At the end of July, the Court of Appeal heard an appeal by a number of litigation funders against a costs decision arising from the Excalibur Ventures LLC v Texas Keystone Inc & Others1 litigation.

The substance of the appeal and background to it was the subject of an alert we published following that hearing, entitled “Excalibur: Funders appeal against indemnity costs order – final chapter in long running dispute?”, which can be found here.

The question of the scope of the funders’ liability arose because costs had been awarded to the Defendants on the indemnity basis. Although £17.5 million had already been paid as security for costs (and subsequently had been paid to the Defendants upon the claim being dismissed), the amount of security had been calculated by reference to the Defendants’ costs budget and assumed recovery of costs on the standard basis. When the Claimant was ordered to pay costs on the indemnity basis, there was a shortfall of some £5.6 million.

The Court of Appeal unanimously dismissed the appeal.2 It found that the litigation funders had correctly been held to be jointly and severally liable for the indemnity costs order made against the Claimant – subject only to that liability being limited to costs incurred by the Defendants after the date of the various funders’ first contributions. 

Key issues

The Court of Appeal was asked primarily to consider two points which arose from Lord Justice Clarke’s first instance costs decision3 , namely:

1. whether the Claimant’s funders should be required to “follow the fortunes” of the Claimant so that they become jointly and severally liable for the indemnity costs order against the Claimant (the “Indemnity Costs Issue”); and

2. when applying the Arkin cap, 4 should sums provided by way of security for costs be included (the “Arkin Cap Issue”).

The Indemnity Costs Issue

In dismissing the funders’ appeal concerning the Indemnity Costs Issue, the Court of Appeal held that Clarke LJ was correct, in his first instance decision, when he identified how s.51(3) of the Senior Courts Act 1981 (“SCA”)5 should be applied and held the funders, as non-parties to the litigation, jointly and severally liable for the Claimant’s indemnity costs. Clarke LJ had also correctly referred to the Court’s wide discretion under Part 44 of the Civil Procedure Rules with regard to costs. Lord Justice Tomlinson, who delivered the Court of Appeal’s judgment, also noted that the conclusion reached by the Judge (i.e., that the funders should “follow the fortunes” of the Claimant with regard to the adverse costs order) was “not just within the ambit of reasonable decision making but…was plainly and obviously just, correct and appropriate”.

Although the Court of Appeal accepted that the funders themselves had done nothing which could be considered “discreditable in the sense of being morally reprehensible or even improper”, the funders’ appeal on the Indemnity Costs Issue failed primarily for two reasons:

1. it overlooked the fact that the conduct of the parties is but one factor to be taken into account in the overall evaluation of costs and the Court’s discretion should be exercised in the light of all the circumstances of the case; and

2. it only looks at the question to be decided from the point of view of the funder and ignores the character of the action which the funder had funded and the effect on the Defendants which had been subjected to the litigation.

Tomlinson LJ emphasised that the funders’ argument incorrectly assumed that the funders were only responsible for their own conduct. However, when considering the conduct of the unsuccessful party, the Court must consider how that party, and/or those in his camp (such as lawyers, experts and witnesses) have acted.

The Court of Appeal noted that both the funders and the Claimant were seeking to derive financial benefit from the pursuit of the claim and held that “the position of the funder is directly analogous [with the funded party]…and there can be no principled reason to draw a distinction between them”. Furthermore, there is “a broader principle of justice…the funder chooses which claims to back whereas…a defendant does not choose by whom to be sued, or in what manner”.

Although The Association of Litigation Funders (“ALF”) intervened in the proceedings (on the basis that the judgment raised a number of issues of public policy in relation to litigation funding), it is worth noting that the funders in the present case were not members of the ALF. In fact, only one of the funders had any prior experience of litigation funding, and that particular funder had not previously funded litigation in the UK.

The Arkin Cap Issue

Equally, the Court of Appeal was not persuaded by the funders’ arguments that the provision of funds to the Claimant to enable it to meet orders for security for costs should not count towards the Arkin Cap.

Tomlinson LJ saw no basis for justifying why such funds “should be treated any differently from a funder who advances money to enable that litigant to meet the fees of its own lawyer or expert witness”. The Court of Appeal held that such costs are the costs of pursuing the litigation which, if ultimately remain unpaid, will prevent the litigation from continuing.

The Court of Appeal considered it highly relevant when assessing the overall justice of the case that the terms upon which funds were provided to the Claimant to meet the security for costs orders were identical to the terms upon which funds were provided to the Claimant to pay its own lawyers. The security for costs sums were an investment in the litigation and should be included in any calculation of the Arkin Cap. In other words, a funder’s potential costs exposure will be capped at the overall amount advanced to the funded party, irrespective of whether those funds have been advanced for payment of legal fees or to satisfy orders for security for costs.

Analysis

The Court of Appeal has now provided clarity to the litigation funding market on the scope of potential exposure that funders may face with regard to adverse costs orders. It is now clear that:

1. funders may themselves be joined to the proceedings and held liable to pay indemnity costs in circumstances where indemnity costs are awarded against a party they have funded, and that party is unable to meet that costs order; and

2. when calculating the Arkin Cap, no distinction should be made between sums advanced to the funded party for the purpose of funding the litigation (such as solicitor’s fees) and funds provided for the purpose of meeting a security for costs order.

The Court of Appeal also made a number of important observations concerning funders’ obligations to carry out necessary due diligence on funded claims. In particular, it was noted that funders’ lawyers should keep the litigation they are funding under review to reduce the risk of an indemnity costs order. If such a review is conducted responsibly, there is no danger of it being characterised as improper.