High Court orders security for costs against third party funder supporting group litigation

The High Court has granted an application for security for costs against a commercial litigation funder supporting the then remaining claimants in the RBS Rights Issue Litigation. It declined to order security against another third party which was not in litigation funding as a business and was not primarily motivated by a wish to profit from the provision of funding: The RBS Rights Issue Litigation [2017] EWHC 1217 (Ch).

Although each case will turn on its facts, the decision suggests that the court may be well disposed to ordering security for costs against third parties who fund litigation on a commercial basis, particularly in the context of a group litigation order (GLO) where the claimants have the benefit of an order providing that (if the claim fails) they will be liable only for a proportion of the defendant's costs on a several, rather than joint, basis. It may be more difficult to obtain an order where a third party has funded litigation primarily for some other motive, even if the third party is charging a commercial return on the funding provided. 

Background

This application arose in the context of group litigation brought against RBS relating to a rights issue of shares in the bank announced in April 2008. In March this year the court granted the defendants an order requiring the claimants to identify those funding the litigation, to enable the defendants to consider whether to apply for security for costs under CPR 25.14(2)(b), which allows security to be granted against those who fund litigation in return for a share of the proceeds (see our blog post on that decision).

The claimants identified two third parties as having provided funding: Hunnewell Partners (BVI) Limited ("Hunnewell BVI") and London and Northern Capital Partners Limited ("LNCP") (together the "Respondents").

The defendants applied for security for costs against the Respondents on 16 and 17 March respectively. The applications were opposed, including on the ground that they were too late, as the trial was then listed to begin on 22 May, with pre-reading from 8 May.

Decision

The High Court (Hildyard J) granted the application against Hunnewell BVI, but declined to grant security against LNCP.

The judge noted that there was no real doubt about the court's jurisdiction to make an order for security against the Respondents, despite the fact that they were not substantive parties to the proceedings. Although it has been held in a number of cases that orders for costs against non-parties are "exceptional", this just means that they are outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question is whether in all the circumstances it is just to make the order. The judge expressed the view that:

"a case with multiple claimants seeking to vindicate their rights under a GLO and who have been accorded by Court order the considerable benefit of several and not joint liability for costs will be likely to be considered 'exceptional'. In such a case, the defendant(s) will almost inevitably be put to exceptional difficulty in enforcing any costs order in their favour if they obtain one at the end of the day."

The potential exposure of a funder to an order for costs at the end of the day does not, however, of itself mean an order for security for costs should be granted. The judge identified five criteria as being of particular relevance in assessing whether an interlocutory order against a non-party should be granted under CPR  25.14(2), namely:

1. Whether it is sufficiently clear that the non-party is to be treated as having in effect become a real party motivated to participate by its commercial interest in the litigation. In this regard, the judge said the reasons and motivation for the funder's involvement will be an important consideration - in particular, whether the funder is acting purely for profit or whether it is acting altruistically to enable access to justice (a "pure funder"), or whether it falls somewhere within that spectrum.
2. Whether there is a real risk of non-payment. The judge rejected the Respondents' suggestion that the defendants must first prove a real risk of non-payment by the claimants before they could seek security from a third party funder. The question of whether there was a real risk of non-payment had to be considered in the round.
3. Whether there is a sufficient link between the funding and the costs for which recovery is sought. Although it was not necessary to establish strict causation, there had to be at least some causal link between the non-party's conduct and the costs incurred.
4. Whether a risk of liability for costs has sufficiently been brought home to the non- party, either by express warning, or by reference to what a person in its position should be taken to appreciate as to the inherent risks. The judge noted that with the growth of litigation funding as a business in which funders may be assumed to know the inherent risks, the requirement for express warning had gradually been diluted; in the case of a commercial litigation funder, the lack of an express warning was unlikely to be a particularly weighty consideration.
5. Whether there are factors, including for example delay in the making of an application for security or likely adverse effects, such as to tip the overall balance against making an order. The judge commented, in this context, that there are no hard and fast rules.

Applying these considerations to the applications against the Respondents, the judge concluded that it was appropriate to order security to be provided by Hunnewell BVI but not LNCP.

In relation to Hunnewell BVI, the real question was as to its financial position and ability to satisfy a liability for costs if imposed on it. The judge noted that there was little if anything more than an assertion that Hunnewell BVI would be able to meet a costs order against it, no accounts of any description were provided, and none were publicly available.

Although there was evidence that Hunnewell BVI was due to receive substantial funds in June/July 2017 as a result of its entitlements under funding arrangements with claimants who had previously settled their claims in the action, this was not sufficient to make up for the absence of other evidence as to its financial position. There was no way of knowing whether these funds would be available to pay costs of whether they would "go down the plughole for other creditors or unsuccessful ventures in an uncertain line of business".

The possibility of alternative recourse against the claimants themselves did not remove the risk of non-recovery to any material degree and did not militate against the order for security for costs. The order that the claimants should have only proportionate several liability for costs was appropriate and necessary in the context of the GLO, but it led to obvious difficulties for the defendants in recovering such comparatively small sums from so many claimants. Further, the defendants had sufficiently demonstrated a real risk of non-recovery, including because of a shortfall in the claimants' after-the-event (ATE) insurance cover and the fact that a significant proportion of the adverse costs liability would fall on individual retail claimants of limited means, some of whom were abroad.

Although delay in the making of an application of this nature was always a relevant consideration, the judge was satisfied that the delay was justified both by the altered risk profile following the settlement of a large proportion of the claims in December 2016 and the late revelation that there was materially inadequate ATE cover in place.

The position in relation to LNCP was, however, materially different. The judge said he was troubled by LNCP's reticence both as regards the terms of its arrangements with the claimants and its own financial position, and that it was to be inferred that LNCP had required some commercial return as the price of its support. However, the evidence suggested that its primary motive was to assist the claimants, including entities associated with LNCP, to obtain damages as compensation for wrong done to them. Accordingly, in the spectrum, and in contrast to Hunnewell BVI, LNCP was closer to a "pure funder" than a professional litigation funder.

The defendants were required to provide a cross-undertaking in damages as the price of the order for security for costs against Hunnewell BVI.