Security for costs – a further blow to commercial funders and their clients

Our previous article considered the High Court’s decision in Rowe & Ors v Ingenious Media Holdings plc & Ors. This concerned circumstances where commercial litigation funders may be required to provide security for costs to protect defendants from the risk of being unable to recover any costs ultimately awarded in their favour. The Court of Appeal (CoA) has now provided guidance on when a court should exercise its discretion to require a voluntary cross-undertaking in damages as a condition of requiring a claimant or their commercial litigation funder to provide security for costs.

Taking a step back, the costs of obtaining litigation finance cannot ordinarily be recovered from a defendant (National Westminster Bank v Kotonou [2010]) because they are not “costs of or incidental to” the proceedings for the purposes of section 51(1) Senior Courts Act 1981 (the SCA). This typically bars the recovery of costs incurred in providing security, such as:

• After the event (ATE) policy premiums
• Costs of fortifying those policies
• Costs of obtaining bank guarantees
• Cash borrowing costs and
• Costs payable by a claimant to their commercial funder as a condition of that funder providing security.
  
  

In the judgment handed down earlier today, the CoA declined to require the defendants in this case to volunteer an undertaking to meet any such costs as a condition of security being provided. In reaching that decision, the CoA was influenced by the “unsatisfactory practical effects” of routinely requiring a defendant to volunteer an undertaking, including the risks of:

• A substantial increase in satellite litigation
• An increase in the scope and costs of security applications and
• Deterring defendants from seeking security for their litigation costs.
  
  

The CoA noted that commercial litigation funders are not motivated by considerations of access to justice but instead aspire to make a return on their investment. If such funders have adequate capital, they will be able to demonstrate an ability to meet any adverse costs orders and therefore should rarely if ever be ordered to provide security for those costs. Conversely, commercial funders who are required to provide security (because their capital is inadequate to meet an adverse award of costs) should not be allowed to impose upon a defendant the consequences of their inadequate capitalisation. An obligation on a defendant to volunteer a cross-undertaking in damages as a condition of security would expose that defendant to an open-ended and unquantifiable liability to meet costs that would otherwise not be recoverable pursuant to the SCA.

Whilst the CoA was satisfied that courts have a discretion to order a defendant to volunteer a cross-undertaking as a condition of security, they should not do so save in “rare and exceptional” circumstances, particularly where the cross-undertaking is required to be given for the benefit of a commercial litigation funder. There were no such rare and exceptional circumstances in this case to justify the generalised cross-undertaking sought.

Comment

This decision will be welcomed by insurers and their insureds. Where an insured defendant is entitled to seek security against claimants and/or commercial litigation funders, it will typically be able to do so without volunteering either a generalised cross-undertaking or one which includes, or might include, irrecoverable costs pursuant to the SCA. This is particularly relevant in the context of group-litigation and complex commercial litigation

• where commercial litigation funding is becoming commonplace, and
• where claimants are likely to have disparate resources,

such that insurers and their insureds can have little confidence that all of those claimants will be able to discharge substantial adverse costs awards against them.

The CoA queried whether it would be appropriate for the Law Commission or the Civil Procedure Rules Committee to prepare a synoptic review of commercial litigation funding and “the potential effect on civil litigation in a wider context”. We agree that this would be sensible. As explained above, commercial litigation funding has become commonplace in litigation of this nature and, in our view, its broader consequences have not properly been addressed since the 2010 Jackson Report.

Kennedys’ professional liability team is instructed by one of the advisory defendants in the Ingenious Litigation, who succeeded in the appeal hearing.

Related items:

• Proceedings stayed by Head of the TCC due to “unreasonable and oppressive behaviour” by the claimant
• The Ingenious Litigation – security for costs and litigation funders