Order for security ruling provides lessons on third party funding

Jennifer Craven of Pinsent Masons, the law firm behind Out-Law.com, said the judgment shows how businesses whose funding agreements were not properly in place may face losing their right to continue with their claims before the courts in England and Wales should the funding be withdrawn at short notice, and an order to pay security to a defending opponent cannot then be met.

The case before the Court of Appeal concerned a dispute between a provider of management and consultancy services, Catalyst Management Services (Catalyst), and an investments firm, Libya Africa Investment Portfolio (LAIP).

Catalyst sued LAIP for nearly $15.5 million plus damages over an alleged wrongful termination of a written agreement the organisations made in 2009. LAIP has defended itself against the claim.

During the lengthy legal proceedings between the companies, LAIP successfully obtained a court order requiring Catalyst to provide a security for legal costs anticipated in the case.

According to the ruling, Catalyst claimed that it had secured third party funding for payment of the $1.75m security. However, it defaulted on paying the $1.75m sum by the court-set deadline after the funding was withdrawn at a "late stage", the ruling said. The default prompted LAIP to apply for Catalyst's claim against it to be struck out.

However, Catalyst challenged the move, arguing for more time to secure funding for its action. It was given a second deadline to provide security but when it did not make the payment its claim was automatically struck out.

Catalyst raised an appeal following that development.

According to the Court of Appeal, Catalyst's appeal was based on an alleged "material change" in its circumstances. It argued that this 'material change' occurred when a third party funder it claimed to have a funding agreement with, withdrew days before the first deadline for payment of the security, and further claimed that to strike out its "meritorious claim" against LAIP would "cause serious injustice".

However, the High Court dismissed the appeal in April 2017. The Court of Appeal has now upheld that position. Central to the decision of both courts was their consideration of the contents of an email from Catalyst's lawyers to Zia Qureshi, Catalyst's sole director and shareholder, which was presented by Catalyst in evidence.

Catalyst argued that the email demonstrated it had a funding agreement in place prior to the first hearing on the issue of security for costs, and that because the funding was withdrawn after the security for costs order had been issued that this constituted a material change in its circumstances.

However, the Court of Appeal ruled that the email did not contain proof that a funding agreement was in place at the time of the email.

"The email was clear in its terms that a funding agreement had not yet been made," said Lord Justice David Richards. "It stated that [Catalyst's solicitors] were holding funds on behalf of a person whose name is redacted but who was in fact the funder. The [High Court] judge was clearly right in saying that it provided no evidence of a concluded funding agreement. Given that no satisfactory evidence was given of the alleged concluded agreement, whether by producing the agreement or otherwise, the judge was entitled to find that [Catalyst] had failed to establish a change in circumstances."

Jennifer Craven of Pinsent Masons said issues around costs are always a concern when court proceedings are commenced. She said typically the losing party will be ordered to pay a substantial proportion of the winning party's legal costs but that in some circumstances, the defendant can ask the court to make an order for security for costs against a claimant company, if there is reason to believe that it will be unable to pay any adverse costs award made against it.

She said the ruling by the Court of Appeal offers lessons to businesses that lodge claims before the courts where they require third party funding or other financial assistance to help them pursue their litigation.

"It is common for claimants who do not have financial resources readily available to attempt to secure third party funding, or look to the market for alternative options, such as ATE insurance, to assist them in pursuing litigation. Whatever the type of financial assistance claimants must face up to the reality that they may well be ordered by the court to make a payment by way of security of the defendant's costs, and so should consider carefully how they might meet such an order, if it is successfully obtained," Craven said. "Claimants would be well advised to ensure that the financial agreements with any third party funder are signed and in place before an order for security is made."

"Defaulting on an order to make payment of security can result in the strike out of the claim, and claimants are subsequently very likely to face an uphill battle to rectify that position as was the case here," she said.