Interim judgment in the “Ingenious Litigation” addresses claimants’ liability for adverse costs in group litigation and the circumstances in which a litigation funder may be ordered to provide security for costs

On 10 February 2020, Mr Justice Nugee handed down a significant judgment in respect of claimants’ liability for adverse costs and a litigation funder’s obligation to provide security for costs in the latest interim hearing in the highly publicised “Ingenious Litigation”, in which Stewarts acts for the largest group of claimants.

This decision follows and expands upon some of the themes covered by Mr Justice Hildyard in the RBS Rights Issue Litigation, in which Stewarts acted for 313 institutional claimants. It will be of interest to commercial litigators, funders and after-the-event (ATE) insurers, particularly in relation to the allocation of cost liabilities between claimants in group litigation, and the circumstances in which security for costs can be ordered against a third-party litigation funder including whether the terms of an ATE insurance policy can be considered adequate security, and if so to what extent.

Background

The main proceedings involve claims by over 500 investors in film and video game partnerships promoted by the Ingenious Media group who seek recovery of losses sustained after HMRC’s refusal to accept the tax reliefs they were expected to generate. The defendants comprise a number of Ingenious companies and associated individuals, including its Chairman, Patrick McKenna, in fraudulent misrepresentation as well as claims in negligence against financial advisers and banks involved with the implementation and marketing of the schemes. The claims are proceeding by way of lead claimants under the court’s general case management powers. A group litigation order (GLO) has not been ordered, although the proceedings share many of the same features as claims under a GLO.

The applications

The claimants applied for an order that their liability for adverse costs be several and pro-rata to the amount they invested in the schemes.

In response, a number of the defendants issued applications seeking security for costs from the claimants’ funder.

The headline points from the judgment are that:

1. The claimants’ liability for adverse costs will be (a) several (not joint and several), and (b) pro rata to the size of their respective cash investments in the relevant partnerships (rather than equal).
2. There is no ‘quid pro quo’ that several liability entitles defendants to security for costs.
3. A litigation funder cannot be required to provide security for costs attributable to claimants whose claims it is not funding even if those claimants might not have brought their claims without the benefit of the funded claimants sharing legal costs.
4. Although there were potential areas of uncertainty in the wording of the ATE policies, the court was satisfied that substantial credit should be given for them.
5. The security that fell to be provided by the funder was reduced from a sum of around £11m sought by the defendants to £3.95m.
6. Should the funder incur external costs (such as obtaining a bank guarantee) when providing security for costs, then a cross-undertaking in damages from the defendant may be appropriate. (The Court of Appeal subsequently held that a cross-undertaking in damages in favour of a claimant as a condition of ordering security for costs should only be ordered in “a rare and exceptional case”, and in favour of commercial litigation funders in “even rarer and more exceptional cases”.) However, any amounts payable to the funder by the claimants for providing the security was to be regarded as a reallocation of damages between it and the claimants and, taking the funder and claimants together, there would be no additional damage occasioned by the granting of security.

Discussion

We consider in more detail the findings relating to the several costs order and the extent to which a funder can be ordered to put up security for costs having regard to the composition of the claimant group and the availability of ATE insurance.

Several liability for costs

In large scale group litigation against financial institutions, potential adverse costs liabilities can be very large, and it is inevitably important from an individual claimant’s perspective that they are not exposed to the full extent of group costs on a joint and several basis. Conversely, a joint and several order is usually in a defendant’s interests as they would, if they successfully defend the claims, be able to seek to recover all adverse costs from the best resourced claimants.

Mr Justice Nugee held that the hundreds of claimants in this case were not connected with each other, but rather they each had their own independent claim that varied considerably in value, but which were being heard together for the convenience of the parties and the court.  Consequently, they were entitled to the protection of an order that any adverse costs be borne severally and, as in the RBS Rights Issue Litigation , in proportion to their claim value, rather than per capita. He did not agree that joint and several liability was the “default” position or that the claimants were seeking the court’s indulgence by seeking several liability only. Rather it was a discretionary decision for the court to be decided on what is just between the parties to the case in hand.   This decision is likely to be of assistance to claimants seeking several liability in group actions.

Litigation funder’s liability for costs

It was common ground that a litigation funder can be ordered to pay adverse costs at the end of a case (s.51 of the Senior Courts Act 1981) and can be ordered to provide interim security for those costs (Civil Procedure Rule 25.14(2)(b)).

However, a significant minority of claimants in the Stewarts group were not funded by a litigation funder. The court found that it could not impose its s.51 jurisdiction to make the funder liable for costs attributable to these claimants, even though they were part of the same group as funded claimants and were sharing costs with the funded claimants. The effect of this was to reduce proportionately the amount of security that needed to be provided by the funder.

It is not unusual for claimant groups to include funded and unfunded (e.g. self-funding) individuals and practitioners should not overlook this point when preparing and defending applications for security.

ATE insurance policies

The court then considered the claimants’ ATE policies and whether they would be responsive in the event that a defendant sought to enforce an order for adverse costs. If there was more than a fanciful risk that they would not be responsive, additional security would be necessary. The difficulties that the court grappled with are commonly encountered in policies for commercial disputes and included:

1. Provisions that entitled the insurer to avoid the policies in the event of fraud or deliberate non-disclosure by the claimants.
2. Rights of the insurer to terminate cover in defined circumstances.
3. The existence of other non-applicant defendants with rights to claim on the policy in addition to the applicants.
4. The fact that absent assignment, the proceeds of an ATE policy belong to the claimants, not the defendants, and could be used to meet other debts.

A number of practical answers to these difficulties were contained in the terms of the policies that had been secured with the assistance of AJ Gallagher by Stewarts to provide £7.25 million cover for their claimant group and/or were proposed by the claimants. They included:

1. The right to avoid in the case of fraud and deliberate non-disclosure being limited only to the claimant(s) responsible for the relevant wrongdoing, so that fraud by one claimant does not invalidate the whole policy.
2. Confirmation that termination of cover does not avoid liability for costs up to termination, coupled with an agreement by the claimants’ solicitors to notify the defendants in the event cover is terminated.
3. A provision permitting assignment of the proceeds of the ATE policies to the defendants in terms that confers priority over other creditors, which had been offered by the claimants in advance of the hearing.

Despite the above, the court “with some reluctance” found that that there was a real, and not a fanciful risk, that the ATE policies would not respond in full. However, the court rejected the defendants’ submissions that it was not possible to partially account for ATE policies and that credit could be given in full or not at all. On that basis, the court allowed significant credits of between half and two third of the value of the policies against the security that would otherwise have been ordered (subject to compliance with certain conditions).

The court remarked that these difficulties arose because “an ATE policy, as recognised on both sides, is not designed as security for costs” and adapting such a policy to make it suitable for this purpose required significant effort.

Conclusion

The judgment is an important decision for claimants’ liability for adverse costs in group litigation as it shows the court is keen to ensure a claimant’s liability is commensurate with the value of its claim.

It also highlights the well-known difficulties with ATE insurance policies providing sufficient security for costs in large group claims. Nevertheless, the decision demonstrates that if the claimants’ solicitors and their brokers are able to obtain appropriately worded policies, the sums awarded as security can be significantly reduced. In addition, while Mr Justice Nugee was not considering the specific manner of security to be provided, and he was not addressed on bonded insurance policies, he did note that it would be beneficial to all concerned if funding and insurance industries were able to further develop ATE policies to address the concerns of all parties in group litigation. It will be interesting to see how the litigation funding and insurance market responds to this challenge.

The Stewarts claimants are represented by a team led by partners David Pickstone and Darren Kidd. Counsel instructed at the hearing were Nicholas Bacon QC and PJ Kirby QC.

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