The Court of Appeal's decision in Rowe and others v Ingenious Media Holdings plc and others  EWCA Civ 29 gives guidance on the court's jurisdiction to order a defendant to provide a cross-undertaking in damages as a condition for granting security for costs. The case also considers the position when a third party litigation funder is involved.
The Court of Appeal partly overturned the decision of Mr Justice Nugee when it unanimously ruled that, when ordering security for costs, it is only in "rare and exceptional" cases that the court should require the applicant to give a cross-undertaking in damages in the claimant's favour and even rarer and more exceptional circumstances must be present in the case of third party litigation funders. It found that no such circumstances were present in this case. The Court of Appeal also identified a number of previous authorities, in which cross-undertakings were ordered, which should no longer be followed.
In light of the growing involvement of commercial litigation funders in financial services litigation, further guidance and clarity on this issue is welcome. However, the narrow scope identified by the Court of Appeal will be of little comfort to claimants and commercial litigation funders alike. It will, therefore, be interesting to see just what constitutes such "rare an exceptional" circumstances as to require a cross-undertaking as a condition for granting security.
Background to the Appeals
The appeals arose out of on-going litigation involving over 500 claimants pursuing various actions in respect of film financing and video game investment schemes, promoted as tax efficient and operating between 2002 and 2007. Therium is funding a cohort of Claimants, represented by Stewarts Law LLP (the "Funded Claimants") and it is this cohort of Claimants that are directly relevant to the appeals.
Mishcon de Reya LLP represents a separate cohort of 113 Claimants who have brought claims against the Ingenious Defendants only. These Claimants are funded by Harbour Fund III LLP and arrangements for the provision of security were agreed between Harbour and the Ingenious Defendants without the need for a court decision. Harbour agreed that it would offer a direct indemnity, up to the 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. The appeals concerned an application made by Ingenious, HSBC, UBS and a firm of accountants (together the "Security Defendants") for security for costs against Therium under CPR25.14. Whilst the Funded Claimants and Therium resisted the application, they agreed the terms governing the treatment of any security in the event that Therium would be ordered to provide it. It was agreed that Therium would fund the security for costs, and the additional costs of providing such security, unless there had been a material adverse decline in the merits of the claim or its commercial viability. If the Funded Claimants succeeded in their claims, they would be liable to pay Therium the security costs, plus an "Enhanced Return" i.e. a sum representing two and a half times the security for costs to be paid out of any damages recovered in the litigation in accordance with the waterfall arrangements in the litigation funding agreements.
The Funded Claimants resisted the applications for security for costs. However, relying on paragraph 5 of Appendix 10 of the Commercial Court Guide they argued that, in the alternative, if security was ordered, it should be on the basis that the Security Defendants provide a cross-undertaking in damages in respect of any losses suffered by the Funded Claimants and/or Therium, including the Enhanced Return.
- In February 2020, Nugee J held that Therium should provide security for costs. He did not allow the cross-undertaking on the basis that the Enhanced Return was not something that should be underwritten by the Defendants. The Judge refused permission to appeal.
- The Funded Claimants sought permission to appeal from the Court of Appeal and this was granted by Lewison LJ on 12 June 2020.
- In light of Nugee J's comments in February, the Funded Claimants asked the Security Defendants to provide a cross-undertaking in relation to certain external costs associated with providing the security, namely the brokerage and insurers' fees for bonding the existing ATE policies. This was subsequently ordered by Nugee J in July 2020 as a condition of Therium providing security. The Security Defendants were granted permission to appeal.
- The orders of Nugee J therefore resulted in two appeals to the Court of Appeal.
Issue 1 – Jurisdiction
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:
- 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.
- 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.
- 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.
- 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).
Issue 2 – Should a cross-undertaking be required?
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:
- An interim injunction or freezing order was an exceptional remedy, the purpose of which was to restrain the defendant's use of their assets.
- 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.
Popplewell LJ also outlined that the following would be unsatisfactory practical effects if cross-undertakings were required in most cases concerning security for costs:
- A significant increase in inquiries into damages under cross-undertakings.
- An increase in the scope, time and costs of security applications.
- 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.
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:
- 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.
- 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.
- 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.
Popplewell LJ concluded that it should only be in "rare and exceptional cases" that the court should require a cross-undertaking in damages in favour of a claimant as a condition of ordering security for costs, and only in even rarer and more exceptional cases should it do so in favour of commercial litigation funders. The appeal of the Funded Claimants was dismissed and the cross-appeal of the Security Defendants allowed.
It was also held that no such rare and exceptional circumstances existed in the previous authorities of re RBS Rights Issue Litigation  1 WLR 4635, Bailey v. GlaxoSmithKline UK Ltd  4 WLR 7, Hotel Portfolio II v Ruhan  7 WLUK 340 or Pisante v Logothetis (10 December 2020) and those decisions should no longer be followed.
Whilst this judgment provides authoritative guidance on the court's jurisdiction to order a defendant seeking security for costs to provide a cross-undertaking in damages as a condition for granting security, it remains unclear just what would constitute "rare and exceptional" circumstances. Interestingly, in the closing paragraphs of the judgment, Popplewell LJ suggested that if there is to be any new practice on the application of cross-undertakings in the context of security for costs applications, it would be preferable for this to be addressed by primary or delegated legislations, rather than by judicial decision. As such, there may yet be further developments in this area.