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Carlo Taczalski and Frederick Simpson are successful in the Court of Appeal Cross-undertakings have little place in the security for costs regime – Case note

Summary

The Court of Appeal has handed down judgment in the latest instalment of the Ingenious litigation: Rowe v Ingenious [2021] EWCA Civ 29.

Every reported case in which a cross-undertaking has been required as the ‘price’ for a defendant obtaining security for its costs has been expressly overruled.  The Court of Appeal has confirmed that while a jurisdiction to require such a cross-undertaking exists, it should be exercised only in “rare and exceptional circumstances”, which should be “even rarer and more exceptional” when the party providing the security is a commercial litigation funder.

The Litigation

The Ingenious Litigation arises out of investments in the film industry offered by one or more entities within the Ingenious Media Group of companies which were intended to take advantage of sideways loss relief (which allows a loss made by a partner in a partnership to set that loss off against his/her personal tax bill provided that certain conditions are met). Very roughly, the idea was that individuals would invest in an LLP, which would produce a film or computer game and in so doing make a loss in its first year; that loss would be allocated to the individual partner, who would recoup the vast majority if not all of his/her investment in tax relief in the initial year.  Thereafter, the investor would have an asset which produced a steady income stream with tax paid on that income.

Many hundreds of people took advantage of these schemes.  HMRC challenged each in turn, including in both the First Tier and Upper Tribunals: ([2016] UKFTT 521 (TC), [2017] UKFTT 429 (TC) and [2019] UKUT 226 (TCC)). These challenges are now on appeal to the Court of Appeal as well.

The result for the investors is that their claims to sideways loss relief have been refused, and some significant tax bills have been issued.

The investors bring claims in three groups, each represented by a separate firm of solicitors. Some, but not all, of the claimants are funded by commercial litigation funders. The funded claimants represented by Mishcon de Reya are funded by Harbour. Those represented by Stewarts Law (“the Funded Stewarts Claimants”, in the language of the litigation) are funded by Therium.

The Appeal

In November 2019 Nugee J (as he then was) considered the funding of the litigation. Although not formally group litigation for the purposes of CPR 19 the Claimants sought an order that their liability for adverse costs should be several rather than joint. In return, the defendants sought an order that Therium should provide security for costs on the ground that it could not show that it would be able to meet an award of adverse costs (it being established that security for costs could be ordered against a funder). Nugee J handed down judgment in February 2020; the judgment is [2020] EWHC 235 (Ch) and commentary from Crown Office Chambers can be found here.

On that occasion Nugee J ordered that Therium provide security for the costs of the defendants sued by the Claimants it was funding. Therium and the Funded Stewarts Claimants sought a cross-undertaking in damages as a condition of being required to provide security for costs, but Nugee J refused to require one at the time, and specifically ruled that the loss which the Claimants and Therium sought to have covered could or should not be covered by any cross-undertaking in any event.  That loss was the ‘multiple’ or ‘Enhanced Return’ of 2.5 times deployed capital which it was said Therium would be charging the Funded Stewarts Claimants for providing security.  However, Nugee J opined that the case for a cross undertaking would be stronger in respect of ‘external’ costs imposed upon the Funded Stewarts Claimants and Therium as a whole – such as the costs of providing a bank guarantee.

At the third CMC in June 2020 the Funded Stewarts Claimants and Therium renewed their request for a cross-undertaking in damages and on this occasion were successful in having the condition imposed, but the undertaking required was limited to the ‘external’ costs contemplated by Nugee J in November 2019.

The Funded Stewarts Claimants sought to appeal Nugee J’s refusal to require a broad cross-undertaking following the November 2019 hearing (the relevant order is “the February Order” in the language of the appeal); the relevant defendants (the “Security Defendants”) appealed Nugee J’s decision to require a cross-undertaking at CMC3 in June 2020 (“the July Order”).

Cross-Undertakings and Security for Costs

Cross-undertakings are well-established in the context of interim injunctions; the party obtaining an interim injunction undertakes to compensate the party subject to the interim injunction for loss caused thereby, if it turns out following trial that the injunction should not have been granted.  This is reflected in a long line of case law (see for example F. Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295), and in Practice Direction 25A.

The practice of requiring a cross-undertaking in the context of security for costs is much less well established.  It has been mentioned as a possibility in appropriate cases in the Commercial Court Guide since 1997, but neither counsel nor the Court could identify what prompted its introduction, or why it appeared in the Commercial Court Guide alone of the Court Guides.  There appears to be no reported case or legislative provision which sets out the jurisdiction or ‘grounds’ the practice.

It has been considered in only a handful of cases since 1997. The first appears to be Stokors SA v IG Markets Ltd [2012] EWHC 1684 (Comm), in which the possibility was noted but a cross-undertaking was not eventually required. It was required as a condition of being granted security for costs in the RBS Rights Issue Litigation [2017] 1 WLR 4635. In that case the question of a cross-undertaking had been raised during the hearing by Hildyard J, who considered it to be an appropriate case for one though his reasons were not fully explained. A cross-undertaking was also required in Bailey v GlaxoSmithKline UK Ltd [2018] 4 WLR 7 and Hotel Portfolio II v Ruhan [2020] EWHC 233, although again in neither case was the basis of the jurisdiction or the circumstance which made the condition appropriate fully explained.  A dissenting note was struck by Marcus Smith J in TBD (Owen Holland) Ltd v Simons [2020] EWHC 2681 (Ch), who found the jurisdiction to require a cross-undertaking to be ‘very open-ended and dangerous’, but in Pisante v Logothetis [2020] EWHC 3588 (Comm) Henshaw J had no such reservations.

Having developed somewhat haphazardly (apparently) over the space of a few years, the practice of requiring a cross-undertaking in return for the grant of security for costs (and the question of whether it made any difference that a commercial litigation funder was involved) was ripe for review and clarification by the Court of Appeal.

Principles Established

Giving the judgment of the court, Popplewell LJ (who was also the judge at first instance in Stokors) held:

(1)        There was no doubt the court had jurisdiction to require a cross-undertaking, on the basis of [35] “the discretionary nature of an order for security under CPR 25 itself, and … the express terms of CPR 3.1”. The nature of the jurisdiction was the same as that exercised when the court required a cross-undertaking in return for an interim injunction or freezing order: [37].

(2)        In general claimants were not insulated from having to bear the costs of pursuing claims in civil litigation, including both the costs of the litigation itself (which are generally not recovered in full even by a successful claimant) and the costs of funding the litigation (eg employing or borrowing money to bring the claim): [45]-[51].

(3)        Requiring a cross-undertaking in return for security for costs constitutes the reallocation of the risk of funding litigation from the claimant to the defendant [52]. “It is therefore itself an exceptional departure from general practice and the general principle that funding costs or losses lie where they fall.”

(4)        On this basis, [53] “to require a defendant to provide a claimant with the benefit of a cross-undertaking in damages in return for security for costs should at the very least be an exceptional remedy.”

(5)        The circumstances triggering the cross-undertaking will in principle be the same as those triggering a cross-undertaking given in return for an interim injunction: the order for security for costs will have been wrongly made if the party providing security ultimately succeeds at trial: [63]-[64].

(6)        However, there is a difference in that interim injunctions and in particular freezing orders restrain a party’s use of their own assets and so constitute [65] “substantial interferences with the defendant’s way of life and conduct of business which are not part of the normal run of litigation” whereas orders for security for costs are aimed at the costs of litigation and are [66] “an ordinary incident of the process of civil litigation”. The practice of requiring cross-undertakings in connection with interim injunctions and freezing orders therefore does not justify requiring them in connection with security for costs.

(7)        Allowing the requirement of cross-undertakings to become routine would have undesirable practical consequences as it would (1) lead to a significant increase in inquiries into damages under cross-undertakings, with an attendant increase in satellite litigation, (2) increase the scope, time and costs of security applications, and (3) discourage defendants from seeking security as they would be required to accept an open-ended and unquantifiable liability in return: [67]-[71].

(8)        The exceptional nature of requiring a cross-undertaking in return for security for costs is even more so the case where commercial litigation funders are involved, as: (1) the costs of funding are generally irrecoverable, and should not be made recoverable in this way; (2) the possibility of being required to provide security for costs is an aspect of the business in which commercial funders have chosen to involve themselves, and their business models ought to accommodate that; (3) commercial funders should be sufficiently well capitalised that they can defeat an application for security for costs with ease meaning the requirement of a cross-undertaking would be undeserved whereas its refusal would prompt improvements in the funding market; and (4) refusing cross-undertakings in favour of commercial funders would not frustrate access to justice: [72]-[81].

(9)        Accordingly [82] “it should only be in a rare and exceptional case that the court should require a cross-undertaking in favour of a claimant as a condition of ordering security for costs, and only in even rarer and more exceptional cases that it should do so in favour of commercial litigation funders.” There were no such exceptional circumstances in RBS, Bailey, Hotel Portfolio II or Pisante and those cases should no longer be followed.

Application to the Ingenious Litigation

Applying the above principles to Ingenious, Popplewell LJ found that a cross-undertaking was not justified. He also dismissed the Funded Stewarts Claimants’ suggestion that the restraint on the use of assets which security for costs inevitably involved represented a restriction on a party’s right of access to a court and so offended against Art 6 ECHR, finding that this issue was fully answered by the established restriction on the provision of security for costs when this would stifle a claim: [56]-[59].

Permission to appeal to the Supreme Court was refused.

Conclusion

Although the Court concluded that cross-undertakings in return for security for costs should be ‘rare and exceptional’, and that the cases to date had not been so, it is notable that the Court declined to say anything about what would constitute sufficient grounds for a cross-undertaking to be required. In some respects this does not leave the situation much clearer than it was before: the jurisdiction exists, but nobody can really say when it should be exercised. However, this may be an intentional tension. The Court clearly did not wish to fetter a judge’s ability to require a cross-undertaking in a truly exceptional case, but the fact that every known case in which one has been required as a condition of security has been expressly overruled is a clear signal that practitioners and parties should not be requesting cross-undertakings as a matter of course.

It may be, as suggested by SRLV in its submissions but not commented upon by the Court, that the sorts of situations in which cross-undertakings are required will be limited to cases where security would not otherwise be granted.  This would be consistent with the Court of Appeal’s conclusion that the jurisdiction to require such an undertaking is itself inherent in the discretion being exercised.

Carlo Taczalski and Frederick Simpson represented SRLV, a firm of accountants which is an Intermediary Defendant in the Ingenious Litigation, in the Court of Appeal.  They are led by Ben Quiney QC in the case, and they are instructed by Martin Chesher, Laura Hurst and Henry Saunders of Kennedys.



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