CA bids to strengthen funding market with security for costs ruling

Security: Therium to pay £2.7m

A principle that a defendant receiving security for costs from a claimant’s litigation funder should not have to provide a cross-undertaking in damages will improve the funding market, the Court of Appeal has ruled.

Lord Justice Popplewell said it would bring “further pressure to bear on commercial funders”, beyond the voluntary code of the Association of Litigation Funders (ALF), to ensure that they were set up, operated and capitalised properly “such that they can meet their potential obligations so that security for costs is simply not required from them”.

He went on: “Well-advised claimants can be expected to seek to avoid funding from funders who are set up in such a way that orders for security for costs might be required against them (for example, where the funder is inadequately capitalised, or not transparent as to its financial standing, or is unwilling to provide defendants with an undertaking that it will meet their costs).

“Funders who choose to conduct their businesses in these sorts of ways, and who seek to recover the cost of putting in place security by charging their funded clients a multiple of the amount of the cash that they are ordered to put up, can be expected rapidly to lose market share to those funders who are properly capitalised (and demonstrably so) from the outset.”

By contrast, enabling funders to recover the costs of putting in place adequate security from defendants would create “a positive incentive” to be “deliberately reticent about their financial means”, retain less capital and obtain less after-the-event (ATE) insurance.

This would be at odds with Sir Rupert Jackson’s goal of ensuring that third-party funding did not impose additional financial burdens on opposing parties.

Giving the unanimous ruling of the court in Rowe & Ors v Ingenious Media Holdings PLC & Ors [2021] EWCA Civ 29, Popplewell LJ said he was “sceptical” of the claimants’ submission that, unless losses were potentially recoverable by way of a cross-undertaking, access to justice may be frustrated.

“The interests of justice are properly served by ensuring that commercial funders have already taken steps to be able to meet any costs orders that may be made against them in litigation in which they choose to invest for profit.”

The court was ruling in appeals against two decisions of Mr Justice Nugee in the ongoing Ingenious litigaton, claims brought by nearly 600 investors seeking to recover some £200m in losses suffered in film-investment schemes that were promoted as tax-efficient.

HM Revenue & Customs did not accept that the schemes worked as intended, a view upheld by the tax tribunal.

Stewarts Law represents 360 claimants, of whom 250 are funded by Therium. Peters & Peters has 115 claimants, also funded by Therium, and Mishcon de Reya acts for 113 claimants, funded by Harbour. The various actions are being case managed together.

In February 2020, Nugee J ordered Therium to pay the defendants security for costs of nearly £4m on behalf of the funded Stewarts claimants (a figure subsequent varied to £2.7m), based on estimates of costs up to the third case management conference, with liberty to apply for further security in the future.

Therium did not provide evidence that it could meet an order for costs, with membership of ALF ruled insufficient.

He refused the application for a cross-undertaking in damages in relation to the enhanced return Therium had negotiated, that would see it receive 2.5 times the security in the event of eventually winning the claim. The Stewart claimants appealed this.

However, following the third case management conference in June, Nugee J relented to a degree and required the defendants to give a cross-undertaking in respect of the external costs of putting up security.

These would be the brokerage and insurers’ fees charged for ‘bonding’ the existing ATE policies. Bonding involves ATE insurers providing a direct indemnity in favour of the defendants in respect of a costs order in their favour. The defendants appealed this order.

Popplewell LJ rejected the submission that a cross-undertaking should be the usual requirement as a condition of an order for security for costs, saying it would likely have a number of “unsatisfactory practical effects”, such as increasing the scope, time and costs of applications.

The involvement of commercial litigation funding made this conclusion even stronger for three reasons, the judge went on.

Firstly, he cited the appeal court’s 2017 ruling in Excalibur, which held that the costs incurred by a litigation funder in covering security for costs were not to be treated any differently from any other costs they incurred.

Secondly, commercial funders “are not motivated by considerations of access to justice, although the facilitation of access to justice may be an incidental by-product”.

As a result, if funding a claim required security for costs to be provided, “that is a normal and foreseeable aspect of the investment being made, and the funder can be expected to include it in his business model in determining the terms on which funding is provided”.

Thirdly, commercial litigation funders ought to be properly capitalised, in order to be able to meet an adverse costs order if the claim failed.

“They should therefore be in a position to defeat any application for an order that security be provided by demonstrating an ability to meet an adverse costs order.”

A properly run commercial funder “should rarely if ever need to be ordered to put up security”.

“In those circumstances it is wrong that a commercial litigation funder such as Therium which is ordered to put up security, because it has failed to show that it has structured its business so that it is in a position to meet an adverse costs order, should be able to pass on the costs (by way of a cross-undertaking) of putting the necessary resources or security in place.

“The public interest, reflected in the key concern expressed by Sir Rupert Jackson, and the ALF code itself, requires Therium to have in place adequate capital to discharge any adverse costs order that may be made.

“It is not appropriate or fair that Therium should seek to impose the cost of arranging that capital upon the security defendants through the mechanism of a cross-undertaking in damages.”

The court concluded that a cross-undertaking should only be required in very rare and exceptional circumstances where a commercial funder was involved and there were none here.

If this was to change, Popplewell LJ added, it would be better done by a review and then legislation, rather than individual judicial decision.

As a result, he dismissed the claimants’ appeal, and allow the defendants’ cross-appeal.

Security has also been ordered against Therium in respect of the Peters & Peters claimants, although they did not participate in these appeals, while Harbour and the defendants reach an agreement without the need for a court decision.

Harbour agreed that it would offer a direct indemnity up to an agreed limit in respect of the defendants’ costs, and provided financial information to confirm it would be able to meet its obligations under the indemnity; no cross-undertaking was requested or given.

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