In a shift from a line of first instance decisions, the recent Court of Appeal decision in Rowe & Ors v Ingenious Media Holdings PLC & Ors  EWCA Civ 29 (Rowe) has narrowed the circumstances in which a defendant may be required to provide cross-undertakings in damages as a condition of an order for security for costs to “rare and exceptional” cases. Where the claimants are funded by a commercial litigation funder, the Court of Appeal narrowed the circumstances yet further to “even rarer and more exceptional” cases.
Background facts and law
Rowe involved a group of claimants who had received litigation funding from a provider called Therium to pursue claims relating to tax arrangements in film financing. The claimants’ funding agreement specified that Therium would fund the security for costs, if ordered, and that, if the underlying claims were successful, Therium would receive an enhanced return payment at 2.5x the value of any security they had put up.
In response to applications seeking security for costs against Therium, the claimants argued that if security for costs were granted, the defendants should provide a cross-undertaking in damages for any losses suffered by Therium and the claimants as a consequence of that order. The claimants maintained that this cross-undertaking should cover the enhanced return. At first instance the court held that:
- Therium was to provide security for costs but as the enhanced return amounted to a reallocation of the recoveries between the claimants and Therium, it should not be underwritten by the security defendants; and
- The security defendants were required to provide a cross-undertaking as a condition for the security for costs, but only in relation to the “external costs” of borrowing the funds, such as costs associated with securing ATE cover.
Court of Appeal decision
The first instance court’s decision was appealed by both the Therium-funded claimants and the defendants. The Court of Appeal allowed the defendants’ cross-appeal by not requiring a cross-undertaking while the panel dismissed the claimants’ appeal on security being limited to external costs only.
In doing so, the Court rejected the claimants’ argument that a cross-undertaking in damages should usually be provided as a condition for security for costs, instead holding that this should “at the very least be an exceptional remedy” to be applied only in “rare and exceptional” circumstances. Cross-undertakings being required as a matter of course would have unsatisfactory effects on litigation, including increased costs and time spent on security applications and associated satellite litigation. Crucially, defendants could also be discouraged from seeking security for costs for fear of being required to assume an unquantifiable liability in return.
Referring to the following three factors, the Court determined that only in “rarer and more exceptional” cases should a cross-undertaking be granted in favour of commercial litigation funders:
- The funds that litigation funders provide for security for costs should not be treated differently from other costs incurred in the course of funding the litigation, which are generally irrecoverable.
- The funder’s investment model should account for the requirement to provide security for costs as part of the “normal and foreseeable” costs of funding claims.
- As litigation funders should be properly capitalised and in a position to meet an adverse costs order if the claim fails, there should normally be no need for a properly run funder to be ordered to put up security.
- It will only be in “rare and exceptional” circumstances that defendants would be required to provide a cross-undertaking in damages, a high threshold that will be difficult for funders or claimants to meet. Rowe indicates that situations such as those found in In re RBS Rights Issue Litigation  1 WLR 4635 will not meet the “rare and exceptional” standard.
- Cross-undertakings will be even less likely to be required where litigation funders are involved.
- Litigation funders will need to ensure their business models account for the ability to fund security for costs orders as ordinary costs in the litigation.
- Defendants should feel less concerned about the risk of significant cross-undertakings being imposed if they seek a security for costs order.
With thanks to Cole Chase for his assistance with this article.