The High Court offers guidance regarding adverse costs exposure and security for costs in multi-party litigation 

A recent High Court decision has considered costs related issues in multi-party litigation. The judgment is a careful examination of claimants’ exposure to adverse costs as well as how adverse costs insurance intersects with requirements for posting security for costs.

Re Ingenious Litigation

In 2014, HMRC launched an investigation into film and video game investments promoted by the Ingenious Media Group leading to enforcement action. Over 500 investors in those schemes subsequently launched proceedings against Ingenious companies, the group chairman and certain banks and advisors, variously alleging negligence and fraudulent misrepresentation. The claims are being case managed together. Although no Group Litigation Order has been made, 28 claimants have served a single pleading with a section covering generic allegations.

At a hearing on 19-21 November 2019, the claimants and defendants argued over issues of liability for adverse costs and security for costs. Mr Justice Nugee gave an oral judgment at the hearing, but he expanded upon his oral reasons in a written judgment dated 10 February 2020, Rowe & Others v Ingenious Media Holdings & Others [2020] EWHC 235 (Ch), which we consider in this short note.

Jointly or severally liable?

The claimants sought an order that their liability to defendants’ adverse costs was several rather than joint. Nugee J drew a distinction between the situation where A and B have a “true joint claim” brought, for example, by “companies in the same group” or “members of the same family” and group claims “brought by hundreds of individual claimants, none of whom [which] are connected with each other” with the Ingenious claims being the latter. Having drawn this distinction between different types of claims, the judge did not decide that there as a “default position” on whether individual claimants in group proceedings had joint or several liability.

Nugee J reviewed the leading case in this area, Ward v Guinness Mahon [1996] 1 WLR, and also subsequent judgments and practice. He noted that in each of the authorities that he reviewed “several liability was ordered…, although it is fair to say that there appears to have been little if any argument on the point.” The question of policy was “on whom should the risk of non-recovery fall”. Risk falls on the defendant if liability is several, and some claimants are impecunious. Risk falls on claimants who pay an adverse costs order on a joint basis, but who are then unable to recover the appropriate share from impecunious co-claimants. The judge noted that the normal position, where a GLO is in place, is of several liability for adverse costs unless ordered otherwise.

Taking into regard all of these factors, Nugee J exercised his discretion in favour of ordering that liability for adverse costs should be on a several basis in this claim.

The judge went on to find that the claimants’ liability for adverse costs should be pro rata to the size of their investments, rather than being per capita. He noted that there was great disparity in the size of the investments, with one claimant having invested £10.5m whereas, at the other end of the scale, 12 claimants had invested £36,000 each. The judge decided in favour of pro rata liability for adverse costs on “basic principles of equity.”

Security for costs

The defendants sought security for costs from the claimants’litigation funder (they would not have sought security had the claimants been jointly liable for costs). Pursuant to section 51 of the Senior Courts Act 1981, a litigation funder can be ordered to pay adverse costs and, pursuant to CPR Rule 25.14(2)(b), a funder can be required to provide security in respect of those costs.

The claimant group comprised some individuals who availed themselves of litigation funding and some who were self-funding their claims. Nugee J held that the funder could be required to provide security for costs for the funded claimants, but not for the non-funded claimants (unless, in “exceptional circumstances”, the funder behaved in such a way as to make itself liable for adverse costs of non-funded claimants). This conclusion followed from the earlier finding that the claimants were severally liable for costs: because the funder was not liable for the non-funded claimants’ adverse costs, it need not provide security for costs for them.

In the context of the security for costs application, there was detailed argument between the claimants and defendants on: (i) the ability of the Claimants to meet an adverse costs award; (ii) the adequacy of the ATE policy limits; and (iii) whether the ATE policies would respond if called upon. In relation to (iii), the judge considered that that there was “a real, and not a fanciful risk, that the ATE policies will not respond in full.” Although there was a non-fanciful risk of the policies not responding, the judge thought it unlikely that all of the policies would fail to respond. Accordingly, he gave some credit for the adverse costs cover, thereby reducing the figure for security for costs.

Conclusion

Nugee J performed a thorough review of the funding and adverse costs cover put in place by the claimants in this case. Other funded cases can expect to have their arrangements closely scrutinised as defendants explore opportunities to fracture the financial modelling of those claims. For high value claims, these arguments are worth exploring for defendants, as the downside is minimal.

On a more macro-level, the rules on liability for costs play a very important role in the viability of group litigation and therefore on the volume of claims which corporates face. The judgment referred to a 1995 Law Society working party report which stated that liability for adverse costs in group proceedings should be several because “Any other arrangement would make the risk inherent in group actions so great as to limit the access to justice solely to those plaintiffs with nothing at all to lose.” Whilst ATE can significantly offset the risk of liability for costs, there is always some risk that a policy may not respond, or cover may prove inadequate. Therefore, in principle, joint liability for adverse costs should be a deterrent to participating in group litigation even if ATE is in place because the consequences of the cover not responding are far greater for individual claimants.