Court of Appeal hands down important decision on security for costs and litigation funding

15/01/21

The Court of Appeal has handed down the latest judgment in the ongoing Ingenious Litigation, with important implications for applications for security for costs and the practice of litigation funding.

The Ingenious Litigation concerns a number of film production partnerships, set up by the Ingenious group in the mid-2000s. A number of investors bring claims against Ingenious and various financial advisers, alleging (amongst other things) that they invested in the partnerships as a result of misrepresentations. Most of the Claimants’ costs are funded by commercial litigation funders, including entities forming part of the Therium group.

Ingenious and certain of its co-Defendants applied for security for costs against Therium under CPR 25.14. Nugee J granted the Defendants’ application, and ordered that security be provided.

However, the Claimants also sought a cross-undertaking in damages from the Defendants, as a condition of security being granted. A series of recent first instance decisions, beginning with RBS Rights Issue Litigation [2017] 1 WLR 4635, had suggested that such a cross-undertaking could be required.

In judgments given in February and June 2020 Nugee J held that a limited cross-undertaking should be required. This (a) would cover the ‘external’ costs of providing security e.g. the cost of taking out a bank guarantee, but (b) would not cover ‘internal’ costs which the Claimants had agreed to pay to Therium as a price of providing security. The latter costs were significant, as the Claimants had agreed to pay Therium an ‘enhanced return’ of 2.5x the value of the security put up by Therium out of any financial recoveries in the litigation.

The Defendants appealed Nugee J’s decision requiring a cross-undertaking. The Claimants appealed the decision to limit the cross-undertaking to ‘external’ costs.

Popplewell LJ (in a judgment with which Floyd and Henderson LJJ agreed) held that no cross-undertaking should have been required at all, granting the Defendants’ appeals. In doing so:

• The Court of Appeal reassessed the recent practice of requiring cross-undertakings for damages in applications for security for costs. It held that such an undertaking should be required only “in rare and exceptional cases”, even in non-funded cases. It held that the recent decisions which had held otherwise should no longer be followed. Popplewell LJ held that if there was to be a new practice of requiring cross-undertakings in this area, that should be a matter for primary or delegated legislation, and not developed “by way of individual judicial decision”.
• The Court of Appeal further held that cross-undertakings should be “even rarer and more exceptional” in cases involving commercial litigation funders. It held that, as a matter of policy, commercial funders should be expected to capitalise themselves properly so as to be able to meet orders for costs. If they failed to do so, and were therefore required to put up security, they should not be entitled to visit the costs of doing so upon the Defendants.
• Moreover, a policy of refusing cross-undertakings in cases involving funders would  “incentivise improvements in the way in which the commercial litigation funding market operates”, since “well-advised claimants can be expected to seek to avoid funding from funders who are set up in such a way that orders for security for costs might be required against them”. The Court of Appeal also considered that it was inappropriate for funders to seek to recover an enhanced return from their clients if they were required to put up security, and that funders that did so “can be expected rapidly to lose market share to those funders who are properly capitalised”.

The decision is likely to end the practice of requiring cross-undertakings in the context of applications for security for costs (save in a rare and exceptional case), which had the potential to deter Defendants from seeking security.

The Court’s comments on the practice of litigation funding also confirm that it expects litigation funders to carry on their business through properly capitalised and transparent entities. If they fail to do so then they can be expected to provide security for costs. Further, the Court of Appeal noted that well-advised claimants can be expected to seek to avoid funders who are set up in such a way that orders for security for costs might be required against them.

The judgment is here.