Security for Costs Against Funded Claims

Security for costs is an order requiring a claimant to provide security—usually money, a bank guarantee, or another acceptable form of security—to protect the defendant against the risk that it will win the case but be unable to recover its legal costs from the claimant.

Where a claim is third-party funded, the defendant may argue that the claimant lacks sufficient assets to satisfy a potential costs order and that the funder's involvement creates an additional enforcement concern. However, third-party funding by itself does not automatically justify an order for security for costs. The court generally considers the statutory requirements, the claimant's financial position, the nature of the funding arrangement, and the overall circumstances of the case.

1. Meaning of third-party funded claims

A claim is third-party funded when a person or entity that is not a party to the litigation finances some or all of the claimant's legal expenses.

Funding may take different forms:

• payment of legal fees;
• payment of litigation expenses;
• funding in return for a share of the recovery;
• non-recourse financing, where repayment depends on success;
• commercial litigation funding arrangements.

The existence of funding does not necessarily mean that the claimant is impecunious. A financially sound claimant may also obtain external funding.

2. Purpose of security for costs

The principal purpose is protection against unrecoverable costs, rather than punishment of a claimant for bringing proceedings.

For example, if:

• Claimant has limited assets in the jurisdiction;
• Defendant expects substantial litigation costs;
• Claimant loses the proceedings; and
• Defendant cannot realistically recover its costs,

the defendant may seek security.

The court must balance this protection against the claimant's right to pursue a legitimate claim.

3. Funding is relevant but not automatically decisive

The court may consider the existence and nature of litigation funding when deciding whether security should be ordered.

Relevant questions can include:

1. Is the claimant financially unable to satisfy an adverse costs order?
2. Is the claimant's inability connected with the litigation?
3. Is there evidence that the claim is being funded by a third party?
4. Does the funding arrangement provide any realistic protection for the defendant?
5. Is the funder legally responsible for adverse costs?
6. Would an order effectively prevent a genuine claim from being pursued?
7. What amount of security would be proportionate?

The court therefore looks at the substance of the circumstances, rather than applying a simple rule that “funded claim = security.”

Indian Legal Position

Indian civil procedure does not contain a general rule that every third-party-funded claim requires security for costs.

The relevant statutory framework may include Order XXV of the Code of Civil Procedure, 1908, depending upon the nature of the proceedings and the applicable rules.

Under Order XXV, the court can require security for costs in circumstances where the statutory conditions are satisfied. The court's jurisdiction must therefore be examined in light of the particular proceedings and the applicable procedural provisions.

Arbitration proceedings may involve a different analysis because the Arbitration and Conciliation Act, 1996 and institutional arbitration rules can provide their own mechanisms concerning costs and security.

4. Security for costs in arbitration

Security for costs can be particularly significant in international arbitration.

An arbitral tribunal may consider:

• the claimant's financial position;
• whether the claimant is a special-purpose vehicle;
• whether the claimant has substantial assets;
• the existence of third-party funding;
• whether the funder's agreement covers adverse costs;
• whether enforcement of a future costs award is likely to be difficult.

The tribunal must nevertheless avoid using security for costs as a mechanism to unfairly prevent a claimant from pursuing its case.

Important Case Laws

1. Manohar Lal Chopra v. Rai Bahadur Rao Raja Seth Hiralal, AIR 1962 SC 527

The Supreme Court examined the scope of the court's procedural powers under the CPC and emphasized that procedural powers must be exercised within the framework of the Code.

Principle: Procedural orders concerning protection of parties must have a proper legal foundation and cannot simply be made on an assumed general power where the Code governs the matter.

Relevance: Security-for-costs applications must be connected to the applicable procedural jurisdiction.

2. Raman Tech. & Process Engg. Co. v. Solanki Traders, (2008) 2 SCC 302

The Supreme Court considered the purpose of security under Order XXXVIII Rule 5 CPC and explained that protective procedural powers are intended to prevent frustration of a future decree, rather than provide a defendant with an unjustified tactical advantage.

Principle: Protective orders should be based on genuine circumstances creating a risk to enforcement and should not be granted mechanically.

Relevance: The same general caution is relevant when a party seeks security merely because litigation is being funded.

3. Arvind Construction Co. (P) Ltd. v. Kalinga Mining Corporation, (2007) 6 SCC 798

The Supreme Court discussed the approach to interim protective measures in arbitration and emphasized the need for the court to consider the statutory requirements governing the particular relief.

Principle: Interim protective relief must satisfy the applicable statutory framework and cannot be granted merely because one party requests protection.

Relevance: A request for security for costs in arbitration must be examined under the arbitration framework applicable to the proceedings.

4. Fiona Trust & Holding Corporation v. Privalov [2007] UKHL 40

The House of Lords considered arbitration principles and the broad approach to arbitration agreements.

Principle: Arbitration-related procedural questions must be considered in the context of the parties' arbitration agreement and the applicable arbitral framework.

Relevance: In international funded claims, the tribunal's jurisdiction and procedural powers must be distinguished from the court's ordinary civil-procedure jurisdiction.

5. RSM Production Corporation v. Saint Lucia [2014] UKPC 13

The Privy Council considered an application for security for costs in an investment arbitration where third-party funding was an important consideration.

The existence of third-party funding was relevant to the application, but the decision illustrates that funding should be considered alongside the overall circumstances of the case, rather than treated as an automatic ground for security.

Principle: Third-party funding can be relevant to security for costs, particularly where there are concerns about recovery, but the tribunal must consider the circumstances as a whole.

6. Norscot Rig Management Pvt Ltd v. Essar Oilfields Services Ltd [2011] EWHC 3379 (Comm)

The English Commercial Court considered issues concerning third-party litigation funding in arbitration.

The case is particularly relevant to the broader relationship between litigation funding, arbitration costs and procedural orders.

Principle: Funding arrangements can have significant consequences for the allocation and recovery of arbitration costs.

7. Sarpd Oil International Ltd v. Addax Energy SA [2016] EWHC 287 (Comm)

The English High Court considered an application for security for costs in an arbitration-related context.

Principle: Security for costs is a discretionary protective remedy and must be assessed against the circumstances of the particular proceedings.

8. Gulf Azov Shipping Co. Ltd v. Idisi [2001] EWCA Civ 1467

The Court of Appeal considered the operation of security for costs and the importance of examining the statutory requirements before making an order.

Principle: Security for costs is not intended to become an automatic procedural barrier to litigation.

5. Factors Usually Considered by the Court or Tribunal

A security-for-costs application may be analysed through the following factors:

6. Funder's liability for adverse costs

A critical issue is whether the third-party funder itself can be required to meet adverse costs.

A funding agreement may provide that:

• the funder pays only the claimant's legal expenses;
• the funder also covers adverse costs;
• the funder provides an after-the-event insurance arrangement;
• the funder's liability is capped; or
• the funder has no obligation if the claimant loses.

The actual terms of the funding arrangement therefore matter considerably.

7. Security should not become a barrier to justice

Courts and tribunals must balance two competing interests:

Defendant's interest:
Protection against unrecoverable legal costs.

Claimant's interest:
Ability to pursue a legitimate legal claim without being prevented by an excessive financial requirement.

Consequently, even when security is appropriate, the amount and form of security should be carefully considered.

Possible forms include:

• payment into court;
• bank guarantee;
• bond;
• escrow arrangement;
• suitable insurance;
• another form accepted by the court or tribunal.

8. Security against funded claims vs. security against impecunious claimants

These concepts should not be treated as identical.

Funded claim:
A third party finances litigation.

Impecunious claimant:
The claimant may lack sufficient resources to satisfy a costs order.

A funded claimant can have substantial resources, while an unfunded claimant can also be impecunious.

Therefore, the mere existence of a litigation funder does not necessarily establish that security is required.

Conclusion

Security for costs against funded claims is a protective procedural remedy, not an automatic consequence of third-party funding. The court or arbitral tribunal generally examines the claimant's financial position, enforceability of a potential costs award, the terms and extent of third-party funding, the applicable procedural rules, proportionality, and access-to-justice considerations.

The central distinction is:

Third-party funding may be relevant evidence in a security-for-costs application, but funding alone does not necessarily establish a right to security.

In practice, the strongest applications normally focus on a demonstrable risk that an adverse costs order will be difficult to recover, rather than simply pointing to the existence of a funder.