Recent decision of the Court of Appeal may make litigation funding more expensive

Introduction

In a decision, which may lead to an increase in the costs of litigation funding, the Court of Appeal has severely restricted the circumstances in which a defendant seeking security for costs may be ordered to meet the additional cost to the claimant of the provision of security.

On 15 January 2021, the Court of Appeal handed down its judgment in Rowe & Ors v Ingenious Media Holdings & Ors [2021] EWCA Civ 29, effectively overruling previous decisions in which cross-undertakings in damages relating to the additional cost of providing security were required as a condition of ordering security for costs.

The appeal court held that cross-undertakings should only be required as a condition of security for costs in “rare and exceptional circumstances”, and in “even rarer and more exceptional cases” when the party providing the security is a commercial litigation funder.

Commercial litigation funding, security and the cross-undertaking in damages

Some cases are appropriate for litigation funding, whereby a third party funder provides all or part of the costs of prosecuting the claim (legal fees, expert expenses, etc.) in exchange for an interest in the proceeds.  If the claim fails, the funder loses his investment but the litigant is not out of pocket for the legal fees he would have had to cover absent the funding.  Litigation funding plays a particularly crucial role in group actions as it allows individuals who may have little in the way of assets other than their claim (which in and of itself may not be very large) to prosecute that claim in the courts; funding thereby serves the important social cause of access to justice (although in Ingenious the appeal court expressed a view to the contrary).

Generally, the losers in litigation are required to pay a large portion of the winner’s legal costs.  While funders have every incentive to back strong claims, if a funded group claim fails the defendant will be faced with the prospect of seeking to collect its costs from a potentially large number of (potentially) impecunious claimants.  For this reason, the rise of litigation funding has also seen a rise in defendants in funded claims seeking security for their costs.

The basis for the court to order security against a third party funder in a funded claim is CPR 25.14. Security can be either provided by the funder directly or obtained from a further financial entity, often an insurer; in either case, there will be a cost, whether up-front (and therefore, by necessity, borne by the funder) or contingent on victory in the litigation.  Orders to post security have therefore prompted claimants and funders to seek to defray the additional costs of that security by making the order of security conditional on the defendant agreeing (in the parlance of the courts, a “cross-undertaking”) to pay those additional costs if the security is not called on.

Decision

This decision arises from a group claim of 500 investors in an investment scheme.  The claimants had been ordered to post security for costs, but on condition that the defendant provide a cross-undertaking to pay the additional cost of meeting the order, which were in the form of a premium payable by the claimants and “external” costs of obtaining the security from an insurer.  The defendants appealed against the imposition of this condition and the Court of Appeal granted their appeal.

1. Does the court have jurisdiction to require undertakings?

The court confirmed that it had jurisdiction to require cross-undertakings, as per the general powers of case management.

2. Should a cross-undertaking be required generally?

The claimants had argued that cross-undertakings should be required as a condition of security for costs, in order to protect the claimants’ right to untrammelled access to justice under Article 6 of the European Convention on Human Rights (“ECHR”).

When considering whether to make an order for security for costs, the court noted that the Article 6 rights of both claimants and defendants are engaged. The court held that if an order for security for costs would have the effect of stifling the claim, thereby trammelling the claimants’ right to access to justice, then it would not be made.

The court ultimately concluded that cross-undertakings to pay damages flowing from the posting of security in “rare and exceptional circumstances”.

3. Should cross-undertakings be required in favour of litigation funders?

The Court of Appeal decided the following with respect to cross-undertakings in the specific context of commercial litigation funding:

• Costs incurred by a commercial litigation funder in providing a claimant with funds to put up security for costs are not to be treated any differently from other costs incurred in funding the other costs of litigation, and as such as therefore generally recoverable.
• Commercial funders are not motivated by considerations of access to justice. Instead, commercial funders are investors who hope to make a return on their investment (i.e. the cost of funding the claim). If funding the claim requires the funder to give security for costs , then that is a normal and foreseeable aspect of the investment being made, and the funder would be expected to include it in its business model.
• Litigation funders should be adequately capitalised so that they can meet any potential liabilities arising from the litigation they choose to fund. For example, this would include meeting an adverse costs order should the claim fail.

Concluding remarks

Rowe is a further example of the courts seeking to strike an appropriate balance between access to justice for claimants and the ability of defendants to recover their costs from unsuccessful claims, in the increasingly complex financial world which has grown up around litigation during the past two decades.  While the court evinced little sympathy for the position of litigation funders, to the extent that this decision imposes additional costs on funders (which it can only) it will tend to make litigation funding more expensive and therefore impact the size and value of group claims which are viable.  The Court also provided little guidance as to the “rare and exceptional” circumstances in which a cross-undertaking will be appropriate, which will have to await further cases.

This case further underlines the complexities of litigation funding and insurance and the importance of engaging solicitors who have a good understanding of the intricacies of that market.

If you believe that you may have a group claim that merits exploration, please feel free to contact David Greene  and Fred Sheppard at Edwin Coe LLP.

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