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Case law: Third party funders paying for litigation can have 'security for costs' orders made against them

Parties to litigation who are funded by third parties should ensure their third-party funders have agreed to be responsible for the other party's legal costs if they lose, a recent case makes clear.

July 2017

This update was published in Legal Alert - July 2017

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

In a long-running and complex court case against a bank, many of the claimants were funded by two third parties, who would receive a share of their damages if they won.

The bank applied to the court for 'security for costs' in the sum of £11.6m against the third-party funders. Security for costs applications are made when a litigant does not believe the other side could afford to pay its legal costs if it loses the case, and is ordered to pay the applicant's costs. A security for costs order usually requires the other side to deposit the necessary money with the court, or provide some other security guaranteeing the costs will be paid.

The third-party funders objected that they should not have to provide security for costs as they were not direct parties to the proceedings.

The bank argued that even though the funders were not direct parties, they could still be liable if costs became payable.

The High Court agreed with the bank. It said that it had discretion to make an order for security for costs against anyone who had contributed to the claimant's costs in return for a share of any compensation recovered in the proceedings, if it was just to do so.

It said the relevant factors were:

  • Whether the third-party funder was funding the case for commercial, rather than altruistic, reasons
  • Whether there was a risk of non-payment of costs by the third-party funder if the claimants lost
  • Whether the third party was aware of, or had been told, of the risk of having to contribute to the other side's costs
  • Other facts, such as whether the bank had been timely in applying for security for costs

In the circumstances, it ordered one of the two funders to give security for costs. Its reasons for doing so were that the first funder was a commercial funder, well aware of its potential liability to pay the winner's legal costs if its clients lost their case, and it had not produced sufficient evidence that it could be relied upon to pay those costs if they became due.

However, the second funder was not in the line of business of funding litigation, and was doing so on a more altruistic basis because there were family relationships with some of the claimants. This also made it more likely that it would pay up if costs were awarded against the claimants. The court also found that the second funder may not have appreciated its potential liability to contribute to the bank's legal costs if the claimants lost.

As to the timing of the application, both funders alleged there had been too much delay on the bank's part in making the application. However, the court said that lateness did not necessarily amount to delay, and that there were reasons relating to particular developments in the proceedings, for the delay.

Operative date

  • Now

Recommendation

  • Parties to litigation who are funded by third parties should ensure those third parties have also agreed to be responsible for the other party's legal costs if the case is lost

Case ref: The RBS Rights Issue Litigation [2017] EWHC 1217

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.