Security for costs and litigation funding

This judgment will be of interest to litigation funders and those facing claims backed by funders.

It was held in Rowe and others v Ingenious Media Holdings plc and others [2021] EWCA Civ 29 that it would only be in “rare and exceptional” cases that the Court should require a defendant to give a cross-undertaking in damages in a funded claimant’s favour. It will now be very difficult indeed to convince the Court that a cross-undertaking in the funder’s favour would be appropriate. Previous case law in this area is no longer good law.

Background

The Court has jurisdiction to order a party in litigation to pay ‘security’ for another party’s costs of the proceedings if it is just to do so, and if one of a number of conditions are satisfied. The question of security most commonly arises where the claimant is a company and there is reason to believe that it would be unable to pay the defendant’s costs if ordered to do so.

This is because the general position in civil litigation is that the ‘loser pays’ the successful party’s costs of the litigation (where a funder is involved on behalf of an unsuccessful party, they will generally be liable for the cost of the opposing party to the extent of the funding provided). The Court rules therefore recognise there are circumstances in which it will be unjust to allow a party to pursue a claim it may ultimately lose, when the opposing party will be put to costs in defending the claim, and which it may not be able to recover (e.g. from an impecunious claimant).

An order for security for costs requires a party to pay money into Court or provide some other form of security for their opponent’s costs. If security is ordered and not provided, the claim cannot continue. In some cases security will be ordered on terms that the applicant for security gives an undertaking to comply with any order that the Court may make if the Court later finds that the order for security has caused loss to its opponent and that they should be compensated accordingly.

Security and funders

The Court also has the power to order that someone other than the claimant pay security where it is just to do so, for example where a third party has contributed or agreed to contribute to the claimant’s costs in return for a share of any money or property which the claimant may recover in the proceedings, and where that party is someone against whom a costs order may be made (i.e. a professional commercial litigation funder).

Of course, very often the reason that a litigant seeks litigation funding is that it cannot afford the litigation costs in the first instance. This makes funded claimants vulnerable to an application for security for costs.

The Courts have previously identified circumstances when a cross-undertaking in damages will be required from the defendant in such cases, for instance where, in having to put up security, the funder would not otherwise be able to use its funds for the purpose of lending and/or other business opportunities. The leading case before now held that such cases would not be common-place, but should not be considered as exceptional.

The position now

In Rowe and others a number of claimants pursued claims arising out of failed tax-saving schemes. Some of the claimants were funded by a third party professional litigation funder.

The defendants sought security from the funded claimants. The funder had agreed the basis upon which it would agree to pay security on behalf of the claimants in the event it was ordered, which effectively required the funded claimants to repay a multiple of the security in the event that the claims were successful, out of the damages recovered in the litigation.

The defendants’ application was resisted by the funded claimants; alternatively they said that if security was ordered, it should only be on the basis that a cross-undertaking in damages be ordered in respect of any loss suffered by the funder or the funded claimants as a consequence of that order.

At the first instance in the High Court, the judge ordered, as a condition of security, that a cross-undertaking in damages be provided in respect of the external costs of putting the security in place. On appeal, the Court of Appeal overturned this decision.

The Court of Appeal noted that the jurisdiction to award security against funders was always subject to the overriding consideration that it must be just to do so in all of the circumstances of the case. As such, funders would never be required to offer security if they were sufficiently capitalised and solvent in the first place (because then there would be no risk of the funder not being able to pay the successful party’s costs of the litigation).

It was noted that losses caused to a party in funding litigation generally lie where they fall, with general position being that the party who incurs funding costs bears them. As such, a cross-undertaking of the type sought involved an unjustifiable re-allocation of that risk. On that basis, the Court confirmed that cross-undertakings in damages in funded cases should only be ordered in “rare and exceptional cases”.

Summary

The message from the Court of Appeal was clear; funders are able to insulate themselves from the risks of having to offer up security by being sufficiently capitalised in the first instance. The Court noted that the potential for awards of security was simply a normal and foreseeable aspect of the investment being made, and funders could be expected to include provision for in their business models in determining the terms on which funding is provided.

The Court concluded that this principle could be expected to further improve the operation of the commercial litigation funding market in the UK. The value of Court cases and cash held by UK litigation funders is now estimated to be in the region of £2billion. Litigation funding is increasingly common and offers businesses the opportunity to pursue claims without facing the burden or risk of financing litigation.

As the funding market continues to mature the cost of funding is likely to become increasingly competitive; good news for access to justice and good news for clients.

Rowe and others v Ingenious Media Holdings plc and others [2021] EWCA Civ 29 (15 January 2021)

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