The Law and Business of Litigation Finance

Steven Friel Chief Executive Officer

Steven Friel

The Law and Business of Litigation Finance

Chapter excerpt: Adverse costs and security for costs

Steven Friel
Chief Executive Officer, Woodsford

Table of contents

  • Introduction
  • Adverse costs in England and Wales
  • English case law from the 1980s and 1990s
  • The ‘purity test’ developed by the English courts in Dymocks and Hamilton v Al Fayed
  • The Australian case of Gore v Justice Corp foreshadows Arkin
  • Arkin
  • Excalibur
  • Davey v Money
  • Litigation funder’s liability for adverse costs in the Australian securities class action regime
  • Security for costs in England and Wales
  • ATE as security for costs
  • Adverse costs in international arbitration: institutional rules
  • Investor v State arbitration
  • Commercial arbitration
  • Conclusions

INTRODUCTION
Many jurisdictions around the world apply a ‘loser pays’1 principle to the costs of litigation. England, which is the primary focus of this chapter, is the spiritual home of this principle, so much so that it is sometimes referred to as ‘the English rule.

For centuries,2 English courts have ordered the losing party in litigation to pay a large proportion of the costs (legal fees and other disbursements; for example, expert witness costs) incurred by the winning party. These are often referred to as adverse costs. They can be significant. In English commercial litigation, for example, costs can run into the millions.3

Where a defendant, during the course of litigation, has reasonable grounds to believe that the claimant bringing proceedings against them will ultimately be unable to meet an order for payment of adverse costs, they may apply to the court for an order that the claimant provide security for costs. Security may be provided in a number of ways; for example, a payment into a bank account held or supervised by the court, or a payment into a trust account operated jointly by both the claimant’s and defendant’s solicitors.4 The security can be applied against any adverse costs order made against the claimant, with any balance returned to the claimant.

As with many other English legal principles, the ‘loser pays’ principle has been exported, or is otherwise reflected, around the world. In particular, most legal systems that are based on the English common law, including Australia, which is also considered in this chapter,5 closely follow the English rule on costs.

The United States is one of the few countries that does not follow the English rule on costs, neither at federal nor state level.6 In New York, for example, the losing party is generally not required to pay the attorneys’ fees of the prevailing party except in specific types of case (such as some consumer protection or civil rights lawsuits) or if the unsuccessful party engaged in frivolous conduct in connection with the litigation; for example, if the case was ‘completely without merit in law’.7 Costs (ie expenses other than legal fees) may be awarded to the prevailing party in both the New York state system (although set by statute, and usually minimal) and the federal system (where costs include some court and transcript fees, witness fees and document copying costs,8 and a small statutory daily attendance fee for expert witnesses). Given the limited relevance of adverse costs to US litigation, this chapter looks only briefly at the US position.

Just as England is the spiritual home of the ‘loser pays’ principle, it is arguable that London is the spiritual home of international arbitration. Many English litigation concepts, including, to some extent, costs rules, have been adopted into international arbitration. This chapter therefore looks at the position in both international commercial arbitration and investor–State arbitration.9

The primary relevance of adverse costs and security for costs to litigation finance is perhaps obvious. The costs of litigation are one of the major risks of litigation, and litigation finance offers a method of risk transfer. Whether by operation of contract10 or by operation of the legal principles described further in this chapter, a third-party litigation funder may itself become liable for adverse costs and/or security for costs (and will need to price the cost of funding accordingly11).

CONCLUSIONS
The potential expense involved in bringing or defending litigation presents a major risk to parties and third party litigation funders, since costs are consistently incurred from the point of retainer to enforcement. Third party litigation funders ought to undertake decisions on pricing mindful of further risk exposure to liability for adverse costs and/or security for costs.

To summarise the main points addressed in this chapter:

• In England, and a number of other jurisdictions that follow the English rule on adverse costs, including Australia, courts (but not arbitral tribunals) have wide discretion to make a costs order against third parties to the litigation, including litigation funders. Particularly if a funded party is unable or unwilling to satisfy any order for costs against it, the court may make an equivalent order against the litigation funder.

• There is effectively a presumption that commercial litigation funders have such a potential liability for adverse costs. Funders who are motivated only by a desire to afford access to justice, and who do not seek a commercial return, are less likely to be subject to an adverse costs order.

• A litigation funder’s liability is not limited to standard costs. If the funded party’s conduct of the litigation was such that the court considers it appropriate to make an order for indemnity (ie enhanced) costs, the court may make an equivalent order against the litigation funder, even if the funder had no control over the funded party’s conduct.

• A litigation funder’s liability is not limited by the corporate veil, or other contractual methods of distancing the funder from the funded party. The court has power to make an order against any party that seeks a financial benefit from the litigation, whether or not that party has direct contractual privity with a party to the litigation.

• In England, in a judicial invention that has not been replicated elsewhere, including in Australia, the Arkin Cap will in most (but not all) circumstances operate to limit a litigation funder’s liability for adverse costs to an amount equal to the amount of funding provided by the funder to the funded party.

• Just as the courts have an inherent jurisdiction to make an order for costs against litigation funders, they may also make an order that a litigation funder provide security for costs.

• Arbitral tribunals only have jurisdiction over the parties to the arbitration. Unlike courts, arbitral tribunals do not have inherent jurisdiction to make costs orders, or security for costs orders, against third parties, including funders. However, an arbitral tribunal’s decision on whether, and to what extent, to make an order for costs, or security for costs order, against a funded party may take into account the fact of funding.


1 Also referred to as ‘costs follow the event’ or ‘costs shifting’.
2 In British Columbia (Minister of Forests) v Okanagan Indian Band (2003) 114 CCR 2d 108, LeBel J said at para 19: ‘The jurisdiction to order costs of a proceeding is a venerable one. The English common law courts did not have inherent jurisdiction over costs, but beginning in the late 13th century they were given the power by statute to order costs in favour of a successful party. Courts of equity had an entirely discretionary jurisdiction to order costs according to the dictates of conscience.’
3 The RBS Rights Issue case (see para 7.100 below) provides an extreme example of the costs of English litigation. The law firm Herbert Smith Freehills acted for the bank in defence of a claim brought by a group of former RBS shareholders who claim they were misled into participating in a 2008 rights issue. The bank estimated that its costs, if the case ran to trial and beyond, would exceed £100 million. In a May 2017 case management hearing, Mr Justice Hildyard described the bank’s estimate of costs as ‘staggering’.
4 See below at para 7.113 et seq for a discussion of after the event (ATE) insurance as security for costs. See also chapter 8, Part D.
5 See paras 7.27 and 7.89.
6 Alaska is an exception. See Alaska Rules of Civil Procedure, rule 82.
7 22 NYCRR 130–1.1; see also Fed R Civ P 11.
8 28 USC section 1920.
9 See paras 7.123–7.177 below. See also chapter 9, Part C.
10 See chapter 6.
11 See chapter 12.

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