This article discusses two cases concerning third party funding of litigation.

English High Court Orders Third Party Funders to Pay Indemnity Costs

The English High Court decision in Excalibur Ventures LLC v Texas Keystone Inc and others [2014] EWHC 3436 shows that third party funders may be liable for the indemnity costs of a winning party where they fund a hopeless case.

Facts

Excalibur sued Gulf Keystone Petroelum and other companies for US $1.6 billion in relation to an interest in a number of oil fields. The claim was funded by a number of professional funders who together provided Excalibur with £31.75 million so that it could pursue the claim. The funders also provided security for costs amounting to £17.5 million. However, there was a costs shortfall of £4.8 million, which represented the award of indemnity costs to the defendants. The defendants asked the court to compel the funders to meet this shortfall as Excalibur had no funds of its own.

Decision

The Court held that the claim failed on every point and ordered Excalibur to pay the defendants' costs on the indemnity basis. The court found the claim was speculative and opportunistic with no sound basis in fact or law, and included unsuccessful allegations of dishonesty. The claim could not have been brought without the third party funding and each of the funders stood to benefit financially if the claim succeeded.

Comment

The decision serves as a warning to third party funders to exercise caution before agreeing to fund cases, and to finance only those cases with strong merits. It shows that where a claim is unsuccessful, the funder will generally be liable for the defendant’s costs on the same basis as the funded party. In particular, where the claimant has been ordered to pay indemnity costs, for example because a claim was found to be speculative, the funder will be liable on the same basis, irrespective of whether he bears any personal responsibility for the factors which caused the court to order costs on that scale.

It is noteworthy that the court applied the so-called Arkin cap (as applied in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055) to limit each funder's costs liability to the extent of the funding provided. In determining the extent of each funder's liability for these purposes, the court took into account amounts provided toward security for costs as well as payment of the claimant's costs. In addition, it held that each funder should only be liable to the extent the defendants' costs were incurred after the date of the funder's contribution.

The Irish Courts have also held that they have jurisdiction to order that successful defendants be paid their costs of defending proceedings by a third party funder where the plaintiff cannot meet the liability. In Moorview Developments Ltd v First Active plc [2011] 3 I.R. 615, Clarke J. stated that the key factors for the exercise of such jurisdiction, include: (1) the financial status of the plaintiff company and its potential ability to meet a costs order against it; (2) the degree of possible benefit to the third party; and (3) whether the proceedings were pursued reasonably and in a reasonable fashion.

However, in Ireland, unlike in England, professional funding by third parties with no legitimate interest in the litigation is unlawful and an actionable tort. Accordingly, third parties in this jurisdiction may only fund proceedings where they have a bona fide interest in the dispute (such where they are creditors or shareholders), or where they may obtain a benefit arising from success in the proceedings.

No requirement to warn third party of risk of costs order against him 

In the English case of Weatherfield Global Products Ltd v Hydropath Holdings Ltd and others [2014] EWHC 3243 (TCC) the High Court held that there was no obligation to warn a non-party of the possibility that a costs order may be sought against him or her. 

The Judge was satisfied that it was positively unlikely that, even if the non-party had been warned in advance that a costs order may be sought against him personally, he would have done anything different from what he did which was to continue to defend the claim and to pursue through to judgment the counterclaims.

In reaching his decision, the Judge took the following into account, in relation to the non-party:

  • At all material times he was the major shareholder both in the defendant company (Hydropath) and in another company (Clearwell), and exercised full control of both companies. Both Hydropath and Clearwell had lost on all the major issues of liability in the underlying litigation.
  • He controlled the litigation. All decisions on all matters relating to the litigation were taken by him. 
  • He primarily stood to benefit from the litigation and the Counterclaim. He funded approximately half of the costs of the litigation, by way of loan. Without that loan and without the cash payments, Hydropath was otherwise insolvent, and Clearwell was effectively insolvent save for the fact that it was being supported by Hydropath.
  • The counterclaims were speculative in that they were put forward without any real analysis as to whether there was in reality any prospect of success. The decision for pursuing those counterclaims was substantially that of the non-party.
  • Whilst it was not unreasonable on legal and commercial grounds to contest the proceedings, it was unreasonable to mount, let alone pursue, the speculative counterclaims. The decision to bring and pursue them was that of the non-party alone.

Comment

Whilst there is a jurisdiction for the Irish courts to order non-party costs against third party funders, Irish case law indicates that the knowledge of the third party funder of its potential exposure to a third party costs order may be a factor in deciding whether to make such an order for costs at the conclusion of the proceedings (Moorview Developments Limited v First Active plc & Ors [2011] IEHC 117: Thema International Fund PLC v HSBC Institutional Trust Services (Ireland) Limited and others [2011] IEHC 357; Used Car Importers of Ireland v Minister for Finance [2014] IEHC 256).  Accordingly, it would be sensible for lawyers to consider writing to their opponent, at the earliest opportunity, seeking details of any third party funding arrangement and reserving a client's right to seek a third party funders' costs order at the conclusion of the case.