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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Rowe & Ors v Ingenious Media Holdings PLC & Ors [2021] EWCA Civ 29 (15 January 2021) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2021/29.html Cite as: [2021] WLR 3189, [2021] Costs LR 315, [2021] EWCA Civ 29, [2021] 1 WLR 3189 |
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 2021] EWCA Civ 29 | ||
A3/2020/1166 & A3/2020/1167 & A3/2020/1168 |
CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
MR JUSTICE NUGEE
A3/2020/1168 Royal Courts of Justice, Strand, London, WC2A 2LL |
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| 2021 |
B e f o r e :
LORD JUSTICE HENDERSON
and
LORD JUSTICE POPPLEWELL
____________________
| MR NIGEL ROWE & ORS |
Claimants / Appellants |
|
| - and - |
||
| INGENIOUS MEDIA HOLDINGS PLC & ORS |
Defendants / Respondents |
____________________
Simon Birt QC and Craig Morrison (instructed by Reynolds Porter Chamberlain LLP) for the Ingenious Defendants
Richard Handyside QC and James Duffy (instructed by Herbert Smith Freehills LLP) for UBS AG, London Branch
Carlo Taczalski and Frederick Simpson (instructed by Kennedys Law LLP) for SRLV (a firm)
Simon Pritchard and Harry Adamson (instructed by Eversheds Sutherland (International) LLP) for HSBC UK Bank Plc
PJ Kirby QC (instructed directly) for Therium Litigation Finance AF IC and Therium Litigation Finance Atlas AFP IC
Hearing date : 1 December 2020
____________________
VERSION OF APPROVED JUDGMENT
Crown Copyright ©
2021.
Lord Justice Popplewell :
Introduction
various actions in the Chancery Division. The claims are in respect of eight schemes for investment in financing films, and in one case video games, which were promoted and operated between 2002 and 2007 by entities in the Ingenious group. The schemes were promoted as tax-efficient vehicles through which individual taxpayers could contribute funds to a limited liability partnership ("LLP") and set off their share of the LLP losses against other taxable income. For the schemes to have their intended tax consequences it was necessary that the LLPs should be trading with a view to profit, and that the losses should be of an income nature so that what is called sideways loss relief would be available to the individual investors as members of the relevant LLP. The schemes were later challenged by Her Majesty's Revenue and Customs ("HMRC") on various grounds, including that the relevant LLPs were not in fact trading with a view to profit. In August 2016, the First-tier Tribunal held that the entities were trading with a view to profit but on a much more limited basis than that on which the schemes had been promoted (Ingenious Games LLP & ors v HMRC [2016] UKFTT 0521). In July 2019, the Upper Tribunal dismissed the appeals against that decision, and allowed a cross-appeal by HMRC, holding that the LLPs had not been trading with a view to profit at all (Ingenious Games LLP & ors v HMRC [2019] UKUT 0226).
Ingenious group and certain key individuals involved in the design and promotion of the schemes (together, the "Ingenious Defendants"). Claims are also advanced against those from whom Claimants received advice in respect of their investments, including UBS AG ("UBS") and SRLV, a firm of accountants, and in one case HSBC UK Bank Plc ("HSBC"). HSBC also faces claims advanced on the basis of its involvement in financial arrangements connected with the design of the later schemes. The claims total approximately £200 million.
(1) A further 110 Claimants are represented by Stewarts who are not funded by Therium.
(2) 115 Claimants are represented by Peters & Peters Solicitors LLP. These Claimants are also funded by Therium and security has been ordered against Therium in respect of their claims, although they are not participating in these appeals.
(3) 113 Claimants, who sue only the Ingenious Defendants, are represented by Mishcon de Reya LLP. These Claimants have funding from Harbour Fund III LLP, a member of the Harbour litigation funding group ("Harbour"). Arrangements for the provision of security for costs were agreed between Harbour and the Ingenious Defendants without the need for any court decision. Harbour agreed that it would offer a direct indemnity, up to an agreed limit, in respect of the Ingenious Defendants' costs; and provided relevant financial information to confirm that the relevant entity would be able to meet its obligations under the indemnity; no cross-undertaking was requested or given.
Procedural history
various actions are being case managed together. A group of 28 Claimants have been selected to plead their claims, and the trial of test claims (to be selected from the 28) is to take place from 26 April 2022 with a trial estimate of 24 weeks.
Ingenious Defendants, HSBC, UBS and SRLV ("the Security Defendants") for security for costs against Therium pursuant to CPR 25.14.
viability; and that, if the Funded Stewarts Claimants succeeded in their claims, they would be liable to pay to Therium the Security Costs and additionally a sum representing 2 ½ times the Security Costs, to be treated in accordance with the "waterfall" arrangements in the funding agreements. The amount of 2 ½ times the Security Costs was called "the Enhanced Return" and involved the Funded Stewarts Claimants giving up to Therium that amount out of any damages recovered from the Defendants in the litigation.
various issues which had been argued. In respect of some issues he gave his decision and said that he would provide more detailed reasons in due course if desired. Others he reserved for further consideration, but gave an indication of his likely determination in order to assist the parties. In relation to the applications for security for costs, he said he would like to think further about much of the argument in the light of the oral submissions, but gave an indication that he was likely to find it was an appropriate case for Therium to provide security. In relation to the provision of a cross-undertaking he said:
"35. So far as a cross-undertaking in damages is concerned, on the footing that I order security, which, as I say, I think I am likely to do, I do not think that a cross-undertaking in damages should be required in relation to the losses which have been identified in Therium's evidence. Those losses are the losses that will be sustained by the claimants in having to pay Therium a larger return out of the litigation than would otherwise be the case.
36. That seems to me to be a matter between Therium and the claimants. It does not amount to an external cost on Therium and the claimants together. It amounts to a reallocation of the recoveries between Therium and the claimants. Therium and the claimants together have financial interests in the success of this litigation. It is a matter for them and their commercial arrangements as to how they share those recoveries between themselves. I do not think that the proper function of a cross-undertaking in damages is to require the defendants to underwrite those arrangements.
37. On the other hand, if there are external costs of providing securities, if, for example, Therium proposed to provide security by obtaining a bank guarantee, then the case for a cross-undertaking against that extra cost, which is an extra cost imposed on the claimant pool as a whole, is a much stronger one.
38. I am not going to make any order at this stage, because I think that questions as to that would be better addressed once it has been identified after I have made any order for security, how that security is proposed to be provided, and that should be revisited at that stage."
Ingenious Defendants; £600,000 for HSBC; £950,000 for UBS; and £550,000 SRLV). The sums were subsequently varied by paragraph 3 of a consent order dated 13 July 2020 to a total of £2.69 million.
vary the quantum of security if the Funded Stewarts Claimants did not provide certain written confirmations and make disclosure of other material which was relevant to the assumptions about the ATE policies upon which Nugee J had based his calculations. The February Order left the form of security to be agreed or referred back to the court in the event of disagreement.
"151. … As there appears, the basis for seeking a cross-undertaking in damages was that Therium had stipulated in its agreement with the funded Claimants that if it had to put up security, it would seek an enhanced return out of any recoveries by the Claimants. That obviously means that Therium will not suffer relevant damage by putting up security: the cross-undertaking would only fall to be enforced if the claims succeed, but if the claims succeed, Therium will be better off, not worse off.
152. So far as the Claimants are concerned, it is true that if Therium puts up security, a greater share of the recoveries will go to Therium, and to that extent there will be a cost to the Claimants. But that is not a cost imposed on the Claimants' side as a whole, treating the Claimants and Therium together as being the parties interested in the claim. It is a reallocation of the recoveries as between the funded Claimants and their funder. The total cost of pursuing the claim is the same; it is just borne differently. As I said in my oral judgment, I do not think this is something that should be underwritten by the Defendants, and no authority was shown to me to suggest that it should."
value of the ATE policies by about £1.8m. The remaining shortfall on the amount of security required was to be provided by securing additional ATE policies and making a relatively small payment into court. The cost of taking out further ATE policies was in addition to the £1m but was undisclosed in amount.
"Requiring a cross-undertaking in damages at this stage merely … keep[s] a position open so that an argument can be had at a later date …… all arguments as to whether any payment should be made under the cross-undertaking, let alone whether the quantum sought is recoverable or not, could be put off until a later stage ….
Now that other types of cost have in principle been identified, namely, the costs of bonding the ATE policies and the costs of paying money into court, either by way of borrowing costs or by way of opportunities foregone, I can see that both those forms of providing security are … matters where there is a prospect of a material external cost and in those circumstances, it does seem to me to be appropriate to keep the position open….
[The undertaking should extend to the Funded Stewarts Claimants because] "the claimants and Therium for these purposes, although not for other purposes, can be regarded as falling into a claimant pool who have put together their resources in order to bring this action and who will share the fruits of the action, and if there is a cost imposed on that claimant pool, … it should be available to the claimants and Therium collectively to put forward a case that they should be compensated for that cost, wherever on the pool it happens to fall, and … that requiring details over and above those that have been put forward to be given at this stage might risk invading the confidentiality of the arrangements between the claimants and Therium, which it is not necessary to do at this stage."
"If the court later finds that any order for security for costs made against [Therium] in respect of the costs of [the Security defendant] has caused loss to Therium or [the Funded Stewarts Claimants] arising from the external costs of putting in place such security…(but for the avoidance of doubt not including [the Enhanced Return]) and decides that Therium and/or the Funded Stewart Claimants should be compensated for that loss, [the Security Defendant] will comply with any order the court will make."
Submissions in outline
(1) A defendant should be required to provide a cross-undertaking in damages as a condition of an order for security against a litigation funder whenever there is some prospect that the claimant or a third party may suffer loss as a consequence of the order. This will usually be the case because loss of the use of capital has a cost which is well recognised as a recoverable head of damage, and the cost will usually be passed on to the claimant. A cross-undertaking should therefore be the usual requirement as a condition of ordering security. This is supported by the principle that a claimant's rights of access to justice under article 6 of the European Convention on Human Rights should be trammelled to the least extent which is proportionate and necessary. The position is akin to that involved in an interim injunction or freezing order, where a cross-undertaking is almost invariably required, because an order for security for costs operates as a restraint on the use of assets in the same way.
(2) If there is such a prospect, then the court should not seek to analyse categories of recoverable loss or the likelihood of recoverable loss at the stage of ordering security and requiring the cross-undertaking: those are matters for consideration if and when a claim is subsequently advanced under the undertaking. The undertaking should be in the usual form required when granting an interim injunction or freezing order, namely an undertaking to comply with any order that the court may make if the court later finds that the order has caused loss to the claimant or any third party affected by the order and decides that the party should be compensated for that loss. The purpose and effect of such a cross-undertaking is simply to preserve the court's power to make an order requiring payment of compensation if, on analysis at the appropriate time, it considers it right to do so, and so to ensure that the playing field remains a level one.
(3) Accordingly, the Judge erred in the February Judgment in:
(a) requiring the Funded Stewarts Claimants to prove, as a precondition to any cross-undertaking, that they were exposed or arguably exposed to particular losses which would be recoverable under such an undertaking; and/or
(b) seeking to determine at the interim stage whether particular categories of loss that might arise as a result of the order should or should not be the subject of any cross-undertaking.
(4) Further or alternatively, the Judge erred in concluding that the Enhanced Return should not in any circumstances be recoverable. In particular, the Judge was wrong to treat the Funded Stewarts Claimants and Therium as indistinguishable as the "Claimant pool" when assessing whether any losses were suffered by reason of the order for security. The Funded Stewarts Claimants and Therium are separate economic entities with separate and potentially competing interests. To the extent that the Funded Stewarts Claimants were required to bear an additional cost as a result of the order and the commercial terms of their funding arrangements with Therium, that cost ought to be recoverable in the same way as if it were a cost of third-party borrowing or the bonding of ATE policies. The Judge failed properly to take account of the public policy in favour of promoting litigation funding in appropriate cases as a means of ensuring access to justice. In particular, the effect of his decision is that the question of whether the Funded Stewarts Claimants should be compensated has been determined at a stage when the Funded Stewarts Claimants cannot fairly be expected to disclose to their opponents the full details of the arrangements with their funder under which the relevant losses might arise, and the extent of the impact of the order (or any subsequent such orders) on their ability to pursue the claims to trial.
(5) The Judge was correct in his June Judgment to require a cross-undertaking as a condition of providing security (albeit that it should not have been confined to "external costs"), for the reasons he gave, and the Security Defendants' appeal against that decision should be dismissed.
(1) An order for security for costs to be provided by a commercial litigation funder should never require a cross-undertaking, alternatively only in
(2) Protecting commercial funders by requiring cross-undertakings will have undesirable adverse effects. It will reduce the incentive for them to put in place adequate measures to meet costs orders which may be made against them. It will reduce the incentive for them to fund security for costs in the cheapest way. Conversely it will deter defendants from seeking the legitimate protection they should enjoy against impecunious claimants by exposing them to unknown and unquantifiable liabilities in the future.
(3) Article 6 of the ECHR does not support imposing a cross-undertaking; the balance between the article 6 rights of the claimants and defendants has been settled by the "stifling" principle, namely that where a claimant can show that ordering security would on the balance of probabilities render the pursuit of the claim unaffordable, security will not be ordered.
(4) The analogy with a cross-undertaking given in return for an interim injunction is unsound: in the latter case the injunction will be seen to have been wrongly granted if the claimant fails to secure a final injunction at trial; whereas an order for security for costs is not wrongly made if the claimant succeeds at trial.
(5) Alternatively, the only losses which can be protected by a cross-undertaking, if otherwise available and appropriate, are those of Therium, not the Claimants themselves, because the security is sought from Therium under CPR 25.14.
(6) Alternatively, if a cross-undertaking condition covering losses suffered by the Funded Stewarts Claimants was permissible in principle, the Judge was right to consider whether the Enhanced Return was a head of loss to which it should respond, since all the information was before him and deciding the question would provide certainty to the Security Defendants about their exposure when considering whether to give the undertaking as the price for security; and the Judge was right to hold that the Enhanced Return was not a loss which should be covered by a cross-undertaking; but the Judge was wrong to hold that the external losses identified at the June hearing should be the subject matter of a cross-undertaking.
(1) the court has no jurisdiction to require a cross-undertaking as a condition of ordering security for costs; and
(2) the Judge should not have considered requiring a cross-undertaking at the third CMC because (a) he had already decided to order security in February without imposing a requirement for a cross-undertaking as a condition; and/or (b) there had been no application or exchange of evidence in relation to it; and it was fundamentally unfair to SRLV to address and decide the issue then.
(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 favour of a litigation funder and if so, in what circumstances?
(3) Should such a cross-undertaking extend to losses of the claimants themselves when the security sought and ordered is against a litigation funder under CPR 25.14?
(4) Should the court reverse the decisions made on the facts by the Judge that any cross-undertaking (a) should exclude from its scope the Enhanced Return and (b) should include "external losses"?
Civil Procedure Rules and previous practice in relation to cross-undertakings as a condition of ordering security for costs, including the few decided cases in this area.
The Civil Procedure Rules and previous practice
view to avoiding a costs order; and those who fund the claimant's claim, in whole or in part, in return for a share of the proceeds of litigation. Rule 25.15 applies to security for costs against appellants.
view to evading the consequences of the litigation; where he has failed to give his address in the claim form, or given an incorrect address; where the claimant is acting as a nominal claimant, other than as a representative claimant under Part 19, and there is reason to believe that he will be unable to pay the defendant's costs if ordered to do so; and where the claimant has taken steps in relation to his assets that would make it difficult to enforce an order for costs against him. A corporate claimant may be ordered to provide security if there is reason to believe that it will be unable to pay the defendant's costs if so ordered. A corporate claimant, wherever incorporated, will not therefore be required to provide security if it is sufficiently capitalised and solvent such that there is no reason to believe it will be unable to meet an adverse costs order. In relation to litigation funders, Rule 25.14 does not have the gateways which apply to orders for security against claimants. Accordingly, an order for security from a litigation funder is potentially available in respect of a defendant's costs of meeting a claim from a claimant against whom no order for security could be made under parts 25.12 and 13, because, for example, the claimant is resident in this jurisdiction. Nor is Rule 25.14 in terms limited in the case of corporate funders to those who it is likely to believe will be unable to meet an adverse costs order. However, since it is only available by the express terms of Rule 25.14 if in all the circumstances of the case it is just to make an order, a corporate funder will not be required to provide security if it is sufficiently capitalised and solvent that there is no reason to believe it will be unable to meet an adverse costs order, in the same way as obtains for a corporate claimant.
Civil Procedure Rules or Practice Directions about cross-undertakings as a condition of an order for security for costs, Paragraph 5 of Appendix 10 to the Commercial Court Guide states:
"In appropriate cases an order for security for costs may only be made on terms that the applicant gives an undertaking to comply with any order that the Court may make if the Court later finds that the order for security for costs has caused loss to the claimant and that the claimant should be compensated for such loss. Such undertakings are intended to compensate claimants in cases where no order for costs is ultimately made in favour of the applicant."
versions of the Guide since it was introduced in 1997. There is no equivalent in the other guides to the specialist courts within the Queen's Bench Division or in the Chancery Division. It has not proved possible to identify the thinking which led to the introduction of this paragraph in 1997. The researches of counsel and the collective experience of members of this court suggest that until recently claimants rarely if ever suggested the imposition of a cross-undertaking as a condition of providing security for costs. Given the very large number of applications for security for costs which regularly come before the courts of the Queen's Bench and Chancery Divisions, this absence is striking, and might suggest that there was not perceived to be the need for such a requirement in the normal run of cases. It may be no coincidence that the very recent development of seeking a cross-undertaking in some cases coincides with the emergence of commercial litigation funding as a business venture.
v IG Markets Ltd [2012] EWHC 1684 (Comm), a decision of mine in which the issue of whether a cross-undertaking should be given had been raised by the claimant in correspondence. I expressed the view that it would have been an appropriate case for a cross-undertaking because two of the claimants were engaged in the business of trading in highly leveraged products, and their losses from having to pay money into court might be far greater than loss of interest on that sum. The defendant declined to proffer a cross-undertaking. That did not lead me to decline to order security; rather it was treated as a relevant factor in determining the amount to be ordered, by reference to its effect on the principle that doubts about the quantum of security are usually to be resolved in the defendant's favour because the balance of prejudice works against a defendant: if the defendant is undersecured, he risks suffering a loss in the amount of the shortfall; whereas the loss to a claimant in having to provide excessive security is not the excess, but the cost of providing that excess, which will normally be far less than the excess. I took the view that the refusal to provide a cross-undertaking in that case removed from the defendant the benefit of doubts about the amount of security, with the result that I had to do the best I could on disputed issues without resolving doubts in favour of either party. On appeal ([2012] EWCA Civ 1706), Tomlinson LJ referred at paragraph 34 to the balance of prejudice principle, and at paragraph 35 identified the relevant passage on cross-undertakings in the Commercial Court Guide. He noted that "such undertakings are intended to compensate claimants in cases where no order for costs is ultimately made in favour of the applicant". He went on to record the defendant's submission that I had been in error in concluding that the claimants were parties who might suffer a greater loss than the mere loss of interest in paying money into court, and therefore in error in failing to give the defendant the benefit of doubts in resolving the amount of security ordered. The court concluded that the appeal should be dismissed because the defendant was unable to show that there were any matters of doubt which I would have resolved differently had I been resolving doubts in the defendant's favour. The case therefore recognises the availability of a cross-undertaking in appropriate circumstances, but contains no guidance as to when such an undertaking may be appropriate. It was not a case involving funders. This appears to be the only appellate decision to consider a cross-undertaking in the context of a security for costs application.
hold that such an undertaking was "not common-place or inevitable" (paragraph 150). He concluded that there was "no hard and fast rule or settled practice: each case must be assessed on its own facts", but that an undertaking should be required on the facts of that case "so that the court has some means to review and remedy any prejudice at the end of the day" (paragraph 151). He rejected the argument that a cross-undertaking was unjustified because the funder had not provided any specific evidence of potential losses which would be suffered by putting up security. He said that it was in the nature of business that such an opportunity cost might arise and the fact that a particular lost opportunity was not identified or quantified did not necessarily militate against protection (paragraph 148). He also rejected the objection that the provision of security for costs was simply part and parcel of a funder's business and a risk of doing business in this area. He said that whilst the provision of security for costs might be a risk which should be anticipated by a funder, it did not follow that such risk should include a business loss occasioned by the order which the court should have power to attenuate or reverse (paragraph 149).
v. GlaxoSmithKline UK Ltd [2018] 4 WLR 7, Foskett J was concerned with another case of security for costs sought from a litigation funder under CPR 25.14. At paragraph 82 he observed that on the evidence then available he had very considerable reservations about whether the funder could legitimately claim losses attributable to giving security, but he felt bound to follow In re RBS and require a cross-undertaking in damages.
v Ruhan [2020] EWHC 233 the defendant sought security for costs pursuant to CPR 25.12 from the claimant itself, a company in liquidation, not from a funder. Butcher J made security for costs conditional upon the defendant giving a cross-undertaking (and in the case of one defendant, Mr Ruhan, fortifying that undertaking). Having referred to the passage in the Commercial Court Guide, he said at paragraph 29 that:
"This seems to be an appropriate undertaking in this case. If there are additional costs of providing the security, then they would in principle be claimable under the cross-undertaking. If there are not, then, of course, nothing could be claimed, but it seems to me to be better to deal with the principle of a cross-undertaking expressed in the usual terms now rather than saying that the claimants should have liberty to come back to apply for a cross-undertaking when they know whether and what additional costs there will be."
v. Simons [2020] EWHC 2681 (Ch). This judgment was delivered between the February Judgment and June Judgment of Nugee J in this case. At the June CMC, Nugee J was referred to a digest of the decision, but a transcript was not available. We have had the benefit of seeing the transcript of Marcus Smith J's ex tempore judgment. It refers to an order for security for costs against a claimant, so presumably under CPR 25.12, but is silent as to whether the claim had the benefit of commercial litigation funding. It is not clear whether the cross-undertaking sought was in the usual form required for an interim injunction: paragraph 1 of the judgment describes the issue as whether a defendant should be required to provide "an undertaking in damages to hold the claimant harmless against the costs or loss caused by the order requiring the claimant to provide security." Marcus Smith J recorded that he had never seen an order requiring a cross-undertaking in his experience, but had been referred to the decision of Hildyard J in In re RBS. He saw two difficulties in the way of making such an order. The first was that it was extremely difficult to define the contingency which triggers the undertaking. The second was that it was extremely difficult to identify or "baseline" the consequences of the undertaking for a defendant. He expounded both points by drawing a distinction with a cross-undertaking given in return for an interlocutory injunction. As to the first he said that a defendant giving a cross-undertaking in return for an interlocutory injunction knows when he gives it that the triggering event will be a failure to secure a final injunction at trial which will mean that the interlocutory injunction was wrongly ordered; whereas even after the event it is difficult to say whether an order for security for costs has been wrongly granted. A security for costs order is justified whatever the outcome of proceedings because it simply makes provision for a contingency, namely that if a costs order is made in favour of the defendant "it should have teeth". As to the second, he said that the defendant who gives a cross-undertaking in return for an interlocutory injunction will generally have some idea of the losses he will be called upon to pay, whereas the consequences for a claimant of putting up security would be very difficult to "baseline". He asked hypothetically whether the cross-undertaking would cover the consequences of a claimant being tipped into bankruptcy, and described it as a "very open-ended and dangerous jurisdiction" which he was being asked to exercise. He concluded that whilst there was jurisdiction to require a cross-undertaking, it should only be exercised if it were clear at the time of the making of the order that there are some special and unusual circumstances which suggest that the claimant providing security requires a degree of protection over and above receiving the security back if he wins the action. He held that there was nothing out of the ordinary in the case before him and so he declined to make his order for security for costs conditional upon the defendant giving a cross-undertaking.
v Logothetis (10 December 2020). He identified the potential losses as the tying up of capital and the incurring of bank charges by the individual claimant in putting one of the corporate claimants in funds in order for the latter to obtain a bank guarantee in favour of the defendants. Having referred to Appendix 10 paragraph 5 of the Commercial Court Guide and the authorities I have cited above, he observed that the concerns of Marcus Smith J in TBD would not arise if the cross-undertaking were in the usual form, because it left it to the court to decide at a later stage whether compensation should be given if loss were caused, and the court need not concern itself when requiring the cross-undertaking as to whether the consequences might be severe: those were matters which could be determined at a later stage taking into account what was just in all the circumstances of the case. He rejected the submission that a cross-undertaking should only be required in exceptional cases and identified four factors which justified requiring one in that case. They were that there was evidence from which it was to be inferred that some loss would be suffered in putting up security for costs; that the claimants had identified some substantial assets but security was being ordered because of concerns as to whether they would be available to meet a costs order; that one of the factors leading to the ordering of security was the unwillingness of the individual claimant to provide information about his assets to defendants he was suing for fraud, which might be seen in a different light if the fraud claim succeeded; and that the case involved essentially individuals rather than large corporations, and that it was the individual claimant who would bear the cost of providing the security and ought therefore to have at least the possibility of being protected from such costs.
Issue 1: Jurisdiction
voluntarily to the court. However, in determining whether to order security for costs the court is exercising a discretion. The Rules determine the circumstances in which the court may order security and provide that it may only do so if satisfied that in all the circumstances it is in the interests of justice (CPR 25.13(1)(a) and 25.14(1)(a)). The court may determine that in the absence of a cross-undertaking it is not just to exercise the discretion to order security, but that if a cross-undertaking is given a security order is just. In such circumstances the voluntary giving of the undertaking is the price a defendant must pay in order to obtain an order for security for costs.
Ve Sanayi AS v OOO Insurance Company Chubb [2020] EWCA Civ 574 at [120] for a recent example.
v P&O Ferries Ltd [2011] 1 WLR 939 established that the power conferred by CPR 3.1(3) could only be exercised for the purposes of exerting control over the future conduct of the litigation. In my view that is to mischaracterise the decision.
"this involves a misunderstanding of rule 3.1(3), which allows the court to attach a condition to a specific order granting relief as the price of doing so. The purpose of such a condition, in his submission, is to control the future conduct of the proceedings, not to punish previous misconduct……"
"17. In both Olatawura
"18 Having said that, I think it is also necessary to recognise that rule 3.1(3) does not give the court a general power to impose conditions on one or other party whenever it happens to be making an order and if District Judge Babbington thought that it did, he was in my
Issue 2: Should a cross-undertaking be required?
The costs of funding litigation generally
civil litigation. That is so both as regards the costs of conducting the litigation, and expenses or losses incurred by reason of funding those costs, as to which the law draws a distinction.
civil claimants against the risk of being unable to recover costs of conducting the litigation.
venture. A claimant who borrows at interest incurs the cost of borrowing. A claimant who engages litigation funding will generally have to forgo a portion of the damages recovered in a successful claim to compensate the funder for the risks of the claim failing.
v RM Douglas (Roofing) Ltd (1987) NLJ 1133; (1987) 132 SJ 935 the Court of Appeal upheld the decision of a taxing master not to award as costs the "on-cost of funding disbursements during the currency of the action" based on bank overdraft interest rates. Purchas LJ said that "… by established practice and custom funding costs have never been included in the category of costs or disbursements envisaged by the statute and RSC Ord 62." In National Westminster Bank v Kotonou [2009] EWHC 3309 (Ch); [2010] 2 Costs LR 193, Briggs J, as he then was, sitting with a Chancery master and a costs judge, said at paragraph 26: "…there is a general principle that the costs of a claim do not include costs incurred by a party in seeking funding either for the prosecution or for the defence of that claim". The principle was reaffirmed and applied in this court in Motto v Trafigura [2012] 1 WLR 657: see per Lord Neuberger MR at paragraphs 104 to 108.
Civil Procedure Rules observe at paragraph 44.2.29, the jurisdiction in this respect does not derive from Rule 44.2(6)(g) as such, but from the statutory power to award interest on judgment debts contained in s. 17 of the Judgments Act 1838 and s. 34 of the County Courts Act 1984.
v McGraddie (No 2) [2015] 1 WLR 560 per Lord Neuberger PSC at paragraphs 14 and 17-19. The Access to Justice Act 1999 provided that such premiums should be recoverable. The position was largely but not wholly reversed by s. 58C of the Courts and Legal Services Act 1990, introduced by s. 46(1) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012, which restricts recoveries of such premiums to clinical negligence cases.
very least be an exceptional remedy. A cross-undertaking is only relevant in respect of losses or costs which do not constitute costs which are recoverable under the jurisdiction conferred by s. 51 of the Senior Courts Act 1981; otherwise it is unnecessary. Statute regulates the extent to which funding costs are recoverable, and the general rule is that they are not, subject only to defined and limited exceptions.
Article 6
v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123; [2007] 1 Costs LR 57 at paragraph 32:
"Nor did [Eady J] err in relation to article 6 of the Convention when he spoke in the same paragraph of "the parties' respective rights" under it. Mr Shaw submits that the only relevant right here is the claimants' right of access to the courts. But it is manifest that defendants too have entitlements under article 6, including a right not to have their access to a court rendered prohibitive by the prospect of irrecoverable costs or, as demonstrated by the judgment in Tolstoy, an entitlement to have claimants' access limited by relevant and proportionate conditions."
v Tarmac Construction Ltd [1995] 3 All ER 534, 539-540 and Kufaan Publishing Ltd v Al-Warrak Publishing Ltd (1 March 2002 unreported), as precluding the ordering of security where the claimant showed on the balance of probabilities that he would not be able to raise the sum required as security, but not where all he could show was that there was a substantial risk of being unable to do so: see paragraphs 25 and 30-31. This is what is often referred to as the stifling principle, which is of long standing. However where an order for security will not stifle a claim, in the sense explained in Al-Koronky, there is no room for a more general application of article 6 to justify imposition of a cross-undertaking on the grounds that it would trammel a claimant's access to the minimum extent necessary, or remove an economic disincentive. If the claim will be stifled by the ordering of security, no order will be made. If not, it is the defendant's article 6 rights which prevail by requiring an order to be made; and there is no justification for an additional burden to be placed on a defendant by way of a cross-undertaking which will itself impose an economic disincentive to the defendant in seeking an order for security.
v Thompson [1997] 4 All ER 362 at 374e to 375b, and in particular his statements that an individual (who is not under a disability, a bankrupt or a vexatious litigant) is entitled to untrammelled access to a court of first instance in respect of a bona fide claim, which is to be contrasted with an interest which a defendant has for security for costs. However, the issue in that case was whether the court should impose a stay of the claimant's action simply on the grounds that the claim was being funded by a third party who might not meet a costs order, in circumstances where there was no jurisdiction to order security for costs against either the claimant (who was resident in Portugal) or the funder (this being prior to the introduction of any rule equivalent to CPR 25.14). The claimant's right of access for his claim was held to trump the defendant's interest in enforcing a costs order after trial because the legislature and rule-making authority had not seen fit to provide the defendant with any entitlement to security, so that the imposition of a stay could only be justified if it were an abuse of process: see p375a-b. It was not therefore a case in which there were any access to justice considerations on the defendant's side to be taken into consideration. By contrast, in these appeals we are concerned with balancing the article 6 rights of claimants and defendants where CPR 25 specifically does grant to the defendants a right to seek security for their costs. The balance is struck by the stifling principle, as Al-Koronky explains. That determines the extent to which the claimant's article 6 rights are legitimately or illegitimately trammelled. There is nothing in that case which supports Mr Hunter's argument that article 6 should require additional protection for a claimant and an additional burden on a defendant in the form of a cross-undertaking.
The suggested analogy with interim injunctions
v Day (1882) 21 Ch D 421 at 424 in these terms:
"I will first say a few words as to the history and meaning of this kind of undertaking. It was invented by Lord Justice Knight Bruce when
v Secretary of State for Trade and Industry [1975] AC 295, Lord Diplock described the justification more broadly as being that for this "temporary and exceptional remedy" the court could not be certain that a plaintiff would succeed at trial and that if a defendant were restrained in the meantime and the claim not made out at trial he would suffer a loss without a remedy if no cross-undertaking were required: see p360G to 361C.
v International Bulk Carriers SA (The Mareva) [1975] 2 Lloyd's Rep 50. It is now reflected in paragraphs 5.1 and 5.2 of PD25A.
view it misunderstands what is meant when it is sometimes said by way of shorthand that the cross-undertaking is to compensate the defendant if it turns out that the interim injunction or freezing order was "wrongly granted". The broad justification for the cross-undertaking given by Lord Diplock indicates that what this means is simply that when the trial is concluded the interlocutory relief can be seen to have been unjustified. In the case of an interim injunction, if the defendant succeeds at trial in defeating a claim for a final injunction, the cross-undertaking will potentially be engaged because the claimant will have failed to establish the right in protection of which interim relief was granted. For the same reason, the cross-undertaking given in support of a freezing order will potentially be engaged if the claimant's claim fails at trial, because a freezing order can only be justified in protection of a claimant's right of enforcement of a judgment on a valid claim, if and when established. In each case the interlocutory order is made on an assumption that the claimant's claim is a good one, which is something which the court cannot finally determine at the interlocutory stage.
v Rickets [1993] 1 WLR 1545, Peter Gibson LJ said at p. 1554:
"This appeal raises an important point affecting the practice of the court on the enforcement of undertakings as to damages given by the successful applicant for an interlocutory injunction when subsequently the injunction is shown to have been wrongly granted. The practice of requiring an undertaking in damages from the applicant for such an injunction as the price for its grant was originated by the Court of Chancery as an adjunct to the equitable remedy of an injunction. There is an obvious risk of unfairness to a respondent against whom an interlocutory injunction is ordered at a time when the issues have not been fully determined and when usually all the facts have not been ascertained. The order might subsequently prove to have been wrongly made but in the meantime the respondent by reason of compliance with the injunction may have suffered serious loss from which he will not be compensated by the relief sought in the proceedings. The risk of such injustice is the greater when the interlocutory injunction has been granted ex parte. The risk is particularly great with Mareva injunctions, granted as they are almost invariably ex parte, and frequently imposing severe restrictions on the respondents' right to spend their money or otherwise dispose of their assets: such injunctions can have the effect of ruining a thriving business or of otherwise causing substantial loss to the respondent and were
civil litigation, which arises as part of the fair procedural management of claims. It is this which makes the analogy which the Funded Stewarts Claimants seek to draw a false one. It is true that, as they submit, an order for security for costs will often operate to restrain the claimant from enjoyment of its assets in the sense that any order which causes a party to incur an expense impairs his ability to enjoy the assets which are used or forgone in order to meet the expenditure. But this is not the purpose of the order, and is no different in its effect from any case management order which requires a party to incur expenditure.
Practical considerations
very substantial satellite litigation. A recent example is Fiona Trust and Holding Company v Privalov [2014] EWHC 3102 (Comm); [2016] EWHC 2163 (Comm); [2016] EWHC 2451 (Comm); [2016] EWHC 2657 (Comm), in which issues in relation to the inquiry took over 10 days to hear and the defendants' costs were of the order of £3m. If cross-undertakings as a condition for security for costs were to become the norm, there would likely be a substantial increase in such satellite litigation.
v Hone (No 3) [2015] Ch 309. This is an unwarranted tilting of the balance of the article 6 rights of access to justice established in Al-Koronky and the cases there cited.
Litigation funders
Ventures LLC v Texas Keystone Inc (No 2) [2017] 1 WLR 2221 that the costs incurred by a litigation funder in providing a claimant with the money to put up security for costs are not to be treated any differently from any other costs incurred by the funder in funding the other costs of litigation: see per Tomlinson LJ at paragraphs 32 to 48. Far from the costs of putting up security being treated as an exception to the costs of funding litigation generally, they are to be treated in the same way. They are irrecoverable as costs save to the extent permitted by the statutory exceptions, and there is no principled distinction to be drawn with other costs of funding litigation which would justify them being recoverable by means of a cross-undertaking when other funding costs are not.
v Texas Keystone, commercial funders are not motivated by considerations of access to justice, although the facilitation of access to justice may be an incidental by-product. The commercial funder is an investor who hopes to make a return on his investment. The return is a multiple of his funding obtained from the proceeds of a successful claim. The investment is the cost of funding the claim. If funding the pursuit of the claim requires security for costs to be provided, that is a normal and foreseeable aspect of the investment being made, and the funder can be expected to include it in his business model in determining the terms on which funding is provided.
Civil Litigation Costs: Final Report. It was his initial view that the capital adequacy of third party funder was a matter of such pre-eminent importance that it should be the subject of statutory regulation; but ultimately, in light of the (then) low-volume of third party funding, and with some hesitation, he considered that capital adequacy requirements could be dealt with by tightening the funders' self-regulatory code which was then in draft: see Chapter 11 paragraphs 3.1 to 3.4 of the Report.
very long or detailed document. Under the Code, members of the ALF accept responsibility - but only to the ALF - to ensure that they (or their parent or subsidiary) have capacity to meet their debts when they become due; to maintain a minimum amount of capital; to comply with a continuous disclosure obligation in respect of their capital adequacy (but only to the ALF and their clients); and to provide annual audit information (again, only to the ALF).
volunteer to join the ALF), to ensure that they are set up, operated and capitalised properly such that they can meet their potential obligations so that security for costs is simply not required from them. 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 (for example, where the funder is inadequately capitalised, or not transparent as to its financial standing, or is unwilling to provide defendants with an undertaking that it will meet their costs). Funders who choose to conduct their businesses in these sorts of ways, and who seek to recover the cost of putting in place security by charging their funded clients a multiple of the amount of the cash that they are ordered to put up, can be expected rapidly to lose market share to those funders who are properly capitalised (and demonstrably so) from the outset. If, on the other hand, commercial funders are potentially able to recover the costs of putting in place adequate security from defendants, this would create a positive incentive for funders to be deliberately reticent about their financial means, to retain less capital and obtain less ATE, since it would enable them – through the machinery of a cross-undertaking – to pass on to defendants part of the cost of capital of their own business and/or to maximise their profits in the process. That would be at odds with the policy goals elucidated by Sir Rupert Jackson, whose Report not only emphasised the importance of ensuring that third party funders satisfy capital adequacy requirements, but also observed at paragraph 1.2(iii) of Chapter 11 that one of the benefits of third party funding is that "the use of third party funding…does not impose additional financial burdens upon opposing parties."
Conclusion on Issue 2
hold that it should only be in a rare and exceptional case that the court should require a cross-undertaking in favour of a claimant as a condition of ordering security for costs, and only in even rarer and more exceptional cases that it should do so in favour of commercial litigation funders. There are no such rare and exceptional circumstances in the present case. Nor were there, so far as revealed by the reports, in In Re RBS, Bailey, Hotel Portfolio II or Pisante, which should no longer be followed.
Civil Procedure Rules Committee of its potential effect on civil litigation in a wider context than that which arises in the current appeals. That applies with particular force in light of the rival arguments in this case as to the beneficial or adverse effect of such a practice on litigation funding and access to justice.
Disposal
view, Nugee J was correct to refuse to require a cross-undertaking in the February Order, albeit for different reasons from those he gave; and that he fell into error in requiring the cross-undertaking in the July Order. That renders it unnecessary to address Issues 3 or 4.
Lord Justice Henderson :
Lord Justice Floyd :