As third party litigation funding becomes more commonplace, the courts in recent years have grappled with a series of cases in which they try to balance competing policy interests. On the one hand, the rise of litigation funding provides access to justice for claims, which may not otherwise have been brought due to financial constraints. On the other hand, the courts have sought to control the commercial interests of the litigation funding in order to prevent it from distorting the very litigation it funds.
In 2017, we reported on a decision in which the court confirmed that an order for security for costs could be made against a litigation funder. This was also the first reported case in which the defendants were required to give a cross-undertaking in damages as a condition of receiving security for their costs. In that case, the judge (who suggested a cross-undertaking of his own volition) said: "…though not common-place or inevitable, I do not think it should be considered particularly exceptional for the court to require a cross-undertaking as the price of an order for security for costs to be provided by a non-party funder".
Earlier this year, that proposition came in for renewed scrutiny in the Court of Appeal in Rowe & Ors v Ingenious Media Holdings PLC & Ors - should a defendant have to give a cross-undertaking as a condition of receiving security for costs from a litigation funder?
In this article, we consider the role of a cross-undertaking in damages as a condition of security for litigation costs, looking closely at recent case history and the findings of the Court of Appeal on the impact this type of approach is likely to have in litigation cases.
Background - Security for costs and cross-undertakings in damages
In litigation in England & Wales, a defendant can apply to the court for security for costs - an order whereby some form of security is given so that a defendant has comfort that, if they successfully defend the claim, they will be able to recover (a proportion of) the costs of doing so. While security is normally sought from the claimant, CPR 25.14 allows a defendant to seek security for costs from someone other than the claimant, for example a litigation funder. For more information, see our article The Basics: How do I obtain security for costs against an opponent?
A cross-undertaking in damages is where a party to litigation undertakes to pay damages if they do not ultimately succeed on their claim as a condition of receiving relief, such as an interim injunction.
The Ingenious case
This case involved more than 500 claimants bringing claims in respect of film and video game investment schemes, which failed to deliver the intended tax-efficient effect. The majority of the claimants' claims were funded by commercial litigation funders - more than 350 of them by funders, Therium. The court ordered Therium to provide security for the defendants' costs. The key question on appeal was whether, as a condition of ordering security, the defendants should be required to provide a cross-undertaking in damages.
The funded claimants contended that, if security was ordered to be given, it should be on condition of a cross-undertaking - if Therium were required to provide security, the cost of doing so would be passed on to the claimants, who therefore stood to suffer financially as a result. In particular, if the claimants succeeded in their claims, they would be liable to pay Therium three times (3x) the amount of the security provided. They argued that the situation was analogous to an interim injunction (where a cross-undertaking is almost invariably required), because an order for security for costs similarly restrains the use of assets in some way.
The defendants argued that commercial funders invest in litigation with a view to a return by sharing the proceeds of successful claims. Putting up security for costs is a part of their business, just like any other cost of the litigation. They added that if a funder could demonstrate it was able to meet an adverse costs order against it, then it could resist an order for security. If an order for security is made, it is the funder's own failure to have, or to show, adequate capital, which causes any loss. Any such costs or losses should not therefore be underwritten by defendants in the form of a cross-undertaking.
Court of Appeal decision
The Court of Appeal noted that funding litigation, by whatever means, comes at a cost. If a claimant funds its own litigation, it loses the opportunity to use that capital for another (more profitable) purpose. If it borrows, then it suffers the cost of that borrowing; and if it accepts funding from a litigation funder, then it will have to forego a portion of any damages it receives to repay the funding, and to pay the funder's return. These costs of funding are not generally recoverable from the other side.
A cross-undertaking reallocates the risk inherent in funding litigation. It would therefore be an exceptional departure from the general principle that the costs or losses of funding litigation are not recoverable. To require a defendant to provide a claimant with a cross-undertaking in damages in return for security for costs should therefore be an exceptional remedy.
The Court did not accept the claimants' analogy between security for costs and an interim injunction. Both may have the effect of restraining a party from dealing freely with their assets. In the case of an interim injunction, that is the intended purpose. It is therefore right that, if the interim injunction is not continued, the defendant is compensated for any loss caused by that restraint. However, security for costs is not designed to curtail a party's ability to use assets - it is a procedural step no different from any other that causes a party to incur costs in litigation. It was not therefore appropriate to require a defendant to give a claimant a cross-undertaking by default.
The court said this conclusion was only heightened when the claimants had the benefit of commercial funding:
- There was no principled distinction that would allow the costs of funding security to be recoverable by cross-undertaking, when the other litigation funding costs are not.
- As previously noted by the Court of Appeal, although access to justice may be an incidental by-product of funding, this is not a commercial litigation funder's motivation. The commercial litigation funder is interested in a return on his investment. The investment is the cost of funding the claim. Security for costs is a normal and foreseeable aspect of litigation and therefore of the investment, and the funder should 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 fails. The importance of capital adequacy was emphasised by Sir Rupert Jackson in Chapter 11 of his Review of Civil Litigation Costs: Final Report. Security for costs will not be ordered where it can be shown that an adverse costs order could be met. Funders 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. It would be wrong for a commercial litigation funder, who has been unable to demonstrate this and so ordered to pay security, to be able to pass on the costs of their business model to defendants (thus maximising their profits) by means of a cross-undertaking in damages.
The court also considered that were cross-undertakings to become the norm, this would likely lead to a number of undesirable outcomes, including: an increase in satellite litigation (inquiries into damages payable under cross-undertakings); an increase in the length and cost of security applications themselves; and possibly a chilling effect on defendants seeking security in the first place.
In the circumstances, the court found that:
- it should only be in a rare and exceptional case that the court should require a cross-undertaking in favour of a claimant as a condition of ordering security for costs;
- only in even rarer and more exceptional cases should it require a cross-undertaking in favour of commercial litigation funders; and
- as such, the decision in the 2017 case referenced above and subsequent cases should no longer be followed.
What does the decision mean for claimants and funders?
The decision has some clear implications, both for funders and claimants:
- Funders need to be structured and operated in such a way so that there is no doubt they could meet an adverse costs order made against them; including being able to demonstrate adequate capital resources to meet the potential liabilities arising out of the litigation they fund. Those that can will rarely, if ever, need to provide security in the first place.
- Claimants should be wary of funders who are unable to demonstrate this (e.g. they are inadequately capitalised, opaque about their financial standing, or unwilling to put up security voluntarily). In these circumstances, claimants are unlikely to be able to recover the cost of funding security, and so it is likely to diminish any recoveries in the litigation.
Finally, while the court has laid out helpful principles in this decision, they have indicated that this area of law should be developed through legislation, rather than judicial decisions, to allow a thematic review.
For more insight into this area or to discuss any questions this article may have raised, please contact Emma Carr in our Commercial Litigation team.