The Court of Appeal has confirmed that litigation funders face the same costs liability as the funded litigant.

In addition, a costs order can also be made against non-party parent companies who are providing the money to fund the litigation even though their name does not appear on the funding agreement and they do not have a contractual relationship with the litigant receiving the funding.

The facts

In Excalibur Ventures LLC v Texas Keystone Inc and others [2016] EWCA Civ 1144, Excalibur claimed US1.6 billion with the backing of litigation funding from several funders. The claim failed and Excalibur was ordered to pay indemnity costs, mainly on the basis of their conduct of the action which was criticised by the judge.

The funding provided to Excalibur was not only to provide £14.25m to fund Excalibur's costs but also £17.5m in relation to the security of the defendant's costs. The indemnity costs order meant there was a shortfall in the security payment of approximately £4.8m.

The High Court held that the funders were jointly and severally liable to pay the defendant's costs on an indemnity basis. It went further to say that two of the funders' parent companies who were the source of the funds and beneficiary of the return, were jointly and severally liable.

The result

The Court of Appeal dismissed the appeal brought by a number of the funders.

The Arkin Cap

The 'Arkin cap' is a principle which limits the costs liability of a funder to the amount which that funder invested in funding the claim. In Excalibur, the Court of Appeal stated that in applying the 'Arkin cap', it did not make any difference whether funds were provided to pay for the claimant's costs or for security for costs, the funds were to be treated in the same way because they were both provided to enable Excalibur to pursue the litigation.

Indemnity Costs Orders

The basis of the original indemnity costs order was the conduct of Excalibur, not that of the funders. The funders argued that because their conduct was not criticised, it was not appropriate for them to be ordered to pay costs on an indemnity rather than a standard basis. The Court rejected their argument. It held that the position of a funder is directly analogous to that of a litigating party in

that they could find themselves having to pay for the conduct of those they are not personally responsible for.

Parent companies

A court can use its discretion to make a non-party costs order. The Court of Appeal held that non-party costs orders are not limited to those funders who entered into a contractual relationship with their funded litigant. If such orders were limited in that way, it would give rise to funders finding ways to avoid their costs liability.

When considering whether or not it is appropriate to make a non-party costs order, the court will look at the circumstances of the involvement of the non-party in the litigation. In Excalibur the Court of Appeal decided that orders against the parent companies of two of the funders were appropriate because those parent companies provided the money to fund the litigation and stood to benefit from a return on the funding investment if the litigation had been successful. The costs risk was one they took on board when providing the funding. The Court of Appeal stated that the making of such an order did not amount to piercing the 'corporate veil'.

What next?

The award of indemnity costs is a departure from the usual costs award. It was made in this case due to the conduct of Excalibur in the litigation.

Going forward, it is expected that litigation funders will introduce even more rigorous risk assessments for cases before they agree to provide funding. This is likely to include increased due diligence as part of the application process and throughout the litigation. They may also decide to be more proactive in the case particularly ensuring the good conduct of those actively involved in the litigation.

Legal budgets are limited. There are times when a business needs support to fund a dispute or the business may not be able to pursue the dispute at all if it fails to secure the funding it needs. Alternatively, it may suit the business risk strategy to share the risk of pursuing a claim or it may be commercially convenient to remove the cost of pursuing the dispute from the company balance sheet.

Those who want to receive litigation funding must be prepared for greater scrutiny from their investor. To be successful, applicants must provide full documentation at the time of the application, which will often include a legal opinion on the merits of the case. Putting cards face up on the table is the best policy.