The issue of security for costs has come into focus in recent years in the context of the increased trend of commercial litigation funders supporting claims in the English courts. The Court of Appeal has recently provided important guidance in Rowe and others v Ingenious Media Holdings plc and others  EWCA Civ 29 in relation to whether a defendant that is seeking security should provide a cross-undertaking in damages.
The Court of Appeal, in deciding that no cross-undertaking should have been required by the court at first instance, held that “to require a defendant to provide a claimant with the benefit of a cross-undertaking in damages in return for security for costs should at the very least be an exceptional remedy.” A cross-undertaking should only be required in “rare and exceptional cases.” The Court of Appeal noted that recent decisions, which have suggested to the contrary (including the first reported case to require a cross-undertaking as a condition of ordering security, In re RBS Rights Issue Litigation  1 WLR 4635), did not involve any rare or exceptional circumstances and should therefore not be followed.
The comments by the Court of Appeal that “a properly run commercial funder should rarely if ever need to be ordered to put up security” will be of interest to funders and relevant to the terms on which they provide funding to claimants.
The case concerned the ongoing proceedings commenced by a large claimant group of investors against promoters, banks and others involved in the Ingenious film scheme, which was challenged by HMRC. There are four claimant groups, each with different legal representation and/or funding arrangements. This appeal concerned claimants funded by the litigation funder Therium. The defendants sought security for costs against Therium. This was opposed by the claimants on the basis that the defendants should provide a cross-undertaking in damages in relation to the “enhanced return” that the claimants would pay to Therium as a condition for providing security. The claimants appealed the decision at first instance to grant security without requiring a general cross-undertaking, and the defendants appealed a later decision to require a limited cross-undertaking in respect of the “external costs” of providing security.
Summary of the decision
There was held to be clear jurisdiction for the courts to require a cross-undertaking as a condition for security pursuant to CPR 25 and CPR 3.1, and by reference to the long-standing guidance in Appendix 10 of the Commercial Court Guide. However, the Court of Appeal made clear that there would need to be “cogent and compelling” reasons to depart from the principle that the costs incurred in funding claims are irrecoverable, as this would reallocate the risk of those costs to the defendants. The provision of cross-undertakings in cases of security for costs could be distinguished from cross-undertakings in interim injunctions, which have the purpose of restraining the use of assets.
The Court of Appeal was concerned that the effects of requiring a cross-undertaking would be an increase in satellite litigation in relation to damages under cross-undertakings, an increase in the time and costs incurred in relation to security applications, and that defendants might be discouraged from seeking security.
Cross-undertakings and litigation funders
The Court of Appeal held that the principle that a cross-undertaking in damages should only be required in exceptional cases was particularly applicable in circumstances where claimants are backed by commercial litigation funding. The Court of Appeal provided the following reasons in support of its view that “only in even rarer and more exceptional cases” should the court require a cross-undertaking where there is security provided by a funder:
- The costs incurred by litigation funders in providing security to a claimant are treated the same as other costs incurred by the funder and are not (subject to some exceptions) recoverable;
- Commercial funders are investors seeking to achieve a return on their investment. The provision of security for costs is part of the investment that can be incorporated into the funder’s business model and the terms on which security is provided; and
- A commercial funder, who should be sufficiently capitalised, can defeat an application for security by providing evidence that it would be able to meet any adverse costs order. A funder that is not able to demonstrate this should not be able to pass on the costs of providing the security through obtaining a cross-undertaking.