Financial transparency the best policy for funders

Financial transparency the best policy for funders
Alistair Croft
Senior Investment Manager, Senior Legal Counsel - United Kingdom

A recent English Court of Appeal decision sent a strong message about the need for litigation funders to provide clear evidence of their ability to meet an adverse costs order.

In Rowe & Ors v. Ingenious Media Holdings (2021), Lord Justice Popplewell noted that litigation funders “ought to be properly capitalised in order to be able to meet an adverse costs order if the claim fails.” By demonstrating their ability to meet adverse costs, the funder should therefore be able to “defeat any application for an order that security be provided.”

“It is a critical feature of the business of commercial litigation funding that funders should ensure that they have adequate resources to meet their potential liabilities arising out of the litigation that they choose to fund,” Popplewell LJ wrote. “It follows that a properly run commercial funder should rarely if ever need to be ordered to put up security.”

In Rowe, the defendants sought security for costs from a funder providing financing to one of the groups of claimants in the underlying case. The claimants sought a cross undertaking in damages from the defendants for the actual costs of providing the security, should their claim ultimately win. The High Court granted security for costs and allowed a limited cross undertaking to cover “external costs,” such as an increase in the funder’s after-the-event insurance policy. The claimants appealed the security for costs and the denial of a more-expansive cross undertaking; the defendants also appealed, looking to overturn the more limited cross undertaking.

In January, the Appeal Court upheld the security for costs order and rejected both the limited and more expansive cross undertakings. Lord Justice Popplewell said that “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”.  Security for costs, he said, is a “normal and foreseeable aspect of the investment being made, and the funder can be expected to include it in his business model.”

A policy of transparency
The Judge’s comments align closely with Omni Bridgeway’s long-held policy of transparency about its financial position, and the company’s belief that a funder must be adequately capitalised to meet its financial responsibilities—including when a case is unsuccessful.

As Popplewell LJ noted in his judgment: “Well-advised claimants can be expected to seek to avoid funding from funders who are set up in such a way that orders for security for costs might be required against them (for example, where the funder is inadequately capitalised, or not transparent as to its financial standing, or is unwilling to provide defendants with an undertaking that it will meet their costs).”

In recent years, a number of new funding companies have entered the marketplace, attracted by the dispute financing’s rapid, global growth and strong investment returns that are not dependent upon turbulent capital markets. Some, however, have been unwilling to provide courts, claimants and defendants with evidence of their financial wherewithal. Transparency is a critical component in building trust with claimants and courts, and funders may demonstrate their stability in a number of ways. One of the most effective is via publicly available financial disclosures.

Omni Bridgeway, for example, is one of only a few publicly traded funding companies and has been listed on the Australian Securities Exchange since 2001. As such, the company is required to publicly report on detailed information about its financial position, its finances and investment portfolio, on a quarterly basis.

The disclosures provide parties and the courts with the ability to independently confirm the company’s financial position and to do so with current and credible information.

Codes of Conduct
Funders also may choose to abide by codes of conduct set forth by the dispute funding industry itself. Omni Bridgeway is a member of, and complies with, the Association of Litigation Funders (ALF) in the UK and the International Legal Finance Association (ILFA). Those codes both refer to the need for funders not to make investment commitments without having adequate capital to meet those commitments. However, as the judge pointed out, the funder, even if a member, must still be willing and able to demonstrate to the defendant and the court that this is the case.

Costs undertaking and after-the-event insurance 
Cost undertakings submitted in relation to potential orders for adverse costs may also help meet security concerns in some jurisdictions. Omni Bridgeway has deployed such undertakings in other common law jurisdictions, including Australia and Canada, and defeated applications for security for costs.

In addition, Omni Bridgeway provides the claimant with full adverse cost protection, due to its global ATE wrapper. By offering adverse cost protection in this way, Omni Bridgeway is able to offer coverage at a fraction of the cost of a standalone ATE policy, resulting in a far greater recovery for the funded party.

The price of security and ATE  
When a funder is unable to prove it can pay adverse costs, claimants will almost certainly end up recovering less. A defendant in a cost-shifting jurisdiction is likely to seek an order of security for costs, and a court is likely to agree to such an application, where the funder is unwilling or unable to provide evidence of their financial wherewithal.

The issue of security for costs should from part of a robust discussion at the outset between funder, solicitor and claimant about strategy. It simply plays into defendants’ hands to even suggest an opposition to the idea of security. Therefore, to engage in an expensive and usually futile attempt to avoid the posting of security, incurs unnecessary costs and diverts from the actual case. A properly run commercial funder should rarely if ever need to be ordered to put up security, because its transparent financial position, should address any of the defendants’ concerns.

Parties seeking dispute financing—and who are concerned whether the funding company is able to meet its obligations in the event of an adverse costs order—would be well-advised to seek a funder that is publicly listed, well-capitalised, ready and willing to disclose its financial position to the court and to the defendant, and provide full adverse cost protection without the need for a standalone ATE policy.

To learn more about Omni Bridgeway’s litigation funding capabilities, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us  to learn more about the ways we can help you pursue meritorious claims.