Sandra Bailey & Ors v Glaxosmithkline UK Ltd

The background to this litigation, which I have been case-managing since 2015, is set out in my previous judgments reported at [2016] EWHC 178 (QB), [2016] EWHC 1975 (QB) and, more recently, [2017] EWHC 377 (QB). Those judgments need to be read to understand the background to the issue raised in the present application. I have been adopting an incremental approach to the case management issues raised.

The last judgment in that series, handed down on 1 March 2017, concerned the Defendant’s application dated 14 February 2017 relating to aspects of the Claimants’ expert evidence, particularly the evidence of Professor David Healy. It was an application which largely succeeded. By order dated 28 March 2017 I ordered the Claimants to pay the Defendant £30,000 in respect of the costs of that application. Certain other directions were given as agreed between the parties. The full terms of that order are set out in the Appendix to this judgment.

It was contemplated at that stage that there would be a further CMC in June 2017 and, in due course, a date was set for 28 June. However, various events overtook the proposal that there should be a CMC on that date and a further CMC is now fixed for 20 February 2018. The timings of certain obligations under the order were altered by agreement subsequently.

Since the order of 28 March 2017 was made, the revised form of Professor Healy’s report has been served.

In the meantime, on 16 June 2017 the Defendant issued an application for security for costs against the Claimants’ litigation funder, Managed Legal Solutions Limited (‘MLS’), pursuant to CPR r.25.14. MLS has been joined as an Additional Party for the purposes of responding to that application.

Security is sought in respect of the Defendant’s costs from 1 August 2015 up to (but not including) trial, presently estimated by the Defendant at a little over £6.8 million. 1 August 2015 is taken by the Defendant to be the approximate date at which MLS commenced funding the litigation. The purpose of seeking security from MLS is that the Defendant intends to seek orders, at the conclusion of (what it says will be) its successful defence of the claim, that MLS should pay its costs pursuant to section 51 of the Senior Courts Act 1981 and there is concern, on the information presently available, that MLS would be unable to comply with such an order.

I heard that application over 1½ days on 7 and 8 November 2017. I was informed subsequently by Counsel that the Court of Appeal had handed down judgment in Premier Motorauctions Ltd v. PWC LLP & another [2017] EWCA Civ 1872 on 23 November 2017 and each party has made written submissions about the suggested implications of that case for the purposes of the present case. In addition to considering those submissions, there has been substantial documentation to review, including a review of other authorities. This judgment has been prepared against the background of an impending CMC in February 2018 and significant constraints on my own time. I cannot deal with every nuance of the arguments presented and will focus on what I perceive to be the most important features.

It is not in issue that–

Although it is some while ago, and the circumstances were different from those obtaining in the present situation, Mr Hunt, who had been managing director of Nissan UK, was sentenced to 8 years’ imprisonment and disqualified from being a company director in June 1993 following his conviction for serious dishonesty involving many millions of pounds. The press reports exhibited to Ms Caswell’s 5^th witness statement indicate that at the time of his sentence, Mr Hunt was aged 59. He must now be in his mid-80s. The substantive assertions concerning his conviction and sentence have not been controverted.

It is asserted on behalf of MLS that Mr Hunt is very wealthy and “would be in a position to meet any costs order in the event that such an order is made against MLS or him”.

The Claimants have the benefit of ATE insurance up to £750,000 provided by BRIT Global Speciality, BRIT Syndicate 2987 (‘BRIT’) in relation to the costs of the generic issues proceedings – in other words, that sum is available to be paid to the Defendants in the event of the Claimants’ case on the generic issues failing unless for any reason the liability of BRIT under the insurance contract is avoided.

The Premier Motorauctions case is directly relevant to the role that such insurance plays in this situation and I will return to it later in the context of issues raised about the potential for the policy to be avoided (see paragraphs 63-71 below).

The essential issue is the quantum of the security to be granted, although it is contended by MLS that the ATE cover, combined with what is contended to be a realistic appraisal of the recoverable costs of the Defendant if successful, is sufficient security and, accordingly, no order should be made. In any event, MLS submits that the amount ordered, if it is, should be limited by the approach referred to in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055 (otherwise known as “the Arkin cap”) to the current level of the funding facility (£1,200,000) and that there should be a cross-undertaking in damages. The basis for that latter requirement is said to be that MLS will have to borrow the funds to provide the security and thereby incur borrowing costs and/or will not be able to use those funds to pursue other funding opportunities. It is contended that it should be compensated for those losses if the security proves to have been unnecessary or excessive. Finally, if, contrary to those arguments, security is ordered and the Arkin cap does not apply, the security should be very much less than that sought by the Defendant and should certainly only relate to future costs.

These contentions are supported by the Claimants.

The Defendant submits (i) that Arkin was not a case concerning the quantum of security to be ordered pursuant to CPR r.25.14 and is not binding upon this court for the purposes of that issue in this case, nor should it be followed in present circumstances, and (ii) applying the Arkin cap would give rise to a substantial injustice in this case.

That, in a nutshell, is the essential battleground between the parties on the present application.

Mr Jamie Carpenter, for MLS, emphasises that MLS is a party distinct from the Claimants and that MLS and the Claimants are simply in a commercial relationship, albeit with a common interest in seeing the litigation through to a successful conclusion. A successful conclusion would, of course, involve recovery of costs from the Defendant and a share in the proceeds of the case. (That usually “consists of either a percentage of the damages recovered, or a multiple of the amount advanced by the funder, or a combination of the two”, according to the ALF website.) He says that any criticisms of the way the Claimants or their representatives have represented the position in relation to the funding should not be laid at the door of MLS. I accept that as far as it goes, but it is potentially of some significance to the court to note briefly the route by which this case has travelled to the present destination because there is plainly a close alignment of the interests of the Claimants and MLS and, it must be assumed, MLS would not have wanted its position to be misrepresented. I will turn to that background after recording the terms of CPR r.25.14.

This provides as follows:

“(1)

The defendant may seek an order against someone other than the claimant, and the court may make an order for security for costs against that person if –

(a)

it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order; and

(b)

one or more of the conditions in paragraph (2) applies.

(2)

The conditions are that the person –

(a)

has assigned the right to the claim to the claimant with a view to avoiding the possibility of a costs order being made against him; or

(b)

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; and

is a person against whom a costs order may be made.”

The background to this rule and some of the factors to be considered in exercising the discretionary jurisdiction were helpfully set out recently by Hildyard J in The RBS Rights Issue Litigation (No. 2) [2017] EWHC 1217 (Ch). I will not cite extensively from the case at this stage, but it is helpful to quote [19]:

“The potential exposure of litigation funders to orders for costs against them at the end of the day does not, of course, of itself mean that an order for security for costs should be granted. At such an interlocutory stage the court must assess not only whether it is sufficiently clear that the criteria for the potential imposition of liability are fulfilled, but also whether there is a sufficient basis for interlocutory intervention. Of particular relevance in assessing whether an interlocutory order against a non-party under CPR 25.14(2)(b) to secure a contingent liability pursuant to Section 51 is appropriate and just will be

(1)

Whether it is sufficiently clear that the non-party is to be treated as having in effect become in all but name a real party motivated to participate by its commercial interest in the litigation;

(2)

Whether there is a real risk of non-payment such that security against the contingent liability should be granted;

(3)

Whether there is a sufficient link between the funding and the costs for which recovery is sought to make it just for an order to be made;

(4)

Whether a risk of liability for costs has sufficiently been brought home to the non-party, either by express warning, or by reference to what a person in its position should be taken to appreciate as to the inherent risks;

(5)

Whether there are factors, including for example, delay in the making of an application for security or likely adverse effects such as to tip the overall balance against making an order.”

Hildyard J also referred to the position of multiple claimants pursuing a claim under a GLO (which is the case here) in the following way:

“16.

It has been held in a number of cases that orders for costs against non-parties are "exceptional"; but … this is less of a restriction than might at first be thought. To quote again from Lord Brown of Eaton-under-Heywood in the Dymocks case (at [25]):

"Although costs orders against non-parties are to be regarded as "exceptional", exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such "exceptional" case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against."

17.

Thus it is a truism, but an important one, that every case must be considered on its facts; but in my view, a case with multiple claimants seeking to vindicate their rights under a GLO and who have been accorded by Court order the considerable benefit of several and not joint liability for costs will be likely to be considered 'exceptional'. In such a case, the defendant(s) will almost inevitably be put to exceptional difficulty in enforcing any costs order in their favour if they obtain one at the end of the day.”

As I have indicated, the role that the availability of ATE insurance plays in this context is dealt with in the Premier Motorauctions case.

The Defendant’s focus at the time of the first hearings before me in late 2015 was on the ability of the Claimants to fund this litigation, litigation that had previously come to an effective end in January 2011 after the withdrawal of the Public Funding Certificate previously granted to the then Claimants in the action.

What I was told about the funding situation at that stage is set out in [77] – [85] of the judgment following those first hearings: [2016] EWHC 178 (QB). I need not repeat all that is there set out, but it is right to note that in a letter from Fortitude Law (‘FL’) dated 16 October 2015 the following was stated:

"We are informed that the third party funder is a member of the Association of Litigation Funders and that they abide by the Code of Conduct for Litigation Funders.”

Ms Louisa Caswell observed in her witness statement of 23 October 2015 that FL did not need to rely upon information from “an unidentified third party” because members of the ALF appear on the ALF website. FL’s response, through Mr Darren Hanison’s witness statement of 26 October 2015, was as recorded in [77] of my judgment. He indicated that, despite its absence from the list, FL was “informed” that MLS “[abides] by the Code of Code Conduct of Litigation Funders”. That was the first time MLS had been identified as the funder.

On the basis of the evidence before me, it would be difficult to resist the inference that the source of the information for both these assertions was MLS itself. However, Mr Carpenter told me, on instructions, that the source of the first misapprehension was a broker, not MLS itself. That was supported by Mr Nigel Jones QC, representing the Claimants on this occasion. This was not put in a witness statement before the hearing, although Ms Caswell’s witness statement had flagged up the issue. I confess that I am beginning to be troubled by simply accepting at face value as wholly accurate what I am told, although I am sure that there is no deliberate intention to mislead me.

As to the second assertion, on the basis of what has emerged since earlier this year, there are substantial grounds for believing that it also cannot have been correct. As already indicated (see paragraph 8 above), MLS is balance-sheet insolvent (the background being summarised in paragraphs 28-29 below) and it produces only “Abbreviated Unaudited Accounts” (the most recent available being to the year ending 30 September 2015: see paragraph 28 below). That being so, it is difficult to see how it could be said to abide by a number of the requirements of the ALF Code of Conduct including the following:

MLS would not, of course, be able to “undertake that it will be audited annually by a recognised national or international audit firm” and provide the ALF with “a copy of the audit opinion given by the audit firm on the … most recent annual financial statements”, one of the other conditions of being a member of the ALF. But more importantly, it does not appear that the kind of accounts produced for MLS (and CAM: see paragraph 29 below) are the kind of accounts contemplated as necessary for litigation funders that belong to the ALF.

What has emerged from the significantly out-of-date accounts referred to in paragraph 26 above is that at that time its liabilities exceeded its assets by a little over £636,000 and its net current liabilities were a little over £639,000 and its banked cash at bank was just short of £6,000. Under the paragraph entitled “Accounting policies”, the following appeared under the sub-heading entitled “Going concern”:

“Although the company’s liabilities exceeded its assets by £636,534 the accounts have been drawn up on a going concern basis. The company is dependent on support from an associated company in the form of a working capital loan. The lender has indicated that it will continue to support the company and will not seek repayment until all creditors claims have been met in full.”

The accounts indicated that creditors include an amount of £3,465,299 which represents a loan from a company called Corporate Administration Management Ltd (‘CAM’). This is the “associated company” referred to in the MLS accounts and shares its registered office with MLS. The sole shareholder of CAM is Mr Hunt (described in the accounts as the “ultimate controlling party”) and its “Unaudited Financial Statements” to the year ending 31 March 2016 show that its liabilities exceeded its assets by just over £4.3 million, its net current liabilities were approximately the same and the banked cash was just over £14,000. It was, therefore, balance-sheet insolvent too. The accounts revealed an outstanding loan of £9,409,263 to CAM by Mr Hunt.

There is a fixed and floating charge over MLS’s assets in favour of CAM.

It follows that whatever contractual arrangement there is between the Claimants and MLS, it is an arrangement with an insolvent company that depends for its funding on another insolvent company which itself is kept afloat by (apparently) the goodwill of Mr Hunt. There is no evidence of any legal obligation on the part of Mr Hunt to maintain these funding arrangements, but there is the general assertion that Mr Hunt would be good for any obligation imposed by the court (see paragraph 10 above). That substantive position was not apparent to me until the present application was brought before me. I do not know whether it was apparent to FL and to the individual Claimants in the case. I would have imagined that considering the financial status of a corporate litigation funder would be part of the “due diligence” of the representative of the litigants who were to benefit from the funding.

Mr Jones makes the point that the “capital adequacy” requirement of the ALF code is to protect the funded litigant, not to protect the opposing party. Indeed this appears to have been what Sir Rupert had in mind when addressing this issue in his report: see paragraph 2.10 of his Final Report. Furthermore, Mr Carpenter points to the wording of the present ALF code and says that all that is required is “access” to adequate funds, not the maintenance of funds. He says there are “reputable” ALF funders that may be “shell” companies.

I am in no position to judge the accuracy or validity of these latter assertions, but the expression in the code is “immediate access” and it is at least questionable to what extent that is satisfied in a practical sense when the money is neither within the company nor demonstrably capable of being forced out of the hands of the ultimate funder or funders.

At all events, a balance-sheet insolvent funding company will be an almost inevitable target for a security for costs application as, I think, Mr Carpenter recognised. Against that background, it is, of course, hardly surprising that MLS concedes that it is likely the court will order some security to be given.

Another feature of the background to the funding that raises some concern is what I have been told about the arrangements. I repeat part of a letter sent to me by FL dated 22 December 2015 (which is quoted in [24] of my judgment of 29 July 2016: [2016] EWHC 1975 (QB)):

“On this basis MLS have, by way of a Funding Deed, committed to provide £800,000 to the Claimants to bring the matter to trial. In the unlikely event that the Claimants require further funds before/at trial, the potential to increase funds by up to an additional £400,000 has already been agreed with MLS, who have set aside that sum should the funding prove to be necessary. There is, of course, yet further potential for the Claimants to approach the funders for further monies upon agreed terms, if required.

The funding is to be used in part for ATE premium payments. A payment of £125,000 has been made. A further such payment will become due prior to trial. The total residual amount, combining the present fund and the contingency element, is therefore (£550,000 + £400,000), £950,000.” (Emphasis added.)

At the hearing on 14 July 2016 that preceded my judgment on 29 July 2016, Ms Perry QC, for the Claimants on that occasion, said with reference to the foregoing letter, that “it is quite clear what Mr Hanison is saying is that another £400,000 has been provided for and will be called upon if necessary” although I have been reminded that she did indicate that this sum had not at that stage been committed to the case.

What has emerged in the witness statement of Mr James Gbesan, the Head of Investment with MLS, dated 3 August 2017 is that the sum of £400,000, although agreed in principle, had still not been committed to the case. He said this at [14]:

“I have agreed in principle with [FL] that MLS shall provide an additional facility of £400,000. However, at this stage an additional funding facility has not been committed and an additional funding deed has not been entered into. Given the impact of increasing the funder entitlement, I would not expect [FL] to formally request the additional funds unless or until absolutely necessary as this would only serve to increase the Claimants’ liability to MLS under the funder entitlement.”

Shortly before the hearing, in a letter dated 27 October 2017, the solicitors acting for MLS indicated to Addleshaw Goddard (‘AG’) that MLS “has just agreed an additional funding facility with the Claimants for an additional £400,000 which will take the Claimant’s funding facility up to £1.2m.” It was made clear that MLS had not yet provided the additional amount of funding, but the change in the commitment had been made.

Whilst it might be said that the matter is simply one of emphasis, the impression given in the earlier stages was that there was a real and substantive commitment from MLS to the additional £400,000 whereas, in reality, the formal commitment was made only shortly before the hearing.

Finally, in this general connection, there is the delay in complying with my order that the Claimants should pay £30,000 for costs in respect of the hearing in February 2017 (see paragraph 2 above) to consider. The order required payment within 14 days which meant that it should have been paid by close of business on 11 April. It was not paid and there was no immediate explanation for the reason. A letter from FL to AG on 12 April (relating to a request for a copy of the Group Register pursuant to paragraph 18 of the order) made no mention of the unpaid costs. On the following day AG sent a letter to FL by email requesting immediate payment of the costs and later that day Ms Caswell spoke to Dr Sarah-Jane Richards by telephone who said that Mr Hanison was on leave and would deal with the issue on his return on 18 April 2017.

On 18 April 2017 Mr Hanison emailed AG, apologising “for the delay in responding due to the Easter vacation.” He said this:

“We confirm we have requested from our clients' ATE insurers the funds required in respect of the Order of 28 March 2017 and will make payment … as soon as the monies are received.”

The payment was still not made and on the application of the Defendant I made the following order on 10 May, namely, that the proceedings would be stayed unless the Claimants -

(i)

paid the Defendant's Costs by 4pm 7 days following the date of the sealing of the order; and

(ii)

[provided] a full explanation to the Defendant and the Court of the reasons why they failed to make payment.

The sum was eventually paid by cheque (not direct to the account the details of which had been provided) on 17 May 2017 (the final day for payment under the order made on 10 May). The explanation given was as follows:

"We sincerely apologise for the delay in providing the Funds and confirm that there was no intention to cause such a delay by the Claimants or to disrespect the Court. The process by which the funds were requested and obtained was delayed by the intervening Easter holiday period, and [exacerbated] by Fortitude Law's inadvertent delay thereafter in following up with the relevant funding parties in order to obtain and await the cleared Funds in its bank account."

MLS has confirmed that it was not responsible for the payment of those costs and that is accepted: it does not affect directly the application for security for costs. However, the manner in which this was dealt with either by FL or by BRIT or by a combination of both, taken with the other matters to which I have referred, does lead to a justifiable concern on the part of the Defendant (and indeed the court) about the intrinsic stability of the financial arrangements made for funding this litigation and for dealing with the adverse consequences that do arise when an order for costs is made in favour of the Defendant.

As already indicated, there is a major disagreement between the parties about the applicability of ‘the Arkin cap’ to the issue of security in this case.

In Arkin (see paragraph 13 above), the claimant claimed substantial damages against four defendants who were members of shipping conferences and who, he alleged, had destroyed his own shipping business through anti-competitive conference activities which infringed the Treaty of Rome. His legal aid having been withdrawn, the claimant entered into a conditional fee agreement with his lawyers and a non-champertous agreement with a professional funding company (‘MPC’) who agreed to fund the cost of the necessary expert evidence for a contingent fee of 25% of the first £5 million damages recovered and 23% thereafter. MPC took no part in making decisions on the conduct of the litigation and made no attempt to control it. The cost to MPC of the funding they undertook was £1.3 million. One of the defendants brought in three Part 20 defendants. All those parties (other than that defendant) incurred significant costs in preparing and adducing expert evidence. The defendant who introduced these parties relied upon the expert evidence they adduced. The claim was dismissed and the claimant was ordered to pay 90% of that defendant’s costs and 80% of the other defendants' costs. Since the claimant was impecunious, the defendants and the three Part 20 defendants applied for orders under section 51 of the Supreme Court Act 1981 that MPC should pay their costs.

The Court of Appeal (Lord Phillips of Worth Matravers MR, Brooke and Dyson LJJ) held that since MPC were aware that they risked a costs order against them if the claim failed, they would, accordingly, be ordered to contribute £1.3 million to the defendants' and Part 20 defendants' costs.

The more general observations of the court are, it is said by MLS, relevant to the present case. The relevant observations were as follows:

“38

… In our judgment the existence of [the rule that costs should normally follow the event], and the reasons given to justify its existence, render it unjust that a funder who purchases a stake in an action for a commercial motive should be protected from all liability for the costs of the opposing party if the funded party fails in the action. Somehow or other a just solution must be devised whereby on the one hand a successful opponent is not denied all his costs while on the other hand commercial funders who provide help to those seeking access to justice which they could not otherwise afford are not deterred by the fear of disproportionate costs consequences if the litigation they are supporting does not succeed.

39.

If a professional funder, who is contemplating funding a discrete part of an impecunious claimant's expenses, such as the cost of expert evidence, is to be potentially liable for the entirety of the defendant's costs should the claim fail, no professional funder will be likely to be prepared to provide the necessary funding. The exposure will be too great to render funding on a contingency basis of recovery a viable commercial transaction. Access to justice will be denied. We consider, however, that there is a solution that is practicable, just and that caters for some of the policy considerations that we have considered above.

40.

The approach that we are about to commend will not be appropriate in the case of a funding agreement that falls foul of the policy considerations that render an agreement champertous. A funder who enters into such an agreement will be likely to render himself liable for the opposing party's costs without limit should the claim fail. The present case has not been shown to fall into that category. Our approach is designed to cater for the commercial funder who is financing part of the costs of the litigation in a manner which facilitates access to justice and which is not otherwise objectionable. Such funding will leave the claimant as the party primarily interested in the result of the litigation and the party in control of the conduct of the litigation.

41.

We consider that a professional funder, who finances part of a claimant's costs of litigation, should be potentially liable for the costs of the opposing party to the extent of the funding provided. The effect of this will, of course, be that, if the funding is provided on a contingency basis of recovery, the funder will require, as the price of the funding, a greater share of the recovery should the claim succeed. In the individual case, the net recovery of a successful claimant will be diminished. While this is unfortunate, it seems to us that it is a cost that the impecunious claimant can reasonably be expected to bear. Overall justice will be better served than leaving defendants in a position where they have no right to recover any costs from a professional funder whose intervention has permitted the continuation of a claim which has ultimately proved to be without merit.

42.

If the course which we have proposed becomes generally accepted, it is likely to have the following consequences. Professional funders are likely to cap the funds that they provide in order to limit their exposure to a reasonable amount. This should have a salutary effect in keeping costs proportionate. In the present case there was no such cap, and it is at least possible that the costs that MPC had agreed to fund grew to an extent where they ceased to be proportionate. Professional funders will also have to consider with even greater care whether the prospects of the litigation are sufficiently good to justify the support that they are asked to give. This also will be in the public interest.

43.

In the present appeal we are concerned only with a professional funder who has contributed a part of a litigant's expenses through a non-champertous agreement in the expectation of reward if the litigant succeeds. We can see no reason in principle, however, why the solution we suggest should not also be applicable where the funder has similarly contributed the greater part, or all, of the expenses of the action. We have not, however, had to explore the ramifications of an extension of the solution we propose beyond the facts of the present case, where the funder merely covered the costs incurred by the claimant in instructing expert witnesses.”

The Arkin cap is the limit referred to in [41] of the judgment. It is, of course, to be noted that the court was addressing the issue of costs at the conclusion of the case, not in the context of an interlocutory application for security for costs. However, the argument of MLS is that if the Arkin cap falls to be applied at the conclusion of the present case and, accordingly, limits the amount that may be recovered by the Defendant, it would be wrong, it is argued, for security in a sum greater than the cap to be permitted. I will return to that argument after considering the applicability of the cap in principle.

The result of the attempt of the court in Arkin to balance the competing considerations referred to in [38] (rather than the attempt itself) was criticised by Sir Rupert Jackson in his Review of Civil Litigation Funding: Final Report (December 2009) and in Cook on Costs (2017). The observations in the case were, of course, made in 2005 when the funding landscape was different from that which it is now and at the time there was not even an established voluntary regulatory structure in place.

In Sir Rupert’s report (Chapter 11) he said this:

“4.3

Comments during Phase 2.

This reasoning of the Court of Appeal attracted some criticism during Phase 2. In their Response to the Preliminary Report the City of London Law Society’s Litigation Committee wrote:

“We consider that the court should have the ability to order the third party funder in an unsuccessful case to pay all of the successful defendant's costs (subject to assessment in the usual way) and its ability to do so should not be circumscribed by the principle in Arkin.”

It should be noted that the facts of Arkin were unusual. MPC, the funder in that case, had funded only the claimant’s expert evidence and the cost of organising the documents.

4.4

The Commercial Litigation Association commented that the Arkin approach creates an uneven playing field. The balance is tilted in favour of third party funding, in that the funder is only liable for costs up to the amount of its investment.

4.5

My view. In my view, the criticisms of Arkin are sound. There is no evidence that full liability for adverse costs would stifle third party funding or inhibit access to justice. No evidence to this effect is mentioned in the judgment. Experience in Australia is to the opposite effect …. It is perfectly possible for litigation funders to have business models which encompass full liability for adverse costs. This will remain the case, even if ATE insurance premiums (in those cases where ATE insurance is taken out) cease to be recoverable under costs orders ….

4.6

In my view, it is wrong in principle that a litigation funder, which stands to recover a share of damages in the event of success, should be able to escape part of the liability for costs in the event of defeat. This is unjust not only to the opposing party (who may be left with unrecovered costs) but also to the client (who may be exposed to costs liabilities which it cannot meet).

4.7

I recommend that either by rule change or by legislation third party funders should be exposed to liability for adverse costs in respect of litigation which they fund. The extent of the funder’s liability should be a matter for the discretion of the judge in the individual case. The funder’s potential liability should not be limited by the extent of its investment in the case.”

There has been no rule change or legislation, but the criticisms have been acknowledged, albeit not resolved authoritatively: Excalibur Ventures LLC v. Texas Keystone Inc. [2016] EWCA Civ 1144.

One matter that Sir Rupert highlighted related to the capital adequacy requirements of those engaged in third party funding, an issue sought to be addressed in the draft voluntary code for all third party litigation funders then under consideration. I will not repeat the various paragraphs in his report, but simply refer to his conclusion at paragraph 3.4:

“After some hesitation, in the short term I think that capital adequacy requirements are best dealt with by a substantial tightening up of … the draft code. In the long term, however, this matter must be revisited. Regard must be had to the nature of the funders entering the market. Also regard must be had to the nature of the cases and the nature of the claimants that they are funding. If funders are supporting group actions brought by consumers on any scale, then this would be a ground for seriously re-considering the question of statutory regulation of third party funders by the FSA.”

The adequacy of the funding was plainly a matter of concern and the reasons are obvious.

The first observation that the Defendant makes, reflecting what is set out in paragraph 49 above, is that Arkin did not involve an application for security for costs. It was a case concerning the appropriate costs order at the end of a trial. Equally, it was not a case where all the claimant’s costs were being met by the funder, merely that part relating to expert evidence. Finally, the Defendant submits that the Arkin cap does not apply in respect of champertous agreements or funding arrangements which are “otherwise objectionable”. Whilst it is not suggested that the agreement between the Claimants and MLS is champertous, there are aspects of the funding arrangements that are, it is said, “objectionable”.

Mr Carpenter says that if I accede to the Defendant’s submission to “disapply Arkin or to distinguish it”, it would be the first such case to do so in relation to the funding of a case by a “true commercial funder”. He recognises that, strictly speaking, what was said in Arkin about a situation where the funder’s contribution to the litigant’s costs was greater than merely a partial contribution was obiter, but says that in practical terms it has been treated as authority for the proposition that any commercial funder’s liability for adverse costs will be limited to the amount of funding provided to the litigant. He says that “it is the universal understanding of the legal and funding professions and has been ever since Arkin was decided that Arkin governs all applications for costs against a commercial funder.” He says, with justification, it seems to me, that Sir Rupert treated Arkin as setting that broad structure, a structure which he felt was no longer appropriate even if it had been appropriate from the outset.

Nonetheless, I am inclined to think that there is a middle ground between the two extremes of the argument that I have heard.

It is undoubtedly the case that the issue of the Arkin cap will not arise until the conclusion of the case. As I have indicated, MLS is effectively asking me to say that it will apply in this case when it is concluded and, accordingly, I must not order security that exceeds it. If there is an absolute prohibition against awarding more at the conclusion of the trial than the amount contributed by the funder to the litigation, then I could see and would accept the force of that contention. However, there are a number of factors that militate against such a proposition, some of which are general in nature, some of which are peculiar to this case.

First, the unquestioned imposition of the cap as formulated in Arkin would of itself fetter the general discretion that the court would have concerning costs at the conclusion of a trial. Whilst, of course, any trial judge would be obliged to consider with care the impact of Arkin in the situation that existed at the end of the trial, there would be various options open to a party who wanted to argue that the cap was not applicable in the particular case. For example, a wholesale attack on the reasoning in Arkin might be launched along the lines of the criticisms that have been made and on the basis that the choice made by the funder of the amount of its funding of the litigant should not dictate the amount of costs it should pay to the litigant’s opponent in the event the litigation fails. It may be that the issue would have to go to the Court of Appeal for a definitive response to the argument, but that possibility cannot be ignored (and, I might add, cannot be ignored in this case given the resources of the Defendant). Equally, there would undoubtedly be an argument that, notwithstanding the way Arkin has (I am told) been applied (see paragraph 56 above), the reality is that the Court of Appeal was addressing only the situation where a professional funder has merely contributed a part of the litigant’s costs and not where the whole of those costs has been underwritten. Finally, the argument might be mounted in a particular case (as Mr Gibson has sought to mount it in this case) that, by way of what are effectively proviso words (“in a manner which … is not otherwise objectionable”) in paragraph 40 of its judgment, the Court of Appeal was leaving open the possibility of disapplying the cap (or not regarding it as applicable) in certain cases where the view was taken that it was inappropriate for it to be applied. I say nothing about what those circumstances might be, but I agree with Mr Gibson that the words used by the Master of the Rolls would undoubtedly have been carefully considered and carefully crafted and arguably were intended to create one means of ensuring that a court could adopt a more flexible position outside the limitations imposed by the cap where there was something “objectionable” about the funding arrangements made.

The discretion afforded by CPR 25.14 is very wide. I approach it on the basis that a factor to be considered would be the argument that the Arkin cap applied. Equally, however, it would, in my judgment, be wrong to ignore the possibility that the cap may not be treated as applicable in the circumstances of this case. Balancing those competing considerations is not easy, particularly at a stage some considerable time before the trial (variously estimated as between 7 and 12 weeks duration) is listed and takes place. Nonetheless, balancing various factors at an interlocutory stage is a well-established process and broad judgments have to be made from time to time. There might, one supposes, be an argument for postponing a decision on this feature until later in the pre-trial process, but I am concerned about the costs that are mounting up in this case and, if the Claimants’ funds are not to be used up in repeated interlocutory applications, a broad view needs to be taken now. That would not preclude a further application at a later stage, but repeat applications are time- and cost-consuming exercises and are to be avoided if possible. However, unless I take into account now the possibility that the cap will not be applied, there is a risk that the security ordered will be insufficient and the ultimate intention of the court of trial (and, perhaps, the Court of Appeal on appeal) so far as the costs are concerned will be frustrated.

At the end of the day, the applicability or otherwise of the Arkin cap is only one factor to consider on this application. But if I order that more than the present limit of the cap (£1.2 million) should be provided, then, subject to one matter, no injustice will be done if ultimately the cap is applied. The additional money will have been paid into court in the meantime (unless some other means by which it can be retained pending the outcome of the case can be agreed) and can, of course, be repaid to MLS in the event that it is not required following the decision of the trial judge. Since the source of the funding is apparently Mr Hunt (whose resources are said to be very substantial), it is highly unlikely that MLS itself will lose anything or anything significant as a result of the over-provision of security, but in principle any such loss could be recouped pursuant to an appropriate undertaking in damages given by the Defendant as a condition of the grant of security.

I will return to the issue of whether such an undertaking is required when I have considered certain other issues.

The debate at the hearing of the application was overtaken by the decision in Premier Motorauctions (see paragraph 7 above).

I have received detailed written submissions from the Defendant and MLS about the effect of the decision and about its impact on the present application. I propose to deal with these matters relatively briefly.

The focus of the Premier Motorauctions case was to determine whether the ATE policy in place for the claimant in that litigation provided “sufficient protection” to the defendant in relation to costs in the event of the claimant’s case failing. The Court of Appeal recognised (at [20]) “that an appropriately framed ATE insurance policy can in theory be an answer to an application for security”, but equally confirmed (as Mance LJ, as he then was, had said in Nasser v United Bank of Kuwait [2002] 1 WLR 1868 at [60]) that a defendant would be “entitled to some assurance as to the scope of the [ATE] cover [and] that it was not liable to be avoided for misrepresentation or non-disclosure”: [29].

In Nasser the grounds upon which the insurer could avoid the policy for non-disclosure or misrepresentation were restricted to a situation where the “non-disclosure was fraudulent”. As Longmore LJ said in relation to that provision in Premier Motorauctions at [31]:

“Insurers could therefore avoid for fraud but not otherwise. It may not be a particularly difficult exercise for a judge to assess the likelihood of avoidance if the right to avoid is confined to fraud but, where there is no anti-avoidance clause of any kind, the exercise is very much more difficult and the defendants' need for the assurance to which Mance LJ referred is all the greater.”

In Premier Motorauctions the Court of Appeal held that, on the facts, the defendants could not receive the required reassurance and that the prospect of avoidance was not “illusory”: [29].

In the present case there is no anti-avoidance clause in the insurance contract. Whilst that of itself does not preclude the efficacy of the ATE policy in this case, it does bring into play Longmore LJ’s observation referred to at paragraph 66 above. Furthermore, the Defendant draws attention to certain provisions in the contract (a redacted version of which has been disclosed), including the following –

A copy of the proposal has not been disclosed (doubtless for good reason) and it is not, therefore, possible to evaluate the statements made to the insurers on behalf of the Claimants by their solicitors about the prospects of success and/or in respect of the costs assessments and thus to determine whether they were accurate or complete. I have previously expressed concern that the Claimants’ legal team appear to have had an unrealistic appreciation of the likely level of damages, assuming liability is established (see [2016] EWHC 1975 (QB), [7-20]), and that an unrealistic attempt was made to expand the scope of the forthcoming trial (see [2017] EWHC 377 (QB), [20-24]). The apparently less than wholly accurate way in which certain things about the funding of the litigation (see paragraphs 23-43 above) have been expressed leads to a sense of unease about how watertight everything is within the Claimants’ camp even though I accept Mr Carpenter’s point that no-one within FL or within the group of Claimants would have any interest in obtaining a worthless ATE policy. Equally, there has been no hint that the ATE insurers have as yet felt that there are grounds for avoiding the cover and it is to be observed that a fair amount of the “loose” talk to which I have referred was some while ago.

However, for the reasons foreshadowed in the preceding paragraph, I do not think it is possible to discount as illusory the prospect of the avoidance of the ATE insurance cover at some stage. Since it is not an issue that arises at the jurisdiction stage (as it did in Premier Motorauctions), the issue is to what extent can or should it be reflected in the discretionary, balancing exercise. The Defendant argues that I should “disregard (alternatively, … give limited weight to), the existence of the … ATE policy when exercising [my] discretion as to the appropriate quantum of security to be ordered.” MLS (supported by the Claimants) contends that I “should conclude that the ATE policy gives [the Defendant] sufficient protection in relation to £750,000 of its costs” or, alternatively, that I “should ascribe some value to the policy as part of the exercise of discretion [and if] … there is some risk [of avoidance], then [I should] reduce the amount of security which [I] might otherwise order by an amount below £750,000 to reflect those contingencies.”

It appears to be recognised by all sides in the case that this is another area where a broad discretionary exercise is called for. For my part, I can see no other alternative. I will return to that exercise when I have reviewed briefly the costs structure around which the Defendant submits that I should carry out this exercise.

I have indicated the starting point contended for by the Defendant in this exercise at paragraph 6 above. The overall figure of £6.8 million is comprised (in round-figure sums) of £2.3 million from 1 August 2015 to 29 June 2017 (approximately when this application was launched) and £4.5 million since then until the eve of the trial. That latter figure includes estimated (not agreed) brief fees for four Counsel for the Defendant totalling £3.166m. In his closing submissions Mr Gibson suggested that the reasonable, recoverable costs might be in the region of 70% of the overall figure yielding a figure of about £5 million and I have assumed that that represented his final “pitch”.

Mr Carpenter, both in his written and oral submissions, sought to undermine those figures by reference in part, amongst other things, to the costs that it was estimated by Hugh James Solicitors (the solicitors acting in the litigation that came to an end in 2011) would be spent on the Claimants’ behalf from March 2010 up the commencement of the anticipated trial back in 2011 and by making a detailed comparison of the Defendant’s present estimate of future costs with previously made estimates for the period from about March 2010 until the date of the trial. I have to say that, whilst it is useful to look at comparisons of this kind, it can only assist an exercise such as this in the very broadest sense. I have already alluded in an earlier decision concerning costs on 28 March 2017 (see paragraph 2 above) to the “Rolls-Royce” team that the Defendant has already deployed and is intending to continue to deploy. That is the Defendant’s entitlement, but inevitably the reasonable, recoverable costs, certainly on a standard basis, will be significantly discounted. I can, at present, see no basis for approaching my current task on the premise that the Defendant will, if successful, recover indemnity costs.

The ultimate decision on this application cannot be dictated by a clearly defined mathematical approach. The broad brush that has to be applied becomes broader as the arguments in the case are digested. A figure of £6.8 million for the pre-trial costs would not, in my view, be reasonably recoverable following an assessment. As an initial broad sweep, I would take 66% of that sum as being a reasonable working figure (but, I emphasise, not one that binds any tribunal in due course). This yields a working figure of approximately £4.5 million for the Defendant’s costs between 1 August 2015 and the commencement of the trial.

There are a number of factors to take into consideration, not the least of which being the need to avoid ordering security in a figure that will have the effect of stifling this claim. I have already said (see [2016] EWHC 178 (QB), [122]) that the Defendant gives every impression of wanting to bring this litigation to an end before trial by any means other than (as it appears at present) seeking summary judgment. I have case-managed the case in a way designed to permit the Claimants to advance their case to its highest point, which I assume has now been achieved. No application to bring this claim to an end on its merits (or lack of merits, as the Defendant would contend) has been made. What I must endeavour to ensure in those circumstances is that the Defendant does not achieve via the back door a result for which it is not prepared to contend by entering through the front door.

Given the actual and proposed expenditure of the Defendant on this litigation, including the earlier version of the present litigation, (much of which will, it will be appreciated, not be recovered), it would be easy for some to say that the Defendant, as a huge, multi-national corporate entity, should conduct this litigation at its own expense. However, that is not the way litigation is conducted and the Defendant is as entitled as any other defendant to a claim made against it to do what it can to protect its own position when confronted by a claim the funding structure for which appears to be fragile. There is nothing wrong, in principle, for the Defendant to seek security for costs as has been conceded by MLS.

Mr Gibson has pressed me with the proposition (which he says has not been controverted) that the only prospect of the Defendant recovering any costs from MLS in the event that the claim fails is through this application for security for costs. It is possible that that is so, but I do not consider it legitimate for me to approach this application on the basis that no other application for security could be made or that other means for recovering the Defendant’s costs from the litigation funders might not be deployed in the event that the claim is defeated.

Doing the best I can to reflect all the competing considerations as they exist at present, I consider that ordering security in a sum reflecting 50% of the reasonable working figure I have adopted above will do broad justice to the present application. On that basis, and subject to any adjustment in light of the ATE policy, the sum required would be £2.25 million.

MLS argues that the whole of the £750,000 under the ATE policy should be deducted; the Defendant says that none of it should be deducted. Given the considerations to which I referred above (see paragraphs 68-69) I consider that the risk of the ATE policy being avoided at some stage can be reflected by deducting two-thirds of the sum of £750,000 (namely, £500,000) from the amount of security otherwise to be provided. This reflects my assessment that it is more likely that the policy will remain intact and remain available for the payment of part of the Defendant’s costs if the Defendant is successful, but that there is a more than minimal risk that it will not remain intact.

The net effect of all this is that I propose ordering MLS to provide £1.75 million by way of security for costs. This is £550,000 more than the sum it was prepared to offer, namely, the amount currently committed to the litigation. That balance will be protected if the end result of the proceedings is that the Arkin cap is applied. If the cap is not applied, the Defendant will (subject to any other avenues it may pursue) be secure in the knowledge that it will recover at least £1.75 million.

I should say, for the avoidance of doubt, that I have considered the argument advanced by MLS and by the Claimants that an application for security could have been made earlier and that any security should be only for the costs between now and the trial. I have, of course, had to consider whether this application is merely a tactical ploy on the part of the Defendant to put pressure on the Claimant’s funding structure. If I had felt that the application had been delayed for that reason, my response to the application may have been different. However, whilst I can see that the application might have been made earlier, the procedural landscape for the case did not emerge finally until the decision I made following the CMC in February 2017 (see paragraph 2 above) and I do not think it was unreasonable to await the outcome of that and the service of the expert evidence for the Claimants before making this application. I do not regard the time factor as one that militates against the grant of security in relation to the whole of the costs since August 2015. As it is, I have discounted the working figure by 50% which, it seems to me, contains within it a margin that could easily be attributed to any delay that could be the subject of criticism.

Whilst, on the evidence presently available, I have very considerable reservations about whether MLS could legitimately claim any losses attributable to giving security (or giving security over the level of the Arkin cap), I think I must accede to the submission that there should be a cross-undertaking in damages: see The RBS Rights Issue Litigation (No. 2) at [150]. Mr Carpenter referred to paragraph 5 of Appendix 16 to the Admiralty and Commercial Courts Guide which is in the following terms:

“In appropriate cases an order for security for costs may only be made on terms that the applicant gives an undertaking to comply with any order that the court may make if the court later finds that the order for security for costs has caused loss to the claimant and that the claimant should be compensated for such loss. Such undertakings are intended to compensate claimants in cases where no order for costs is ultimately made in favour of the applicant.”

That guidance should inform the drafting of the undertaking in this case.

The usual order when security is directed is to stay the proceedings until the security is given. I propose to order that the relevant sum be paid into court by 4.00 pm on the day 28 days after the order giving effect to this judgment is sealed unless the Defendant and MLS have agreed another means of retaining the sum so ordered pending the outcome of the trial and that that sum has been committed by MLS to that agreed arrangement by the same time on the same date. In default of that payment being made by the due date, the proceedings will be stayed until the security is given either by way of a payment into court or by way of an agreed arrangement between the Defendant and MLS, the Defendant having the right to apply to the court for whatever relief it considers appropriate if the security has not been given by the expiration of two months of the imposition of a stay. The purpose of this is to allow the parties to continue preparing for the CMC in February next year whilst arrangements are made for the security to be provided within the 28-day period to which I have referred, but if it is not so provided within that time, the proceedings will be halted until it is. If after two months of that stay, the security has not been provided, it will be open to the Defendant to apply to the court for such relief as it considers appropriate in the light of the failure to provide security.

I will be grateful if Counsel could agree the terms of an order giving effect to this judgment. If there is an issue about the costs of the application, I will deal with that as a separate issue: the order relating to the security for costs should be drawn up as soon as possible.