In a recent and novel decision, the Commercial Court ruled that where a Claimant had multiple commercial litigation funders, one alone should be jointly and severally liable with the Claimant for the costs of the proceedings, irrespective of other litigation funders' involvement.
The particular litigation funder had the dominant financial interest in the litigation and had effectively controlled the proceedings through the Litigation Funding Agreement (LFA). The Defendants, by contrast, had not had a choice and were required to incur costs in defending the claim. Applying authorities, Moulder J decided it would be unfair to make the Defendant's recovery of those costs dependent on the pursuit of numerous entities, thereby causing further costs and delay, with an uncertain outcome.
Underlying Proceedings and Costs Order
In the substantive fraud claim, the court had delivered judgment in 2021 in favour of the Defendant, HSBC Group Plc. The Defendant applied under the Senior Courts Act 1981 s.51 for an order requiring the Claimant's commercial litigation funder to pay their costs. The court added the litigation funder as a party to the proceedings for the purposes of costs only, and required the Claimant, ECU Group PLC, to pay the Defendant's costs on the indemnity basis and to make an interim payment on account of US $11 million.
The Defendant received the sum of just under US $10 million as payment on account, which represented the amount paid out under adverse costs insurance. In this application, the Defendant applied for an order requiring the litigation funder to pay its costs and to be jointly and severally liable with the Claimant for costs. Such an order would require the litigation funder to pay over US $1 million, being the balance of the payment on account the Claimant was required to pay to the Defendants.
Litigation Funding Agreement
The litigation funder provided its contribution to the funding of the proceedings by way of an LFA. Pursuant to the LFA, signed in September 2019, the litigation funder agreed:
- to provide a commitment of approximately £9.3 million in total to fund the claim.
- to reimburse the Claimant for part of its legal costs incurred since 30 November 2018.
- if proceedings were successful, depending on how quickly a pay-out was obtained, in addition to the reimbursement of costs paid out, that the litigation funder would receive a contingency fee of three times the amount of costs funded.
- the funding was to be provided in five tranches and the funder had a right to decide whether to fund each of the subsequent tranches. It also had various rights to information (including to be kept informed of "significant developments", and a monthly report regarding the progress and conduct of the proceedings), as well as a right for its consent to be sought before any change of solicitors or counsel.
- that the claim would be covered by adverse costs insurance up to £7.5 million.
The funder also entered into a priorities agreement which provided that any proceeds from a successful claim would be paid out to the funder in priority to the Claimant's other funders.
Litigation Funder's Argument
The litigation funder was one of several commercial funders used by the Claimant. The litigation funder accepted that as a commercial funder it should have some liability for costs of the proceedings and it had therefore consented to being joined as a party for costs purposes. The funder also accepted that costs would be assessed on the indemnity basis since that was the basis of the order against the Defendant.
It argued, however, that:
- it should only be liable for costs incurred by the Defendants after the date of the Litigation Funding Agreement;
- and that of those costs, it should only be liable for a percentage corresponding to its percentage contribution to the Claimant's total funding after that date, which it calculated as 66%;
- it also argued that factors relating to the level of the Defendant's costs should be taken into account;
- it also argued credit should be given to it for the £7.5 million already received by the Defendant under the adverse costs insurance;
- and finally, it argued that it should not be required to contribute to the payment on account ordered against the Defendant.
Judgment
The court relied on section 51 of the Senior Courts Act 1981 which provides that the costs of and incidental to all proceedings in the High Court, shall be in the discretion of the court. The court shall have full power to determine by whom and to what extent the costs are to be paid. It was common ground that the jurisdiction under section 51 gives the court a broad discretion.
The judge made it clear she was relying on authorities and that the question to be decided was whether it was just to make an order against the litigation funder.
The judge decided that neither the scale of the overall costs nor the proportion of those costs incurred prior to the involvement of the litigation funder made it just that the litigation funder should bear costs incurred prior to the date on which the LFA was signed.
However, the funder had agreed to assume liability for the Claimant's reasonable costs incurred since 30 November 2018. Added to that, its right to be reimbursed for the costs it had funded and to be paid the contingency fee applied from 30 November 2018 to the conclusion of the claim. Having taken the potential upside of a contingency fee, it would be unfair for the funder to avoid the corresponding downside where the litigation was unsuccessful. It was therefore just to make an order holding the funder liable for the Defendant bank's costs incurred from 30 November 2018, which amounted to 90% of its total costs.
Moulder J decided that there were no grounds for reducing the funder's liability for costs by the amount paid out under the adverse costs insurance. That payment had reduced the amount owing to the bank under the interim payment on account, but did not affect the amount of costs for which the funder should be liable. The use of adverse costs insurance was a mechanism for the funder to reduce its potential liability to the bank if the proceedings were unsuccessful; it did not result in a further reduction to its liability or a credit against its liability.
As the funder was jointly and severally liable with the claimant for the Defendant's costs incurred after 30 November 2018, the judge decided it was equally liable for the amount of the interim payment on account which remained unpaid.
Comment
The court has a broad discretion when deciding costs orders, and will take into account many relevant factors. Commercial litigation funders cannot therefore assume that their costs liability will simply run from the date of the LFA or will be a straight reflection of their level of funding contribution in the proceedings. Here the court considered that the funder had the dominant financial interest in the legal action, stood to benefit greatly if the litigation was successful and had received a potential advantage from funding costs incurred from 30 November 2018. For these reasons, Moulder J decided it was just for the costs order to reflect the corresponding downside to the LFA.
ECU Group plc v HSBC Bank plc and others [2022] EWHC 1616 (Comm) (24 June 2022)
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