Taking a chance

Recent case law provides helpful advice for litigation funders in weighing up the risks of taking on a case, say John Wardell QC and Andrew Mold

The ability of courts to make a costs order against a non-party under Section 51 of the Senior Courts Act 1981 is well known. It is also widely ­understood that such an order will not ­usually be made against a ’pure funder’.

However, when will a funder’s purity be tainted so as to put them at risk to a costs order? The recent decision of HHJ Mackie QC in Merchantbridge & Co v Safron ­General Partner 1 (2011) provides some ­useful guidance.

The proceedings in Merchantbridge were brought by an investment adviser against the fund manager of a Cayman Islands hedge fund for breach of an investment advisory agreement. The claim was ­defended but, following trials on liability and quantum, an award of damages and interest totalling more than £1m was made in the claimant’s favour. No part of that judgment was ever satisfied by the ­defendant company, which was insolvent.

The defence was funded by a group of investors in the hedge fund who had ­capitalised and owned the holding ­company of the defendant. They had evidently taken legal advice on their status as funders and the defendant had written to the claimant stating that its defence was being funded by a ’pure funder’.

Nonetheless, the claimant was given ­permission to join the funders to the ­proceedings for the purpose of costs and its application for a non-party costs order was eventually heard in the Commercial Court in April 2011.

Most decisions involving applications for non-party costs orders reiterate the ­general principle that an order for costs is in the ­discretion of the Court, and that these ­applications require a summary procedure not over complicated by reference to or by over-analysis of case law.

However, as Judge Mackie appreciated, that noble approach is often counteracted by the fact that guidelines for the exercise of the discretion by first-instance judges are to be found in at least nine appellate-level cases. Judge Mackie also noted that the law has developed since the approach set down in earlier cases such as Taylor v Pace ­Developments (1991).

Pure funders are “those who do not stand to benefit from [the litigation], are not ­funding it as a matter of business, and in no way seek to control its course”, according to Lord Justice Simon Brown in Hamilton v Al Fayed (No. 2) (2003). They are treated as akin to disinterested relatives who might fund a litigant’s case merely out of love or familial duty.

omeone within this camp is normally immune from an adverse costs order.

In contrast, if a funder can be described as the ’real party’ to the litigation – in the sense that he controls or is interested in the outcome – then it will normally be just that he bears the successful party’s costs. An order may be appropriate against a non-party who has an interest in the outcome of the proceedings even if the non-party does not exercise control over the proceedings.

On the facts of the case, Judge Mackie decided that the funders were interested in the outcome of the proceedings because they saw them as a “nuisance” and acknowledged that a vain attempt might be made by the claimant to enforce the judgment against the funders, as investors in the fund that was managed by the defendant.

Furthermore, once the funders had ­commenced funding the litigation – ­thereby exposing themselves to a potential adverse costs order – they thereafter became more directly interested in the claim being ­dismissed since this would remove any risk of the court making a costs order against them.

The above considerations, which the judge held to be legitimate and to reflect rational commercial decisions, nonetheless amounted to a business interest, which meant that the funders were not pure ­funders of the disinterested kind as ­identified in Hamilton.

The decision is important for two further points. First, Judge Mackie rejected a ­submission that each funder should only be liable to pay an amount equivalent to the sums they had contributed towards the defence. This submission reflected the approach towards professional litigation funders adopted in the decision of Arkin v Borchard Lines Ltd (No. 2 & 3) (2005).

Second, Judge Mackie’s costs order was made against the funders on a joint and several basis given that they had acted in concert in funding the defence. This was of particular practical importance given that all of the funders were incorporated abroad.

Therefore, the decision shows that it will not take much for a shareholder or investor who funds a related party’s litigation to be considered as the ’real party’ to the ­proceedings and to be exposed to an adverse costs order. For those advising on the cost benefit of a decision to fund, a full ­understanding of this risk is important.

John Wardell QC and Andrew Mold are ­barristers at Wilberforce Chambers