As the market for litigation finance continues to boom, courts have been busy with the technical issues it throws up between the parties to disputes.

Three recent decisions on security for costs, where claimants are funded by a third party and/or have the benefit of After the Event Insurance (ATE), include analysis of when security may be ordered against non-party funders, and whether ATE Policies can provide adequate security.

RBS Rights Issue Litigation

A defendant may suspect that a claim is being funded by a third party, but there is no obligation on the part of a claimant to tell the defendant that it has outside funding. In the RBS Rights Issue Litigation, RBS obtained a court order in March this year for disclosure by the claimants of identity of those funding the remaining claimants – a large proportion of them having settled in December 2016. The application was posited on an anticipated application for security for costs against the funder. It was granted – see our Resolve article on the decision here.

The RBS Rights Issue Litigation [2017] EWHC 1217 (Ch) was RBS' later application against the funders whose identity had been disclosed to them. Hildyard J granted only one, of two, applications for security for costs against the funders made shortly before the trial was due to start. The respondents opposed them on the grounds that they were brought late, as well as challenging their merits.

The decision shows some of the factors the court may regard as relevant when exercising its discretion under CPR 25.14 (1) and Section 51 Senior Courts Act 1981.

The judge noted that an order for security would only be appropriate where there was a real, not merely a fanciful, risk that a costs award in the defendant's favour would go unsatisfied. Here the claimants had the benefit of a Group Litigation Order, which provided that they would be severally and not jointly liable for the defendants' costs. That meant that, to recover any costs to which they became entitled after trial, the defendants would have to enforce a small proportion of an overall costs award against each claimant separately: as the judge put it, they would "inevitably be put to exceptional difficulty in enforcing any costs order in their favour".

Of a list of factors which the judge regarded as potentially relevant, the most important was the reason and motivation for the funder's involvement. Was the funder involved simply for a commercial return, or were there other reasons? Here public policy has a role. Where the motive is simply commercial "the policy is likely to be to visit the consequences and costs …on the "adventurer"", the judge said. Where a funder supports a claim for altruistic reasons, where the claimant "could not otherwise vindicate its position in a genuine case", policy may favour facilitating the funding of such claims. So it was in this case: an order for security for costs was made against the commercial funder, Hunnewell. By contrast, LNCP, a company owned or associated with a well-known philanthropist, and itself a claimant in the proceedings, was not to be treated as a commercial funder, and escaped an order for security being made against it.

On the quantum of security to be provided, Hildyard J noted that the extraordinary and 'unparalleled' amount of costs incurred, particularly by the defendants, and the vast difference between the claimants' costs to date and those incurred by the defendants, would make it difficult for the claimants to obtain sufficient ATE policy cover. Any order for security would not exceed a potential costs award in the defendant's favour - there would therefore be no 'surplus' security.

Hildyard J's decision shows the importance of determining each case on its own facts in reaching a view as to whether it would be just to order security against a funder.

ATE policies as security for costs

Harlequin

In 2015, the court in Harlequin Property (SVG) Ltd and another v Wilkins Kennedy (a firm) [2015] EWHC 1122 (TCC) considered whether a claimant's ATE insurance policy could provide adequate security for costs. It held that security could be provided by a claimant by means other than the usual payment into the court or bank guarantee and, depending on the terms, an ATE insurance policy may be adequate. But if the defendant can point to specific policy provisions which could reduce or obliterate the value of the security, the ATE policy may not be adequate. Such concerns must, though, be realistic, not theoretical or fanciful.

Harlequin highlighted the principal difficulty for defendants seeking security for costs who are offered ATE insurance policies as security: they are not parties to the policy. If there is a real threat of insolvency proceedings against the party with the benefit of the ATE policy, the policy proceeds may end up in the general "pot" for unsecured creditors; the scenario is even more challenging where those insolvency proceedings may be brought in another jurisdiction. The judge in Harlequin was alive to these concerns and as a result did not consider that the ATE insurance policy in that case would provide adequate security, but he encouraged the parties to explore the possibility of the claimants offering the defendants a deed of indemnity.

Catalyst

In March 2017, the court again looked at whether a particular ATE insurance policy would constitute adequate security and again held that it wouldn't. In Catalyst Managerial Services v Libya Africa Investment Portfolio [2017] HC 1236 (Comm) (unrep) it was held that that the ATE policy in question was not reasonably satisfactory: the proceeds might not be available to the defendant in the event of the claimant's insolvency; moreover there were allegations of fraud by the claimant which might lead to avoidance of the policy.

Teare J explained in Catalyst that, as the claimant company had already failed to show it had sufficient funds to resist the security for costs application, there was a real, and not fanciful risk of insolvency. On insolvency the policy proceeds would go to unsecured creditors and not to pay the defendant's costs, rendering it valueless to the defendants. This risk was also exacerbated as the ATE policy wording specifically excluded the Contracts (Rights of Third Parties) Act 1999. ((The Third Parties (Rights Against Insurers) Act 2010 was redundant as the company was incorporated outside of the UK.)

Newwatch

Newwatch v Bennett [2016] EWHC 3506 (Comm), is another unreported decision, which appears to have turned on similar facts to those in Catalyst. It again reminds us that an ATE insurance policy may not be sufficient for security for costs, whether in terms of scope, amount of cover, risk of avoidance or the diversion of proceeds. In Newwatch the claimant companies were foreign (based in Denmark and Jersey) and there were allegations against them of illegality and fraud, which could lead to exclusion of liability under the ATE policies, which were in any event worth less than the defendants' likely costs. So the judge ordered the claimants to provide security themselves.

Conclusion

Pleaded allegations of fraud (which, if upheld at trial would usually trigger a policy exclusion), or evidence of imminent insolvency, are particular pressure points for claimants attempting to rely on ATE policies as security for costs.

With reports of litigation funding having expanded four-fold in value invested between 2013 and 2016, these decisions are useful for insured or funded claimants, and for defendants seeking security for costs where litigation funding plays a role.