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Litigation Funding and ATE Insurance in High Court spotlight

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Comments made by a High Court judge recently have highlighted some of the complexities involved when using litigation funding to back large commercial claims. The comments, by Mr Justice Nugee, were made during the latest stage of the Ingenious Litigation, in which a large number of investors are attempting to recover losses incurred following investments in so called ‘film-schemes’ – schemes that were initially promoted and sold as a highly tax-efficient form of investment, but more recently have been deemed as inappropriate by HMRC. The investor claims have been made against a number of Ingenious entities and against financial advisors who originally recommended the schemes, with litigation funding being provided to support the claim by Therium.

Nugee J recommended that litigation funders and ATE (After The Event) insurers should make their arrangements more defendant friendly, and also stated that just because a funder was a member of the ALF (Association of Litigation Funders), this does not mean that a funder will pay in the event of a problem with the costs involved in making a claim. Nugee J said:

Costs as I have said are always discretionary, but on a question like this there is much to be said for uniformity of practice where possible, not only because like cases should as a matter of principle be treated alike but also because it helps the parties if costs are relatively predictable.”

He went on to say that liability for adverse costs should be apportioned pro-rata rather than per capita “as a matter of fundamental equitable principles”.

Costs and Cover

The question was then whether Therium should give security for the costs of the claimants it is backing. Nugee responed by saying that this was subject to Therium not having to provide security for the self-funding claimants, subject to any exceptional circumstances, stating that:

It is in theory possible that Therium might behave in such a way as to render itself potentially open to an order for costs even in relation to the self-funded claimants, but the circumstances would have to be fairly unusual.”

On quantum, the court said that given the nature of the some of the allegations – such as deceit and fraudulent misrepresentations – there was “a reasonable prospect” of the defendants recovering costs on an indemnity basis if they were successful.The appropriate figure therefore was 75% of the estimated costs:

That is the figure adopted by Teare J [in Danilina v Chernukhin [2018] EWHC 2503 (Comm)], and is also what I would myself have thought about right judging from what experienced litigation solicitors have told me in other cases that they would expect to recover on a detailed assessment on the indemnity basis".

Nugee J said he could not proceed on the basis that Therium would meet any order for costs, explaining:

It is striking that no actual financial information about Therium has been adduced in evidence. The evidence is that if Therium had to put up cash, it would need to make a call on its investors. It is not clear from the evidence whether it has any right to call on its investors, or whether the investors’ response to that would be voluntary…nor am I confident that its membership of the ALF, and the obvious pressure which that puts on it to comply with the ALF rules, is sufficient to give one enough confidence that if it were facing a large liability for costs at the end of the day, that the money would be forthcoming.”

When it came to deciding whether the ATE policies in place would be effecitive, Nugee J highlighted a series of “difficulties” with the policies, including being voidable for fraud – he could not rule out the possibility of the trial judge expressing an adverse view of a claimant’s truthfulness – and other circumstances in which the insurers could exclude or terminate cover. How the proceeds of the policies would be apportioned between the various defendants, where some sought security and other did not, might also be a problem. He said:

The fundamental difficulty is that an ATE policy, as recognised on both sides, is not designed as security for costs. It is designed as cover for the claimants… I have come to the conclusion, with some reluctance, that there is a real, and not a fanciful risk, that the ATE policies will not respond in full… There is real difficulty in adapting a policy that is written for one purpose into the quite different purpose of meeting an application for security…I suspect the problems that have been identified could be solved, and there may be something to be said for litigation funders and ATE insurers to seek to develop a form of policy that could both act as insurance for claimants and sufficient protection for defendants.”

 

Commercial Litigation Funding

If you are thinking about taking legal action against another individual or company but are worried about the costs involved, Advantage Litigation Services have the skills and expertise to help you find a way of funding commercial litigation without risking your personal finances or those of your business. Click here to contact us today or call 0800 160 1298 to see how we can help.

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