High Court clarifies security for costs position where litigation funders provide financing to law firms

In a judgment handed down on 25 March 2024, the High Court considered that, where a litigation funder provides funding to a law firm rather than specific claimants, the Court may nevertheless have the power to make a third-party security for costs order against the funder. When assessing whether the relevant procedural test was met, the Court said that it was the substance of the funding arrangement and not its form which was important.  The Court therefore accepted that an examination of the underlying documents to any funding arrangement was required to understand the true substance of the arrangement and would be prepared to make a disclosure order of relevant funding agreements to facilitate that in appropriate circumstances. The judgment, which addresses a novel area of law, could have significant implications for third party litigation funders and the law firms that they back, particularly given litigation funding is becoming increasingly prevalent in the UK.

Overview

Various Defendants in the NOx Emissions Group Litigation made applications for disclosure of the relevant financing agreements entered into between one of the lead claimant law firms and the litigation funder to determine whether to seek security for costs against the litigation funder. Publicly available information suggests that the litigation funder provided the law firm with a debt facility worth around £450m. The applications were made pursuant to a timetable laid down by the Court as part of its wider management of the litigation.

Under CPR 25.14(2)(b), a Court has jurisdiction to make a security for costs order against someone other than the claimant if that third party has “contributed or agreed to contribute to the claimant’s costs in return for a share of any money or property which the claimant may recover in the proceedings”. 

The Defendants argued that they required sight of the relevant funding documentation in order to assess whether the terms of the arrangement meant that the CPR 25.15(2)(b) test was met.  The Claimants argued that the test was not met because: (i) the loan was structured as a business-to-business loan provided to the law firm and not to the Claimants directly; and (ii) the litigation funder would not receive a benefit from any money or property recovered by the Claimants in the proceedings. Therefore, the Defendants were not entitled to any disclosure of the underlying agreements.  

This is the only case that has been before the English courts where the question of whether a loan provided by a third party ostensibly to a law firm for the purposes of financing a spread of cases falls within CPR 25.14(2)(b) in circumstances where the identity of the funder is known but the terms of the funding agreement have not been disclosed. 

The judgment acknowledged that the Defendants’ contention that the litigation funder may fall within CPR 25.14 was, on the evidence, "more than fanciful or speculative" which "weighs in favour of disclosure" of the financing agreements. The judges were also sceptical that CPR 25.14 could be circumvented “simply by inserting a vehicle in between the claimant and the funder", saying that would be "wrong in principle". 

However, against the backdrop of the wider context of the case, the judges decided to defer making a decision on whether to order disclosure pending a costs management hearing scheduled for later this year in order to assess whether the After-the-Event (ATE) Insurance obtained by the Claimants would be sufficient to meet the collective Defendants’ budgeted costs and to give opportunity for the litigation funder itself to consider making representations.

Key takeaways 

Below are six key takeaways from the judgment which may have potentially significant implications for litigation funding in England going forwards.  

1. Funding provided to a law firm rather than directly to the claimants in a specific piece of litigation may nevertheless still be caught under CPR 24.14(2)(b).  Litigation funders will not necessarily be able to evade a security for costs application by structuring the funding in that way.
2. The question of whether a funder has contributed or agreed to contribute to a claimant’s costs in return for a share in the money that may be recovered in the proceedings is one of "substance, and not form". 
3. The underlying documents must be examined to determine the true position, and the question of whether a security for costs application can be made can "only be ascertained in substance by examining the arrangements in question". 
4. The fact that claimants instruct their solicitors pursuant to the terms of conditional fee arrangements (under which liability for costs are contingent) does not take them outside the scope of CPR 24.14(2)(b).  The argument that they "are not in a real sense incurring costs" was rejected.
5. A decision on whether to order disclosure may be delayed until it is understood whether the claimants have put into place sufficient ATE insurance to cover all of the defendant(s) anticipated costs to ensure that they are not left exposed. Should the ATE cover be sufficient, a security for costs order may not be required.
6. A Court may want to hear from the litigation funder from whom disclosure is sought where a disclosure application has been made.