said.