The Court of Appeal refuses to grant cross-undertakings for security for costs

The first issue considered was whether the court had jurisdiction to require a defendant to provide a cross-undertaking in damages as a condition of ordering security for costs in its favour.  Popplewell LJ held that the passage that had been in the Commercial Court Guide for over 20 years assumed that the court had such jurisdiction, as does previous case law.

The court's jurisdiction lay both in the discretionary nature of an order for security under CPR25 and in the express terms of CPR 3.1. The following reasoning was provided for this assessment:

1. An undertaking is something which can only be given voluntarily to the court. However, in determining whether to order security for costs, the court is exercising a discretion.  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.
2. There are many cases, for example anti-suit injunctions, in which relief has only been granted by the court on condition that the applicant has undertaken to do something or refrain from doing something in terms which the court could not itself have ordered.
3. CPR 3.1(3)(a) provides that, when the court takes a step or makes an order of the type enumerated in CPR 3.1(2), it may make it subject to conditions.
4. The power in CPR 3.1(3) is not confined to cases where the condition is designed to exercise control over a person's future conduct of the litigation. The power may properly be exercised to impose a condition of specific relief being granted, as a price for granting it. As such, seeking to attach the condition of a cross-undertaking to a specific order for security for costs as the price for the grant of such order, falls squarely within the scope of CPR 3.1(3).

The second issue considered by the court was whether a cross-undertaking in damages  should be required as a condition of ordering security in favour of a litigation funder and, if so, in what circumstances.

The costs of funding litigation generally

The Funded Claimant's overarching argument was that 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 third party may suffer loss as a consequence of the order.

In considering this, Popplewell LJ noted that, generally, claimants are not insulated from having to bear costs or losses as a result of pursuing claims in civil litigation, whether those are costs of conducting the litigation, or expenses or losses incurred by reason of funding those costs.

A cross-undertaking of the type in issue involved reallocating the risk for a loss caused by one aspect of litigation, namely the funding of putting up security for costs. Popplewell LJ noted that this was, itself, an exceptional departure from the general practice that the funding costs or losses lie where they fall. 

Popplewell LJ said that he would therefore require "cogent and compelling reasons" for what would amount to a significant departure from established principles on the recoverability of costs or losses incurred in funding litigation before he could accept the Funded Claimants argument that a cross-undertaking should be the usual requirement as a condition for an order for security for costs.

Article 6 of ECHR

The Funded Claimants sought support for their argument by arguing that the principle that a claimant's right of access to justice under Article 6 of the European Convention on Human Rights ("ECHR") should be trammelled to the least extent which is proportionate and necessary.

Popplewell LJ held that there was nothing in Article 6 of ECHR that pointed to a different approach. If the claim would be stifled by ordering security, no order would be made. If not, it was the defendants' Article 6 rights which prevailed requiring an order to be made.

The suggested analogy with interim injunctions

The Funded Claimants compared the position to an interim injunction or freezing order, where a cross-undertaking, is almost invariably required because an order for security operates as a restraint on the use of assets in the same way. However, Popplewell LJ outlined the following distinctions between the two:

1. An interim injunction or freezing order was an exceptional remedy, the purpose of which was to restrain the defendant's use of their assets.
2. An order for security for costs was aimed solely at the costs of litigation and was an ordinary incident of the process of civil litigation, arising as part of the fair procedural management of claims.

Practical Considerations

Popplewell LJ also outlined that the following would be unsatisfactory practical effects if cross-undertakings were required in most cases concerning security for costs:

1. A significant increase in inquiries into damages under cross-undertakings.
2. An increase in the scope, time and costs of security applications.
3. Defendants would be discouraged from seeking security by the fact that they were undertaking "an open ended and unquantifiable liability", which was an unwarranted tilting of the balance of the Article 6 rights of access.

Litigation Funders

In the final paragraphs of his judgment, Popplewell LJ made specific observations in respect of claims when the claimant has the benefit of commercial litigation funding:

1. The costs incurred by a litigation funder in providing a claimant with the money to put up security for costs were not to be treated any differently from any other costs incurred by the funder in funding the costs of litigation. They were irrecoverable as costs, save to the extent permitted by the statutory exceptions.
2. Commercial funders were not motivated by considerations of access to justice, although facilitating access to justice might be "an incidental by-product". Commercial funders were investors who hoped to make a return on their investment.
3. Commercial funders ought to be properly capitalised, in order to meet an adverse costs order, if the claim failed. Therefore, they should be in a position to defeat any security application by demonstrating an ability to meet an adverse costs order.