In a marked shift from previous first instance decisions, the Court of Appeal has provided guidance on the circumstances in which a defendant seeking security for costs may be required to provide a cross-undertaking in damages: Mr Nigel Rowe & Ors v Ingenious Media Holdings & Ors [2021] EWCA Civ 29.

The court held that cross-undertakings should only be required as a condition of security for costs in “rare and exceptional cases” and, where the claimants are funded by a commercial litigation funder, “even rarer and more exceptional cases”. A number of first instance decisions which had indicated an emerging practice of cross-undertakings being generally required (including a decision in the RBS Rights Issue Litigation, considered here) should no longer be followed.

The court commented that it is critical to the business of litigation funders that they are adequately capitalised such that they can meet any potential liabilities arising from the litigation they choose to fund. It follows that there should rarely be any need for security from a “properly run” litigation funder, and disallowing cross-undertakings where security is required from a litigation funder “can be expected to incentivise improvements in the way in which the commercial litigation funding market operates”.

The court also suggested that, if there were to be a new practice in this area, it would be best developed by primary or delegated legislation, particularly in light of the likely effects on the litigation funding market and the potential engagement of considerations of access to justice.

Damien Byrne Hill, John Mathew and Holly McCann consider the decision further below.

Background

The appeals arise from the defendants’ applications for security for costs against the claimants’ litigation funder, Therium, which were granted by Nugee J (as he then was) in February 2019 (see our blog post on that decision here). Specifically, the appeals concerned the following two consequential orders of Nugee J:

  1. In February 2019, at the same time as granting the defendants’ application, Nugee J denied the claimants’ request that security be made conditional upon the defendants providing a cross-undertaking in respect of the “enhanced return” the claimants had contractually agreed to pay Therium . The consequence of the “enhanced return” (which was agreed between the claimants and Therium shortly before the security applications were heard) was that Therium would provide the security ordered by the court and, if the claimants succeeded in their claims at trial, they would pay Therium an amount representing 2.5 times the security put up by Therium. The claimants appealed this decision.
  2. In July 2019, Nugee J granted the claimants’ request for a cross-undertaking to be required as a condition of security in respect of the “external costs” of providing security (ie costs not including the enhanced return). The defendants appealed this decision.

Decision

The Court of Appeal dealt with the following three key issues:

  1. Does the court have jurisdiction to require a defendant to provide a cross-undertaking in damages as a condition of ordering security for costs in its favour?
  2. Should such a cross-undertaking be required in civil litigation generally?
  3. Should such a cross-undertaking be granted in favour of a litigation funder and, if so, in what circumstances?

Issue 1: Jurisdiction to require cross-undertakings

The court confirmed that it had jurisdiction to require cross-undertakings as a condition of security for costs. This is referred to in Appendix 10 of the Commercial Court guide, and stems from the discretionary nature of an order for security under CPR 25 and the court’s general case management powers under CPR 3.1, including the power at CPR 3.1(3)(a) to make any order subject to conditions.

Issue 2: Should a cross-undertaking be required generally?

The claimants argued that cross-undertakings ought to be generally required as a condition of security for costs, as (i) additional protection to safeguard the claimants’ rights to untrammelled access to justice under article 6 of the European Convention on Human Rights, and (ii) a security order operates as a restraint on the use of assets and therefore is akin to an interim injunction or freezing order, which invariably require the provision of a cross-undertaking in damages.

In considering the claimants’ first argument, the court noted that the article 6 rights of both claimants and defendants are engaged when considering applications for security for costs. These interests are balanced through the “stifling” principle (Al-Koronky v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123) – if an order for security for costs would have the effect of stifling the claim (and trammelling the claimants’ access to justice) it will not be made.

In relation to the second argument, the court accepted that there were some similarities between the assumptions underlying interim injunctions and freezing orders and those on which an order for security for costs proceeds. However, interim injunctions and freezing orders are exceptional remedies with good policy reasons for protection being afforded to the party whose assets are restrained. In contrast, security for costs is “an ordinary incident of the process of civil litigation, which arises as part of the fair procedural management of claims”. The primary purpose of an order for security is not to inhibit the claimants’ (or funder’s) enjoyment of their assets, and in this sense it is no different from any other case management order which requires a party to incur expenditure.

The court therefore rejected the claimants’ submission that a cross-undertaking should be required as a condition of security in the usual course, and instead held that this should only be the case “in rare and exceptional” circumstances. To find otherwise would be a “significant departure from established principles on the recoverability of costs or losses” by claimants in funded litigation. While claimants can typically expect to recover approximately 70% of their costs of pursuing a successful claim, they will generally incur additional costs in the period between bringing a claim and satisfaction of any judgment or costs order in their favour. For example, claimants may borrow funds to pay their legal costs during this period, and would not expect to recover the interest they pay on those borrowed funds from the defendant. Similarly, claimants who engage litigation funders will generally agree to forego a percentage of their recoveries to compensate the funder for taking on the risk of their claim. It is well-established that costs incurred by claimants in funding their claim (including ATE premiums, save for clinical negligence cases) are not recoverable.

If defendants provide a cross-undertaking in respect of costs incurred by claimants when satisfying any security for costs order, they are essentially taking on the risk of those costs. This is contrary to the principle referred to above, and therefore “should at the very least be an exceptional remedy”.

The court noted that there would likely be a number of detrimental side-effects if cross-undertakings were to be required as a matter of course, including:

  1. a significant increase in satellite litigation regarding liability for damages under cross-undertakings;
  2. an increase in the scope, time and costs of security applications (especially as the scope of the cross-undertaking would be unknown in most cases until the end of the trial); and
  3. defendants being discouraged from seeking security by the requirement to take on an open-ended and unquantifiable liability.

Issue 3: Cross-undertakings in favour of litigation funders

In considering whether cross-undertakings should be required where security is provided by commercial litigation funders, the court referred to a number of characteristics of the business of litigation funding which indicate that an even higher bar is necessary:

  1. Costs incurred by a litigation funder in providing security for costs are not to be treated any differently from any other costs incurred by the funder when funding litigation (Excalibur Ventures LLC v Texas Keystone Inc (No 2) [2017] 1 WLR 2221), and as such are generally irrecoverable.
  2. A commercial funder is in essence an investor looking to make a return, rather than being motivated by considerations of access to justice. If, in the course of funding a claim, the funder is required to provide security for costs, that is a “normal and foreseeable” aspect of the funder’s business and ought to be accounted for in the funder’s business model.
  3. Commercial funders should be properly capitalised and able to meet an adverse costs order if the claim they are funding fails. The importance of this principle was first raised by Sir Rupert Jackson in Chapter 11 of his Review of Civil Litigation Costs: Final Report, and is reflected in the Code of Conduct of the Association of Litigation Funders of England and Wales (“ALF”). It follows that a properly run commercial funder should rarely if ever need to be ordered to put up security and it would be unfair for defendants to bear the costs of a funder’s failure to properly structure its business.
Damien Byrne Hill
Damien Byrne Hill
Partner
+44 20 7466 2114
John Mathew
John Mathew
Senior Associate
+44 20 7466 2913
Holly McCann
Holly McCann
Associate
+44 20 7466 7595