As we have discussed, the growth of collective claims in the UK, often backed by third party litigation funding, is likely to continue. The costs of litigation and the risk of being ordered to bear the other side's costs are important considerations in all disputes, but have particular strategic implications in collective actions.
The High Court's recent costs decision in relation to the Lloyds/HBOS litigation is a useful reminder of the treatment of costs in English group action proceedings and that, notwithstanding the growth of third party funding and insurance against liability for costs, claimants who choose to participate in group actions cannot safely assume that they litigate without any costs risk.
Costs in collective litigation
The general principle1 in English litigation is that "the loser pays the winner's costs" and those costs will include the lawyers' fees, expert witnesses' fees and the various other costs often incurred in large scale litigation. That principle can be contrasted with the USA model where each party generally bears its own costs, regardless of the outcome of the litigation.
It remains the case that collective litigation in England is usually conducted on an opt-in basis, meaning that the individual claimants have to elect to participate in the claim. The landscape in which such litigation is conducted in England has changed significantly in recent years, with the growth of a variety of tools to manage both the claimants' own costs and the risk of being ordered to pay the defendant's costs:
- conditional fee arrangements ("CFAs") – often referred to as "no win no fee" agreements, but can involve the claimants' legal representatives charging on a discounted basis with a right to an uplift if the case is successful;
- damages-based agreements ("DBAs") – where the legal representatives do not charge on an ongoing basis, but are paid a percentage of the proceeds of the claim;
- third party funding – now an established method of funding collective actions and has undoubtedly contributed to the rise of such actions; and
- after the event insurance and other forms of adverse costs protection – to protect claimants from the consequences of being ordered to pay the defendants' costs, although as the Lloyds/HBOS litigation shows, claimants need to be satisfied that the available cover is sufficient to cover what might be very substantial defence costs.
Although the use of these tools is not limited to collective litigation, the viability of a collective claim will often depend on those seeking to get a claim off the ground being able to persuade potential claimants that they can join at little or no cost, and that they will be protected from the risk of having to meet any adverse costs order from their own pocket.
Where litigation is conducted under a Group Litigation Order ("GLO"), costs are typically categorised as "common costs" and "individual costs".
The "common costs" category covers those costs which relate to issues which are common to the claimants. In cases such as the Lloyds/HBOS litigation, where the central issue concerned information provided to shareholders generally, the vast majority of the costs will fall into this category. The usual practice is for common costs to be divided between the claimants, with each being severally liable for its own share of the common costs (rather than jointly liable for the whole). The appropriate division between the claimants will depend on the nature of the case; for example, if ten shareholders bring a claim, nine of whom are retail investors with small holdings and the other is a substantial investor, it is likely to be more appropriate to divide the common costs on the basis of relative shareholdings, rather than a simple ten way split. This was the approach taken in the GLO granted in the Lloyds/HBOS litigation (see further below).
The "individual costs" category covers those costs that relate to a particular claimant.In some cases, once the common issues have been resolved, there will be very little that needs to be determined on an individual basis. There are other cases, such as group actions where a number of individuals claim to have been injured by an allegedly defective product, where the individual circumstances of each claimant will be significant.
Sharp v Blank2
With that context in mind, we turn to the long-running Lloyds/HBOS litigation.
The background to the case is well known.In brief, approximately 5,800 shareholders (or former shareholders) in Lloyds Banking Group Plc3, commenced litigation against the bank and five former directors in relation to the acquisition of HBOS in 2008, and the UK Government's recapitalisation of the merged entity. The litigation was conducted under a GLO, which was granted by the High Court in August 2014.
The claimants alleged breaches by the defendants of duties with regard to the (in)sufficiency of the information provided to the shareholders regarding the risks of acquiring HBOS (including the fact that it was a recipient of Emergency Liquidity Assistance from the Bank of England), and of the duty to exercise due care and skill in the recommendation made to the shareholders to vote in favour of the acquisition.
The High Court ruled, in November 2019, that the directors had not breached their duties in recommending the acquisition. The directors should, however, have disclosed to the shareholders the Bank of England's funding assistance (i.e. the existence and use of the Emergency Liquidity Assistance facility), although the Court found that, even had they done so, the shareholders would have approved the takeover in any event.
In summary, while the claimants prevailed in respect of one – as it turned out, inconsequential – point, the defendants were the overall winners in the litigation, and the claimant group were the overall losers.
The GLO provided that the liability of each claimant to the defendants should be several, and that an individual claimant's liability for the defendants' common costs incurred in any quarter would be its share of those costs proportionate to the alleged value of each claimant's claim as against the overall alleged value of the claims. This meant that each claimant's proportionate share would be affected as other claimants joined or left the group.
The claimants had the benefit of both ATE insurance, up to a maximum of £6.5 million, and a deed of indemnity from a third party commercial funder, Therium4, in respect of amounts over £6.5 million, with the claimants having openly stated that they had no concerns over Therium's ability to satisfy that indemnity. Therium had excess layers insurance cover in respect of its liability under the deed of indemnity up to a maximum of £14.95 million, giving combined cover of approximately £21.45 million, albeit, according to the Court, even "this level of cover [was] affected by the insolvency of some of the insurers".However, the defendants' overall costs claim exceeded £30 million, so the judge saw what he described as a "most regrettable" risk that individual claimants might face a several liability for costs to the extent that those costs overtopped the direct ATE cover.
The costs order
Following the substantive judgment in November 2109, a further hearing took place in January 2020 in respect of consequential matters, including how costs should be dealt with. The defendants' position was that the "general rule"5 should be applied, meaning that the claimants should be ordered to pay the defendants' costs. The claimants submitted that a "different order"6 should be made, arguing that they should only be required to pay 65% of the defendants' costs, on the basis that they had succeeded on part of their case.
The Court rejected the claimants' submissions, on the basis that:
- Costs should be determined by reference to overall success in the litigation; a successful party would often not succeed in respect of every aspect of its case (as was the case here);
- There was no reason why a party who succeeded on one element of its case but failed on another should be regarded as partially successful: in the present case, while the claimants had prevailed in establishing that the directors had breached their duties by not informing the shareholders of the funding arrangements, they had failed to establish that this was causative of any loss; indeed, given the breadth of the claimants' attack on the transaction in question, "the degree of success was small" and was "achieved on a fine balance"; and
- In order for the Court to depart from the general rule on costs and single out an issue for separate costs treatment, there needed to be some objective ground, other than failure on that issue, which distinguished it; that distinctive ground could relate to the comparative weakness of an argument, or the necessity for evidence or extensive legal argument relevant only to that issue; these factors were missing here.
In summary, the Court held that this was a case in which the "general rule should apply, and costs should follow the event", so the claimants were ordered to pay the defendants' costs, to be assessed on the standard basis if the amount payable could not be agreed between the parties.
But what did this mean for the individual claimants?
The Court noted that the claimants might not have foreseen that its decision on costs would affect the claimants individually, because they thought that they were litigating risk free. But the judge considered that the level of the defendants' costs relative to the extent of the costs protection obtained on behalf of the claimants meant that this was "most unfortunately" not the case.
In anticipation that they might have to look directly to the claimants to recover their costs, the defendants invited the Court to define the class of claimants liable for costs as those who were on the GLO register at the conclusion of the hearing. This would have avoided the need to apportion the costs incurred each quarter, based on the claimants on the GLO register at the start of that quarter. The Court accepted that carrying out this apportionment would be a very burdensome task, but was not prepared to depart from the sharing of costs liability set out in the GLO.
However, the Court did leave the door open to this being revisited, if the nature and extent of the claimants' records made the task impossible, and granted permission for either side to apply to the Court for assistance in determining the share borne by each claimant.
It was common ground that an order for an interim payment on account of costs was appropriate, with the issue for the court being whether it should include 100% of the defendants' budgeted costs (the claimants argued that it should only include 80% of the budgeted costs).
The Court said that a budget arrived at through the costs management process reflected a detailed estimation process, which therefore afforded a large degree of certainty as to what the likely costs recovery would be for the phases of the litigation within the scope of the budget, but it did not completely eliminate the possibility of an error in estimating the costs that a party might reasonably incur.
The interim payment was set at £17 million, reflecting 50% of the defendants' pre-budget incurred costs and 90% of the budgeted costs and VAT thereon.
Third party costs order
Therium, who had been joined as an additional party for the purposes of the costs proceedings, accepted that as a commercial funder it was in principle liable to pay costs awarded against the claimants, but argued that it should only be liable (i) to the extent that the claimants did not themselves satisfy the costs order; and (ii) to the extent of the funding that it actually provided – the so-called "Arkin cap".
The Court dealt with the second point first.It considered the high-profile Court of Appeal decision in Davey v Money7, which was handed down during the period between the Lloyds/HBOS costs hearing and judgment. The Court of Appeal had clarified that the "Arkin cap" which had been thought generally to limit third party funders' liability for costs to the extent of their funding, was not a binding rule, but simply guidance given to individual judges when exercising their discretion in relation to third party costs orders.
The information before the Court indicated that Therium had funded costs of £17 million plus the premiums on the excess layers insurance, so the judge noted that even if the Arkin cap were to be applied the interim payment on account of costs would not reach the cap (but he nonetheless granted permission to apply as a "failsafe"). The extent of Therium's costs liability to the defendants beyond £17 million (i.e. whether or not the Arkin cap should be applied) was adjourned for further consideration.
The Court saw no reason in principle why Therium's liability should be secondary, and not simply joint and several with that of the claimants.
What are the implications of these developments?
The costs decision in this high-profile litigation is likely to be consequential in the wider context of collective litigation.
For a start, big ticket collective litigation, whether in the context of shareholder disputes, competition infringements, data breach cases, or any other field, will often result in certain issues being determined in favour of one side, and certain issues being determined in favour of the other side. As this decision reminds us, the key concept for costs purposes is which side should be considered the "overall winner".
Such litigation is usually, by its nature, expensive; the downside risks to prospective claimants may have been reduced and even potentially removed in recent years by the increased involvement of commercial litigation funders and insurers. That dynamic has, in turn, contributed to the appetite of prospective claimants to pursue claims, on a collective basis, which might otherwise not have been viable.
This decision demonstrates, however, that pursuing big ticket litigation on a collective basis is not necessarily risk-free. Equally, defendants embarking on the process of recovering what might, individually, be small amounts from a large number of claimants may face logistical and other challenges, and successful defendants will also need to take into account the potential reputational implications of going down this route.
It may be that the value for those on the receiving end of collective actions is not so much the actual recovery of costs for which the claimants are personally exposed, but rather that the risk of such exposure will affect whether the claim is brought at all, as well as potential claimants' enthusiasm for joining the group where the litigation cannot be regarded as a one-way bet.