Rowe & ors v Ingenious Media Holdings: the importance of capitalised funders

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Introduction

Third party funding has arrived. It is an integral component of the disputes market in the UK and a burgeoning industry, which has seen an increase in market capitalisation of 400% over the last five years (GBP1.9 billion at the end of 2020)1.

The recent decision in Rowe & ors v Ingenious Media Holdings provides some important clarification of aspects of the UK adverse costs regime applicable to third party funders, an area which poses particular risks and challenges to the market2. Rowe concerned appeals against two decisions of Nugee J ordering security for costs against Therium Litigation Finance AF IC and Therium Litigation Finance Atlas AFP IC (together "Therium"), which had funded some of the claimants in the underlying action (the “Funded Claimants"). The appeals focused on the question of when a defendant may be required to provide a cross-undertaking in damages to a third party funder as a condition of obtaining security for costs.

Case summary

The underlying litigation arose from eight finance schemes which were successfully challenged by HMRC in 2016 and 20193. Over 500 investors in the schemes brought claims against the defendants. Between May and November 2019, the defendants applied for security for costs against Therium as third party funder. The Funded Claimants resisted those applications, submitting in the alternative that if security for costs were ordered, the defendants should be required to provide a cross-undertaking in damages in respect of any loss suffered as a consequence of that order. The Funded Claimants had agreed to pay Therium a sum out of any damages recovered in the event that security for costs was ordered – it was this loss they sought to protect by cross-undertaking.

Nugee J granted security for costs but refused the cross-undertaking for damages on the grounds that it was not a loss, but an allocation of recoveries. Nugee J ordered that a limited cross-undertaking be provided to cover the ‘external’ costs of providing security (such as increasing the value of the Funded Claimants' existing ATE policies) but not the ‘internal’ costs (including the sum payable to Therium by the Funded Claimants pursuant to their funding agreement). In other words, the funder lost out.

The Court of Appeal heard two appeals from the Funded Claimants and the defendants respectively against Nugee J's decision. The court observed that claimants (whether funded or not) are rarely, if ever, insulated from all costs or losses incurred pursuing claims in civil litigation. Even if a claimant succeeds it will likely to have to bear a portion of its own costs. Further, costs or losses involved in funding litigation usually lie where they fall, and are not as a rule recoverable from the other party. The court therefore considered that a cross-undertaking in damages in return for security for costs should only be required in “rare and exceptional cases”.

The court held that such a remedy is even less appropriate where claimants are backed by commercial third party funders. The court highlighted the following three factors in its reasoning:

  1. Following the decision in Excalibur, the costs incurred by a litigation funder in putting up security for costs should not be treated differently from any other costs incurred by the funder in funding the other costs of litigation.
  2. The requirement to provide security for costs is a normal and foreseeable aspect of making a claim, and the funder can be expected to account for this in its business model.
  3. Commercial litigation funders ought to be properly capitalised in order to be able to meet an adverse costs order if the claim fails. They should therefore be in a position to defeat any application for an order that security be provided by demonstrating an ability to meet an adverse costs order.

The court held that Rowe was not such a “rare and exceptional” case, dismissing the Funded Claimants' appeal while allowing the cross-appeal of the Defendants in holding that no cross-undertaking should have been required at all.

The Court of Appeal's decision may also signal a move towards enhanced scrutiny of the growing commercial litigation funding market. The court suggested that now may be the time for “primary or delegated legislation” around third party funding to be developed and reviewed by the Law Commission or the Civil Procedure Rules Committee.

Implications for third party funding

The most significant aspect of this case is the court’s expectation that funders will account for the possibility of adverse cost orders in their business model, and that funders will be organised and capitalised in such a way that an order for security for costs is unlikely to be granted in the first place.

Claimants seeking third party funding should therefore review how prospective funders are set up in order to mitigate the risk of adverse costs orders. Funders without transparent finances, inadequate capital, or which are unwilling to provide defendants with an undertaking that it will meet their costs are likely to be less attractive.

Claimants and potential funders will also need to carefully consider the terms of funding to ensure clear arrangements are in place, not only in the event that security for costs is claimed but also where a cross-undertaking may nonetheless be required.

Third party funding for DLA Piper clients

DLA Piper has entered into a non-exclusive arrangement with publicly listed disputes financier Litigation Capital Management (LCM), and a newly formed litigation funder, Aldersgate Funding Limited which offers clients of DLA Piper access to GBP150 million for funding large-scale litigation and arbitration. With access to funding secured from LCM and Aldersgate Funding, DLA Piper will be able to provide clients with non-recourse finance for 100% of the costs of bringing a claim and importantly, in light of the decision in Rowe, the ability to source in adverse cost cover and security for costs.

For more information see: DLA Piper and LCM collaborate with new third-party funder for DLA Piper clients


1 The Third Party Litigation Funding Law Review, Edition 4
2  As demonstrated in Excalibur Ventures LLC v. Texas Keystone Inc [2017] 1 WLR 2221 (CA) .
3  Ingenious Games LLP & ors v HMRC [2016] UKFTT 0521; Ingenious Games LLP & ors v HMRC [2019] UKUT 0226