The recent High Court decision of ECU Group PLC v HSBC Bank PLC & Ors [2022] EWHC 1616 (Comm) sheds light on the scope of commercial litigation funders' potential liability for costs in unsuccessful actions, including costs incurred prior to the signing of the Litigation Funding Agreement (LFA).
Following HSBC's successful defence of ECU's claims, Mrs Justice Moulder ordered that Therium, one of ECU's many sources of funding, was liable for costs, including costs incurred over the period prior to signing the LFA for which Therium had agreed to reimburse ECU. She also ordered that, despite the presence of other funders and investors funding ECU's claim, Therium was jointly and severally liable with ECU for those costs.
Background
ECU, a debt management firm, had brought a claim against several HSBC entities (together, HSBC), relating to loans that its clients had taken out with HSBC between 2004 and 2006. The primary allegation was that HSBC had manipulated foreign exchange markets. ECU had litigation funding from Therium Litigation Finance Atlas AFP IC (Therium), as well as other funders and investors. ECU's claim was unsuccessful: the Commercial Court held the claims were time-barred and ordered ECU to pay US$11.6 million in legal costs to HSBC on an indemnity basis.
HSBC received approximately US$9.9 million, which equated to the amount received by ECU under its adverse costs insurance. As ECU lacked the funds to meet the outstanding amount, HSBC then applied to the Court for an order requiring Therium to pay the remaining US$1 million. Therium accepted it should be liable for some costs and consented to being joined as a party for costs purposes. The arguments in the costs application concerned whether Therium's liability should be (1) confined to costs incurred after the signing of the LFA, and (2) only for the percentage it contributed to the total funding.
The LFA
The LFA between Therium and ECU was signed on 19 September 2019, after the proceedings had been issued and HSBC's defence filed. Pursuant to the LFA, Therium agreed to provide a commitment of approximately £6.6 million to ECU for the proceedings up until the conclusion of the liability trial. Therium also agreed to reimburse ECU for part of the costs incurred since 30 November 2018 and amounts outstanding to ECU's solicitors as at the date of signing the LFA. Under the LFA, Therium's contracted profit was three times the amount of costs funded, plus 20% of any recovery net of costs above £100,000,000.
Decision
Should Therium only be liable for costs incurred after the LFA was signed?
HSBC argued that causation was not a necessary legal precondition for a costs order against Therium, and that Therium's liability should not be confined to costs incurred after the signing of the LFA.
The Court considered that the mere fact that Therium stood to earn a substantial fee did not mean Therium should bear the costs incurred prior to the date on which it agreed to fund the litigation. However, when Therium signed the LFA, it agreed to reimburse ECU for the reasonable costs incurred since 30 November 2018. Accordingly, Therium's contingency fee applied to the period between 30 November 2018 to the signing of the LFA, as well as the costs from the LFA onwards. The Court held that, as Therium had the potential upside of the contingency fee for the costs from 30 November 2018 onwards, Therium should not be allowed to avoid the corresponding downside of being liable for those costs where the litigation was unsuccessful. However, Therium should not be liable for those costs incurred prior to 30 November 2018 as it had not agreed to fund these under the LFA.
Should Therium's liability be limited to the percentage of funding it contributed to?
Therium submitted that it should only be liable for a percentage of the costs corresponding to its contribution to the total funding ECU had received from its various funders. Since ECU had first sought legal advice on its claims, funding had been provided by at least 27 separate parties. Therium submitted that it had funded at most 64% of the total funding.
The Judge held that Therium should be jointly and severally liable with ECU for the costs of the proceedings, irrespective of the involvement of other funders and investors. This was because Therium had "far and away" the dominant financial interest in the outcome of the proceedings and effectively controlled the proceedings through the LFA. HSBC as defendants had no choice but to incur costs in defence of the claim and it would not be fair to make recovery of those costs dependent on the pursuit of numerous individuals and entities.
Therefore, Therium was held jointly and severally liable with ECU for the costs of the proceedings, incurred since 30 November 2018 (and, as previously ordered against ECU, on an indemnity basis).
Comment
This decision is a reminder of the wide discretion available to the court in making costs orders. Mrs Justice Moulder's judgment makes clear that litigation funders may be liable for costs that pre-date a LFA where the funder applies their contingency fee to that period. In light of this judgment, litigation funders should also not expect the presence of other sources of funding to reduce their potential exposure to liability for costs where they have the dominant financial interest.
