Litigation funders and after the event (ATE) insurers will be carefully reviewing a judgment delivered by Nugee J in the Rowe and others v Ingenious Media litigation because it will affect a number of group claims which, by their nature, rely on funders and ATE to proceed.
The judgment highlights that the court has power under CPR 25.14 to order security for costs against a third party if they have contributed to the costs in return for a share of the proceedings. It also reminds us that should claims fail, the court has the discretion under section 51 of the Senior Courts Act 1981 to order adverse costs against a third party that controls or benefits from the proceedings.
Here, the defendants successfully applied for security for costs against the litigation funder (approximately £4 million) although, importantly, the security order against the funder was limited only to the costs risk of the claimants they were actually funding. This clarifies that the order against a funder for security will not take into account the adverse costs flowing from self-funding members of a group, even though they could only bring their action with the presence of the funded claimants.
In this instance, the order was made because there was both:
- Insufficient ATE insurance:
- “… a real, and not a fanciful risk” that the approximately £7 million policy of ATE insurance in place would not respond, or at least not respond in full.
The first point highlights just how much the question of whether a funder will be expected to provide security will depend on the ATE insurance market. The problem is that insurance capacity is not always available for a variety of reasons, and funders generally commit to fund group cases at a stage where they have not fully appreciated the scale of the adverse costs liability; a potential liability the defendants have every incentive to inflate in group claims in order to disrupt the funding arrangements. The natural conclusion is that funders will be more hesitant to commit without assurances on the availability of insurance at an earlier stage.
Regarding the second point, the insurers had made some modifications to the policies to reduce the risk that a breach of the terms and conditions could lead to a claim being denied, but there was no deed of indemnity or similar instrument to provide a guaranteed payment direct to the defendants. The court was also mindful that the ATE policies covered non-funded claimants (and so the entirety of the indemnity under the ATE policies would not be available to meet the claims of the defendants seeking security) and that some of the polices extended to claims against a number of other defendants not involved in the application. This would have been an issue even if there was a deed of indemnity. This means that even if a case attracts insurance from international grade insurers prepared to offer robust anti-avoidance mechanisms or deeds of indemnity to cover the defendants making the application, the funder may still not avoid such an order if there simply isn’t enough cover to cater for all the defendants.
In light of the above, the court was faced with the question of whether it should ignore the existence of the ATE policies completely, or give some credit for them. In what will be seen as a practical approach by the court, the decision was made to give substantial credit to the policies, thereby reducing the level of security ordered. This is an important approach because is not uncommon in group litigation claims for there to be several defendants who may not be party to an application for security.
The court appears to be inviting ATE insurers to provide products that are better suited to cope with security for costs by making them more “defendant friendly”. The judge’s comments will draw a reaction from some insurers who be exercised by the notion that it should be deemed their responsibility to provide a solution to security for costs in the first place. Others will point to the fact that they already provide stringent anti-avoidance modifications to deal with security for costs that would have obviated the need for the order against the funder. Others will use the comments as a chance to design products that meet the standards the court require, to gain a competitive advantage to attract group claims and funders to their offering.
The judgment will also sound as a warning to litigation funders that they will be increasingly expected to disclose details about their financial assets to the court should they want to minimise an order for security against them. However, the court did recognise that a cross-undertaking in damages in favour the funder might be appropriate where there are external costs incurred for providing the security.
In another interesting facet of the judgment, the claimants successfully applied to make their liability for adverse costs several (rather than joint), so that each of the claimants’ individual liability was pro-rated to their potential share of the claim. The court’s approach here removes the risk that some claimants with assets will face disproportionate risk of enforcement by the defendants in the event they are exposed to costs. This will be encouraging for those seeking to build new claimant groups where the claimants are really a series of individual claims that are grouped for all parties’ convenience.
This judgment covered a lot of ground and the clarity it provides will be welcomed, albeit it will be seen by many as a mixed outcome for those seeking to promote or fund group claims. In a sense, it has lowered the bar with the several liability point and the approach the court took to crediting some of the ATE policy. However, this will only help cases that have the economic headroom to cope with a funder providing the security, which one assumes will be at a rate of return which would be far greater than a commercial ATE insurance policy.