The High Court's ruling in Excalibur Ventures LLC v Gulf Keystone [2014] EWHC 3436 (Comm) is the most recent decision to consider the role of third party funders – an area that has seen little scrutiny to date.

The court held that where a losing party was ordered to pay the successful party's costs on an indemnity basis, the funders were liable for the indemnity costs.  Although the case was "outside the norm", being described as "speculative and opportunistic" and pursued "aggressively", it serves as a reminder to third party funders that, if one of their funded cases turns out to be a bad claim, they could end up footing the bill.

Excalibur had commenced proceedings against Gulf Keystone, asserting an interest in oil fields in Kurdistan. That claim "failed on every point". The question before the High Court was whether the third party funders should be made liable for the costs of Gulf Keystone and, in particular, on an indemnity basis.

The court was not swayed by the public policy argument that to hold third party funders liable for those costs on an indemnity basis would make funders less likely to finance litigation and curtail access to justice. Clarke LJ felt that this was justified: the aim of the litigation funding industry "is not to finance hopeless cases but those with strong merit"'. Having taken the commercial decision to leave the proceedings in hands of Excalibur and its solicitors, the funders should bear the costs that they caused Gulf Keystone to incur.

Finally, in assessing the extent of any costs contribution from the funders, the court applied what is known as the "Arkin Cap". This limited the liability of each funder to the amount that it had contributed towards the costs of Excalibur.

Clarke LJ noted that the decision is not one which will send "an unacceptable chill" throughout the litigation funding industry. Perhaps. It is all too easy to see what the court will view as a "hopeless case" after the event. The decision illustrates very clearly the need for funders to take their own critical view of the merits of each case and to reappraise proceedings as they develop. If not, the costs risk could be very significant.