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Professional third-party litigation funder ordered to pay security for costs

27 June 2017

The High Court ordered security for costs against a commercial litigation funder but declined to do so in respect of a third-party funder who was not involved in litigation funding as a business. The case is interesting for its comparison of ‘commercial’ litigation funders and ‘pure’ litigation funders, and the factors the court takes into account when deciding which category a funder falls into: The RBS Rights Issue Litigation [2017] EWHC 1217 (Ch)

The defendants sought security for costs from two foreign third-party funders at a late stage in the proceedings, following settlement of nearly all claims, on the basis that they could be liable in respect of an adverse costs order against the remaining claimants. One was a commercial litigation funder; the other claimed it only provided funds to assist associated entities, who were claimants. Both argued the defendants had not shown a real risk that any costs order would not be satisfied, the applications were too late, and that the security sought was excessive. The Court drew a clear distinction between ‘pure funders’ and commercial litigation funders, and ordered the commercial litigation funder to provide security for costs in a reduced sum, contingent on a cross-undertaking from the defendants. However, the Court determined it would not be just or appropriate to require the other third-party funder to provide security for costs.  

Decision
 
There was no dispute that the Court has jurisdiction to order security for costs against a third-party funder. This power arises under the combined effect of s51 Senior Courts Act 1981 and CPR 25.14(2)(b). The exercise of this jurisdiction is fact-specific: case law can only provide general guidance. The Court identified five factors relevant to whether such an order would be appropriate and just:
 
Is it sufficiently clear that the non-party is to be treated as having in effect become, in all but name, a real party motivated to participate by its commercial interest in the litigation?
 

The reasons and motivations of the funder are important considerations. Courts will favour facilitating a ‘pure funder’ acting altruistically to enable access to justice, but will likely subject a commercial litigation funder to the costs and consequences of a commercial venture. However, many funders will fall somewhere in between that spectrum, and each case must be considered on its facts.

While Hunnewell Partners (BVI) Limited (H) was a commercial litigation funder, London and Northern Capital Partners Limited (L) asserted that it had never been involved in litigation funding as a business. Seven other entities associated with L (the AEs) were claimants in the proceedings, seeking over GBP 100 million. L argued that it provided funds to facilitate access to justice for the AEs. 

Although troubled by L’s reluctance to disclose the terms of its arrangements, the Court concluded (on “admittedly sparse evidence”) that the positions of H and L were “materially and relevantly different”, and they should be treated differently for the purposes of the application.  While L’s line of business was not decisive, it did bear on the question of whether the funding was provided for commercial gain, and therefore the risks assumed by L. The Court resolved that L was closer to a ‘pure funder’ than a professional litigation funder. This was supported by the terms on which another of the AEs had provided funding: for no uplift, interest or other return, to be repaid only after a substantial threshold recovery.

Is there a real risk of non-payment such that security against the contingent liability should be granted?
 
The risk of non-payment is not limited to non-payment by the claimant. Security can be ordered against non-parties “whether or not the claimant is able to pay an adverse costs order himself”. Nevertheless, the claimant’s ability to meet an adverse costs order remains relevant to assessing whether there is a real risk that such an order may not be paid. The Court held that both the possibility of alternative recourses and any difficulties in enforcing them are relevant considerations. The Defendants had sufficiently demonstrated a real risk of non-payment, as:
  • ATE insurance was not sufficient to cover a potential adverse costs order; and
  • a proportion of liability would fall on individual retail claimants of limited means (most of which were either deceased, pensioners, overseas, or blind trusts).
The Court emphasised that it would be unrealistic and unjust to underestimate the difficulties of recovering comparatively small sums from so many claimants.
 
The risk of non-payment by a third-party funder is also a relevant consideration. Adverse inferences may be drawn from a respondent’s “deliberate reticence” to disclose information on their financial position. H and L were incorporated abroad, and not subject to public filing/inspection of accounts. As they declined to voluntarily disclose this information, their financial position was opaque. There was evidence that they were due to receive substantial sums as a result of the April settlements. However, there was no way for the Court to know whether even quite substantial receipts would result in funds available for payment of costs, and not be used, eg, to pay other creditors. Ultimately, the evidence was insufficient to dispel the impression of deliberate reticence, or the inference that H could not in fact demonstrate sufficient resources to meet an order for costs. The Court was not persuaded that confidentiality and secrecy were the true and predominant reasons for H’s reticence. However, as L was more akin to a ‘pure funder’, it found L’s reticence was more justifiable.
 
Is there a sufficient link between the funding and the costs for which recovery is sought to make it just for an order to be made?
 
Strict causation is not required; however an applicant will need to show “at least some causal link between the non-party’s conduct and costs incurred”.
 
Has the non-party been made sufficiently aware of the risk of liability for costs, either by express warning, or by reference to what a party in its position should be taken to appreciate as the inherent risks?
 
The importance of a warning will vary from case to case. The lack of an express warning is unlikely to carry much weight in respect of a commercial litigation funder. The Court cautioned that “it is not for the Court to protect a party from inherent business risks of which it should be well aware”.
 
H was assumed to know risks inherent in its own line of business, and thus to have appreciated the risk of adverse costs liability or being ordered to provide security. However, this could not necessarily be said of L, which contended that it did not anticipate or expect such eventualities. The timing of the funding provided was also relevant. As L had provided funds “almost on the eve of the trial”, the Court accepted that the possibility of an order security for costs may not have been contemplated or provided for. It considered that it would not be just to require L to provide security for an obligation it cannot be assumed to have envisaged or provided for.
 
Are there factors, such as delay in making an application for security, or likely adverse effects such as to tip the overall balance against making the order?
 

While an application for security can be made at any stage, the Court will be concerned not to allow this to act as an instrument of oppression, particularly where the defendant’s failure to meet a claim may have materially caused the claimant’s impecuniosity. The Court must carefully balance the reasons for making the order, and the considerations of overall justice.  The Court considered that lateness does not necessarily connote unjustified delay: it is important to assess the reason and its prejudicial effect.

Here, there was extreme delay. However, this was not fatal to the application for security. The settlements had changed the risk profile of the claimants. It had also become apparent that the claimants’ ATE cover was materially inadequate (contrary to the public impression created by SG at all times until December 2016). As a commercial litigation funder H should have been fully aware of the position regarding ATE cover, and either get to the bottom of any uncertainty, or incur the risks of not doing so.

The Court expressed its concerns about the disparity and magnitude of the Defendant’s costs and the risk that they might have made it impossible for the claimants to obtain ATE cover (which in turn triggered the application for security).  However, it appreciated the complexity and size of the case, and that security was only sought in relation to costs post-December 2016.  It stressed that costs must be proportionate to be recoverable and that parties “are free to pay for a Rolls-Royce service but not to charge it all to the other side”.

While the Court declined to order L to provide security, it did not consider it just for what might equitably be considered ‘L’s share’ of the costs to fall on H. It calculated an appropriate figure, concluding H should be required to pay approximately 38% of the sums sought. Finally, the Court required a cross-undertaking from the Defendants, as a means of ensuring compensation in case it became apparent the order should not have been made.

Comment
 
This decision confirms the power of the courts to order security for costs against third parties, and underscores that the exercise of this power will depend on the specific facts of each case.  It emphasises the different treatment of ‘pure funders’ and commercial litigation funders, and the types of “inherent business risks” that they will be taken to have assumed.  On the facts, the lack of sufficient ATE cover was also particularly relevant. It further illustrates that, while a funder’s line of business is not decisive, the courts will be more willing to order security against a commercial litigation funder. The decision may also encourage commercial litigation funders to seek a cross-undertaking when faced with an application for security for costs.
 
Notably, the Defendants made clear that they might in due course seek in principle 100% of any costs awarded from H and L, and argue against the application of any “Arkin cap”. Should such circumstances arise, we may well see further developments in these proceedings.
 

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com. ​