Significant control over proceedings poses costs risk for litigation funders

Commercial litigation expert Michael Fenn of Pinsent Masons, the law firm behind Out-Law, said the decision showed that businesses which fund litigation to which they are not a party are potentially exposed to adverse costs orders, and that the costs which they may be ordered to pay to the other side in the litigation may exceed the level of their investment in funding the proceedings.

“The risk is particularly great if the business providing funding exercises a very significant degree of control over the proceedings,” Fenn said.

After litigation between Laser Trust and CFL Finance, three costs orders were made against CFL in Laser Trust’s favour. Over £330,000 plus interest was still to be paid and CFL’s accounts showed it would be unable to pay the balance.

Accordingly, Laser Trust applied for a third-party costs order against Colosseum Consulting, which had funded the litigation for CFL.

Mr Justice Marcus Smith said the discretion to order a non-party to pay costs would not generally be exercised against pure litigation funders. However, this jurisdiction could be exercised against organisation or persons whose role exceeded that of pure funding.

In his decision, the judge said: “Suffice it to say that it is quite clear that under the terms of the funding agreement, the control that Colosseum had was massive.”

The judge said the test for imposing a third-party costs order had “absolutely” been met, and there was no need to limit the order to the costs which had been paid by the funder. Accordingly, he ordered Colosseum to pay the costs that had been ordered against CFL.

Fenn said the judgment served as a reminder for any organisation providing third-party funding for litigation.

“This is not a decision about a commercial third-party litigation funder. However, combined with other recent court authority, it serves as a reminder even to professional funders operating in the burgeoning litigation funding market to keep a careful eye on their contractual terms and on their practices when funding litigation,” Fenn said.

“The particular issue brought into focus by this latest decision is that, while funders will of course wish to have input into the progress of litigation they are funding so as to protect their investment, if they exercise too great a degree of control over the action they may be exposed to unwanted costs liabilities,” Fenn said.