Spring 2017 Editor: Melanie Willems IN THIS ISSUE The Perils of Pay as You Go 03 by Ryan Deane 05 10 Time Waits for No Man: An Update on Delay by Markus Esly Still Stuck in the Stone: Third Party Funding in the Excalibur case by Robert Blackett THE ARBITER SPRING 2017 2 THE ARBITER SPRING 2017 3 The perils of pay as you go by Ryan Deane In the recent case of Graham Leslie v Farrar ConstrucƟon Limited  EWCA Civ 104, the Court of Appeal considered whether an employer could recover overpayments of build costs made to a contractor on five completed property developments. The result, that the overpayments were not recoverable, may be surprising to many operaƟng in the construcƟon industry. The court’s reasoning, however, is applicable to any contract that contains a mechanism for interim and final payments. So it is certainly worth a look. Background Graham Leslie was a wealthy businessman who made his money in the pharmaceuƟcal industry. In his reƟrement, as one does, he wished to build up a property porƞolio. To achieve this goal Mr Leslie sought out Farrar ConstrucƟon Limited (“FCL”), a construcƟon company whose principal shareholder and director was Neil Farrar. SomeƟme in 2008 Mr Leslie and Mr Farrar reached an agreement in the following terms: (i) sites would be idenƟfied and agreed as suitable for development; (ii) Mr Leslie would buy those sites; (iii) FCL would design and construct housing on the sites to an agreed design and budget; (iv) Mr Leslie would pay FCL its “build costs”; (v) on compleƟon the open market value of the development would be agreed, the acquisiƟon and build costs would be deducted, and the resultant profit share divided equally. This was referred to during the course of the liƟgaƟon as the “Framework Agreement”. In their wisdom the parƟes decided not to reduce their agreement to wriƟng, ignoring the pleas of Mr Farrar’s accountant to do so. Nor did they idenƟfy what was meant by the term ‘build costs’, in parƟcular which items of expenditure were included or excluded. What could possibly go wrong? This state of affairs was not a problem for the first five years, when the developments proved profitable. Five developments were completed in that Ɵme, though many more were ongoing. In each case, before work began, the parƟes agreed a costs budget. As works proceeded, FCL submiƩed requests for interim payments. These requests were always for round sums not supported by any detail or evidence of costs actually incurred. These amounts were referred to by the parƟes as ‘budget costs’. Mr Leslie made the payments because they were within the costs budget and appeared reasonable. He obviously placed a lot of trust in Mr Farrar and the two were described as iniƟally having an “extremely good relaƟonship”. Indeed the relaƟonship between the two men was so good that Mr Farrar waived FCL’s profit share on one of the developments, esƟmated at £165,000, as a wedding giŌ to Mr Leslie. Once the honeymoon period was over, the relaƟonship began to deteriorate. Work was not proceeding as smoothly on some of the other development sites and Mr Leslie began to form the view that Mr Farrar was taking advantage of him. In July 2013 Mr Leslie refused to conƟnue funding the remaining ongoing developments. Mr Leslie swiŌly commenced a claim in the Technology and ConstrucƟon Court claiming repayment of all sums that he had overpaid FCL. He claimed the difference between the ‘budget costs’ paid and the ‘build costs’ that he had agreed to pay. In its counterclaim FCL claimed it was owed the money Mr Leslie had withheld in respect of the ongoing developments, in addiƟon to damages for repudiaƟon. Mistaken payments and unjust enrichment To begin his analysis, the judge at first instance had to decide which items of expenditure consƟtuted build costs within the meaning of the Framework Agreement. He held that this phrase meant the direct cost of labour and materials together with site specific preliminaries. It excluded Head Office overheads, non-site specific general business costs and capital expenditure on plant and machinery. Using that definiƟon of build costs FCL had in fact overcharged Mr Leslie by 22%. Given that the profit share was divided equally, the net loss to Mr Leslie was 11% of the sums he invested. This did not, however, jusƟfy Mr Leslie’s refusal to perform his obligaƟons under the contract in July 2013. That refusal consƟtuted a repudia- Ɵon of the Framework Agreement and the judge awarded damages to FCL on that basis. The interesƟng part of the judgment, however, is the treatment of the recoverability of the overpayments to FCL. Mr Leslie claimed the overpayments fell to be repaid under the doctrine of unjust enrichment. He argued that FCL had been unjustly enriched because the overpayments were made in Mr Leslie’s mistaken belief that the sums were properly payable. The judge agreed that the overpayments had been made under a mistaken belief, but expressed the belief rather differently. The judge considered that at the Ɵme Mr Leslie made each of the interim payments he was operaƟng under a mistaken assumpƟon of fact, namely that FCL’s present intenƟon was to use the money only to fund the direct cost of construcƟon. That belief was mistaken because Mr Farrar, as the controlling mind of FCL, hadn’t given any thought to the specific purpose that the interim payments should be used for. All he did was to ask for round sum payments on account because those were the amounts he thought were needed to keep Farrar ConstrucƟon in sufficient funds to conƟnue with the developments. The judge didn’t comment further on whether, in his experience, this state of mind was a common feature in building contractors. Having established that there had been an overpayment of over £800,000 made by mistake, the judge held that Mr Leslie was not 4 THE ARBITER SPRING 2017 enƟtled to be repaid any of that amount. The correct legal analysis was that the parƟes, by their conduct, had reached an agreement that the build costs FCL was enƟtled to be paid equated to the budget costs that FCL had charged Mr Leslie. The sums which FCL sought were within budget and Mr Leslie was content to pay them without any invesƟgaƟon. Mr Leslie had in effect assumed the risk that the build costs and the budget costs were not the same, and, by paying those costs without quesƟon, had entered into a seƩlement to finally resolve the maƩer for each completed development. If that analysis was not correct, the judge held that the same conclusion could be reached by two alternaƟve means. First, that by his conduct Mr Leslie had waived his right to make any detailed inquiry into the actual build costs of each development. Second, that Mr Leslie made an implicit representaƟon that he would not require FCL to ascertain and substanƟate its actual build costs, FCL had relied on that to its detriment (by refraining from asserƟng higher build costs than the budget allowed), such that Mr Leslie was estopped from claiming recovery of any overpayments. Knowingly running the risk Mr Leslie appealed to the Court of Appeal on the ground that the judge ought to have allowed recovery of the overpayments on the five completed developments as monies paid under a mistake. Lord JusƟce Jackson, giving the judgment of the court, forcefully rejected that argument. He stated that the core legal principal, formulated and refined over the last two centuries, is that if C, because of a mistake, pays money which is not due to D, he can recover money unless one of the recognised defences applies. Were any defences applicable in this case? Jackson LJ found the answer in the early 19th century case of Kelly v Solari (1841) 9 M & W 54. An insurance company had paid out £987 to the widow of the deceased in respect of three life insurance policies, overlooking the fact that one of the policies had lapsed. The insurers sought to recover the overpayment. Lord Abinger CB stated the relevant principle as follows: “The safest rule however, is that if the party makes the payment with full knowledge of the facts, there being no fraud on the other side, he cannot recover it back again. There may also be cases in which, although he might by invesƟgaƟon learn the state of facts more accurately, he declines to do so, and chooses to pay the money notwithstanding; in that case there can be no doubt that he is equally bound.” Another member of the court, Parke B, agreed staƟng: “If, indeed, the money is intenƟonally paid, without reference to the truth or falsehood of the fact, the plainƟff meaning to waive all inquiry into it, and that the person receiving shall have the money at all events, whether the fact be true or false, the laƩer is certainly enƟtled to retain it …” Jackson LJ also considered the rather more recent case of Brennan v Bolt Burdon  QB 303. At first glance one could be forgiven for missing the relevance of this decision. The claimant’s claim form was struck out for late service and the parƟes agreed to walk away from the dispute and bear their own costs. Subsequently there was a Court of Appeal decision in separate liƟgaƟon, the effect of which was that the claimant’s claim form had in fact been served in Ɵme. The claimant returned to court to appeal the striking out of its claim form. He argued that the parƟes’ agreement was viƟated by a common mistake in law, namely that the claim form had been served out of Ɵme. The Court of Appeal rejected that argument, holding that there had been a compromise of the liƟgaƟon on a give and take basis. Each party had forgone the chance of achieving a beƩer result and avoided the risk of suffering a worse result. The parƟes had to accept the consequences of what they agreed, even if the law subsequently changed to the advantage of one side or the other. Jackson LJ held that the same principle applied in circumstances where parƟes with opposing interests negoƟate a financial agreement. The mere fact that it turns out that one party or the other has made a bad bargain does not viƟate the agreement. Drawing these two strands of authoriƟes together, the Court of Appeal held that this was a classic case of C voluntarily making a payment to D, knowing that it may be more than he owes, but choosing not to ascertain the correct amount. The dicta in Kelly v Solari were precisely applicable and Mr Leslie was not enƟtled to recover any of the alleged overpayments. The arguments on ‘mistake’ were a red herring. The court held that there had been no legally material mistake. The relevant point was that by failing to inquire into the basis of the invoices Mr Leslie had knowingly run the risk that he might be paying more than was strictly due. Whether Mr Leslie had knowingly run the risk was not dependent on his subjecƟve state of mind, but on “an objecƟve reading of the facts surrounding the payments as they could reasonably have been known to both parƟes”. In this instance, there were three facts which led the court to conclude that Mr Leslie had knowingly run the risk of overpaying: “(i) Mr Leslie's main concern on all the developments was not to exceed the budget costs, subject to a couple of minor adjustments. That would ensure (and in the event did ensure) that Mr Leslie made a handsome profit. (ii) Since the final payments were in line with the budget costs, Mr Leslie was unconcerned about whether or not the sums which he was paying accurately represented the build costs. (iii) It was beneficial for both parƟes to avoid the costs and effort which would be involved in audiƟng and negoƟaƟng THE ARBITER SPRING 2017 5 the actual amount of the build costs.” Jackson LJ concluded by noƟng that, if necessary, he would have agreed with the first instance judge that Mr Leslie had waived his right to make any detailed inquiry into the actual build costs of each development. He preferred not to express any view on FCL’s estoppel argument, which he described as “a more difficult ques- Ɵon”. PracƟcal lessons Although the decision of the Court of Appeal is somewhat factspecific, there are a number of pracƟcal points that parƟes would do well to bear in mind in any contract involving interim payments. The first, and most obvious, point is to make sure the details of any interim payment regime are contained in a wriƩen contract between the parƟes. Early in his judgment Jackson LJ dryly noted that: “Misunderstandings of this nature are hardly surprising, if a builder and a property developer choose to embark upon a series of mulƟ-million pound projects on the basis of a brief oral agreement which no one troubles to reduce to wriƟng.” Second, parƟes should be careful to avoid conduct from which it might be inferred that the contractual final account mechanism is being departed from and payments are being seƩled on a different basis. It is important to emphasise that Mr Leslie would have had a contractual right to the overpayments he claimed if the Framework Agreement had been operated in the way the parƟes originally intended. He only lost that right because by his conduct he expressed his agreement to instead pay FCL’s budget costs. It will be surprising to many parƟes to learn that convenient ‘agreements’ of this kind may later be treated as displacing the effect of the contractual terms originally agreed. Looking back at the facts the Court of Appeal took into account when deciding that Mr Leslie knowingly ran the risk of overpaying, none seem parƟcularly remarkable in the context of a construcƟon project, or indeed in the context of any contractual venture involving interim payments. ParƟes reasonably sure of making a healthy profit might be reluctant to devote further resources to drill down into the figures, especially if they require professional assistance to do so. This decision should serve as a warning to such parƟes that expressing that aƫtude in their dealings with another party may well bar any future claims to recover any overpayments made. In order to avoid that result, parƟes should make clear in any communicaƟons relaƟng to interim payments that the sums being paid are subject to the final payment provisions contained in the parƟes’ contract. Finally, cases of this kind will inevitable be highly fact-sensiƟve, depending as they do on “an objecƟve reading of the facts surrounding payments as they could reasonably have been known to both parƟes”. It follows that such cases will be very difficult to challenge on appeal, as demonstrated by Graham Leslie v Farrar ConstrucƟon Limited itself. As McCombe LJ, in a short concurring speech, observed: “We are being invited to overturn a judge's conclusion on a finding of fact, made aŌer a complex trial. It was a finding made in a very careful and comprehensive judgment on eleven issues. In such circumstances, I would not easily be persuaded that he was not enƟtled to make that ulƟmate finding of fact on the evidence which he had heard and which we have not.” Time waits for no man: an update on delay by Markus Esly Delay claims, parƟcularly in major construcƟon and engineering projects, are usually factually and legally complex. Contractors submit heŌy claims, supported by lengthy claims documents and a delay or programming analysis. For such claims to have the best chance of persuading the employer (or a court or arbitrator) of their merits, they need to reflect both what actually happened on site and the way the contract requires that extensions of Ɵme are dealt with. In Carillion ConstrucƟon Ltd v Emcor Engineering Services Ltd  EWCA Civ 65 (10 February 2017), the Court of Appeal has recently considered whether the ‘orthodox’ or convenƟonal approach to extending Ɵme can really be right when it can lead to some anomalous results which (the contractor argued) offended commercial common sense. In this arƟcle we consider whether there may be some wider implicaƟons to this most recent approach. Delays in Court Carillion was the main contractor for the redevelopment of the High Court’s Rolls Building, which houses both the Commercial Court and the Technology and ConstrucƟon Court. Emcor was Carillion’s subcontractor for mechanical and electrical works. Carillion’s main contract was signed in June 2007, and required the work to be completed by early 2011. Specifically, the main contract provided for secƟonal compleƟon of two packages (including the court fit-out) by 28 January 2011. Emcor’s subcontract reflected that compleƟon date for the relevant subcontract works. CompleƟon was delayed by 182 days, unƟl 29 July 2011. As a result, the parƟes got to spend some more Ɵme in the Rolls Building as they liƟgated over who was responsible for the delay, and in parƟcular how any extension of Ɵme for Emcor should be computed. In a nutshell, the compeƟng arguments were that: 6 THE ARBITER SPRING 2017 - either, the period for which Emcor was enƟtled to an extension of Ɵme would simply be added to the compleƟon date (a ‘conƟguous’ extension), which is what Emcor said should happen; or - as Carillion argued, further specific periods were to be fixed during which the works could be carried out, but these periods were not necessarily going to be conƟguous. Instead, these periods would reflect when the contractor was actually delayed by the relevant events. Carillion argued for the second approach because awarding nonconƟguous extensions would lead to a fair and commercially sensible result, while a ‘conƟguous’ approach might end up relieving the subcontractor of liability for delay in circumstances where the work was in fact delayed because of something for which the subcontractor was responsible. ConƟguous or non-conƟguous? Carillion illustrated this with an example. Assume that subcontract works are meant to be completed within 100 days, coinciding with the agreed compleƟon date of the main contract works. The subcontract works are, however, delayed in such a way that compleƟon under the main contract is also delayed. This is all the subcontractor’s fault. At this point, the employer would be enƟtled to liquidated damages against the main contractor, and the main contractor would also be incurring prolongaƟon costs. One would expect that all this loss could be passed down (at least to some extent) by the main contractor to the subcontractor. On day 150, the main contractor then instructs the subcontractor to carry out a significant variaƟon. These new works should take 50 days. Obviously, the subcontractor is enƟtled to an extension of Ɵme. If a ‘conƟguous’ extension of Ɵme is granted (adding 50 days to the original compleƟon date so that it becomes day 150), that would mean that the subcontractor would not be in breach of contract on day 150 - even though there has in fact been culpable delay of 50 days. If the compleƟon date were simply extended in that manner without having regard to the actual progress (or lack thereof) of the works, the contractor (as employer to the subcontractor) might lose any enƟtlement to liquidated damages. It would then be necessary to wait and see when the subcontract works would be completed - perhaps by day 200 - and then determine what the cause of criƟcal delay for the overrun period was. Instead of awarding a conƟguous extension of Ɵme, Carillion argued that the subcontractor in the example should be absolved from any liability for delay only from day 150 to day 200, on the basis that the addiƟonal works would require an addiƟonal 50 days of work. That would reflect what was actually happening on site. Awarding a conƟguous extension of Ɵme could have the unsaƟsfactory result of puƫng the subcontractor in default just as it would embark on addiƟonal work, whilst ignoring responsibility for prior delays in compleƟng the original scope of work. The extension of Ɵme clause in the subcontract In the Court of Appeal, Jackson LJ described Carillion’s argument as novel and indeed unprecedented, never having come across it at the Bar or during his Ɵme on the bench. His Lordship also considered a number of prior cases dealing with extensions of Ɵme (well known to construcƟon lawyers, including Henry Boot v Malmaison and Walter Lilly v Mackay), and found that these all supported the award of a conƟguous extension of Ɵme, based on the actual delay caused by the relevant event. In none of these cases had the Courts been asked to determine a period of culpable delay followed by an extension of Ɵme starƟng on a date other than the original compleƟon date. UlƟmately, however, none of these cases were directly relevant as the quesƟon was one of contractual interpretaƟon: was there any support in the wording of the relevant extension of Ɵme clause for the non-conƟguous approach? Emcor had been engaged under a standard form construcƟon contract for domesƟc use, the JCT’s “DOM/2” agreement. Clause 11.3, the relevant extension of Ɵme provision, stated: “11.3 If on receipt of any noƟce, parƟculars and esƟmate under clause 11.2 the Contractor properly considers that: 1. any of the causes of the delay is an act, omission or default of the Contractor, his servants or agents or his subcontractors, their servants or agents (other than the SubContractor, his servants or agents) or is the occurrence of a Relevant Event; and 2. the compleƟon of the Sub-Contract Works is likely to be delayed thereby beyond the period or periods stated in the Appendix, part 4, or any revised such period or periods, then the Contractor shall, in wriƟng, give an extension of Ɵme to the Sub-Contractor by fixing such revised or further revised period or periods for the compleƟon of the Sub-Contract Works as the Contractor then esƟmates to be reasonable.” Jackson LJ started by considering the natural meaning of these words. He felt that the expression ‘extension of Ɵme’ simply connoted that the period for compleƟng the work would be made longer. References to ‘revised periods’ had the same meaning, since they would be read in that context. Other parts of the contract referred to the “… expiry of an extended period previously fixed under Clause 11”. This suggested that by granƟng an extension of Ɵme, the employer would have extended the date for compleƟng the work, rather than providing for (potenƟally several) periods within which the work, or some of it, could be done. All this supported the conƟguous approach. Commercial common sense Carillion had argued that Jackson LJ’s reading of the contract did not make commercial common sense, and should not therefore be THE ARBITER SPRING 2017 7 adopted. In dealing with this argument, the Court of Appeal restated the principles of contractual interpretaƟon, whilst making some interesƟng comments on the relevance of ‘commercial common sense’. Everyone agreed that the latest principles on contractual interpretaƟon were set out in the decision of the Supreme Court in Arnold v BriƩon  UKSC 36. In Arnold, the Supreme Court stressed that commercial common sense could not be invoked retrospecƟvely, and could only be relevant for something that the parƟes could have foreseen at the Ɵme of entering into the contract. In other words, it is not open to a party to advance an argument based on commercial common sense with the benefit of hindsight, in order to miƟgate the consequences of some unforeseeable event that has turned out to that party’s detriment. This rule against relying on the benefit of hindsight would not have prevented Carillion’s argument here. When entering into a construcƟon contract for any reasonably complex project, the par- Ɵes may well be taken to have been alive to the possibility that their project might be delayed for any number of reasons, with each party accepƟng the risk of some of these potenƟal delay events happening further down the line. The parƟes might also reasonably have expected that the cost of the work could vary, depending on the stage of the project: delay events might therefore give rise to different costs, depending on when they might happen. So, at the Ɵme of contracƟng, the parƟes may have had the commercial consequences of granƟng conƟguous, or nonconƟguous, extensions of Ɵme in mind. Despite the fact that Jackson LJ described the argument for a non-conƟguous extension of Ɵme as novel, it does not seem unusual in any way for an employer to think that once the original compleƟon date has come and gone, and the contractor is responsible for the delay, the employer would be able to levy liquidated damages. It seems equally sensible to think that if something else happens aŌer the date when liquidated damages start to become due, the contractor might be relieved from having to pay them - but only from that Ɵme on. In Arnold, the Supreme Court elaborated that: “… while commercial common sense is a very important factor to take into account when interpreƟng a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parƟes to have agreed …” One could ask how precisely commercial common sense can be “a very important factor in interpreƟng a contract” while the court or tribunal is also told that it must be “very slow” to reject the natural meaning of the contract because of it. The natural meaning is a maƩer for ordinary language, always bearing in mind that under English law, the contract is interpreted objecƟvely by a reader who knows the factual - and commercial - background to the transac- Ɵon just as well as the parƟes themselves did at the Ɵme of entering into the agreement. Commercial common sense will not dictate the natural meaning of the words. Instead, commercial common sense is used to resolve ambiguiƟes: where the words in the contract can bear different, alternaƟve meanings, the more commercially sensible is to be preferred (see Rainy Sky SA v Kookmin Bank  UKSC 50). The crucial quesƟon remains: when exactly is the contractual wording ‘ambiguous’ to allow such a choice? A brief detour In an earlier case, Balfour BeaƩy Regional ConstrucƟon Ltd v Grove Developments Ltd  EWCA Civ 990, Jackson LJ had to consider a similar argument based on commercial sense in the construcƟon context. In that case, the Court of Appeal was split as to whether the contract was sufficiently ambiguous to bring the principle into play. In Balfour BeaƩy, the majority of the Court of Appeal found that the parƟes had agreed that the contractor would receive interim payments but only for a period of 23 months, regardless of how long the work would actually take. The contract was based on the JCT Design and Build Contract form, with some amendments. The parƟes had indicated that they wanted ‘stage payments’ (as opposed to ‘monthly periodic payments’) by Ɵcking the relevant box on the standard form. They did not, however, specify what stages would trigger payments, and instead noted that this was ‘to be agreed’. They did subsequently agree a schedule. Even though they had Ɵcked ‘stage payments’, the schedule that they then agreed looked a lot like ‘monthly payments’. The schedule was headed: “Interim ValuaƟon/Payment Dates 2013 – 2015 ValuaƟon ApplicaƟon on Third Thursday of the month.” It consisted of a table of 23 valuaƟons and payments, giving 23 dates when the contractor was to make an applicaƟon for each such payment, when the value of relevant work would be cerƟfied, and when payment would be made. Those dates stopped just short of the original compleƟon date in July 2015. The work was delayed, ulƟmately taking about a year longer. A dispute arose as to whether Balfour BeaƩy was enƟtled to an extension of Ɵme. The employer refused to make any further interim payments aŌer the 23rd payment. In the Court of Appeal, Balfour BeaƩy argued that any agreement that the contractor would not receive any further stage payments beyond the original compleƟon date no maƩer how much longer it would have to be mobilised would be ‘commercial nonsense’. Jackson LJ rejected this argument. He found that the par- Ɵes’ schedule was clear and unambiguous: it was expressly described as the “agreed schedule of valuaƟon / payment dates for this project”, and it said nothing about dates for applicaƟons, valua- Ɵons, relevant noƟces or indeed payments beyond the last date (close to compleƟon). His Lordship held that: 8 THE ARBITER SPRING 2017 “There is no ambiguity in the present case which enables the court to reinterpret the parƟes’ contract in accordance with “commercial common sense”.” Absent any ambiguity, Jackson LJ stated that commercial common sense could only rescue a party “… if it is clear in all the circumstances what the parƟes intended, or would have intended, in the circumstances which subsequently arose.” He felt that the par- Ɵes’ schedule was anything but clear as to how and when payments would be due aŌer the dates had run out. Jackson LJ dismissed an argument for an implied term for very similar reasons. In his view, there was nothing commercially unreasonable about Balfour BeaƩy having to wait unƟl the final date for payment (following compleƟon of the project) before they would be paid for some of their work. Longmore LJ agreed with that conclusion, so Balfour BeaƩy’s appeal was dismissed. Vos LJ, however, dissented. He found that the contract was sufficiently ambiguous such that the principle of commercial common sense could operate. His Lordship felt that a schedule which was headed “Interim ValuaƟon/Payment Dates 2013-2015” could not be taken as meaning that the parƟes had agreed that interim payments would stop if the work took longer than the original compleƟon date. The parƟes’ agreement was silent as to what would happen aŌer the original date. Vos LJ thought that “… clear words would be required …” to support a construcƟon which in reality would mean that Balfour BeaƩy would have to wait for two to three years unƟl aŌer the last interim payment date on the schedule before it would be paid substanƟal sums. Vos LJ’s preferred construcƟon of the agreement was to insert the words “etcetera” at the end of the schedule, such that monthly payments would conƟnue beyond the date when the parƟes had iniƟally expected the work to complete. In that, however, he was in the minority. Common sense does not help Carillion Whether a contract is ambiguous so that you can have regard to commercial common sense, and choose the more commercially sound alternaƟve meaning, may not be an easy quesƟon to answer: everything will depend on the contract wording in issue. Returning to Carillion v Emcor, Clause 11.3 referred to “… fixing such revised or further revised period or periods for the compleƟon of the SubContract Works.” The starƟng point may have been just one compleƟon date for the work (set out in Part 4 of the Appendix). However, the extension of Ɵme provision in Clause 11.3 did refer to fixing ‘further periods’ (plural), which might be thought to introduce some ambiguity - perhaps enough to support Carillion’s case that there could be more than one period for compleƟng relevant parts of the work. Jackson LJ disagreed. As to the relevance of commercial common sense, His Lordship noted Arnold and simply said that: “Recent case law establishes that only in excepƟonal circumstances can consideraƟons of commercial common sense drive the court to depart from the natural meaning of contractual provisions.” Gone from this statement is any reference to the ‘importance’ of commercial common sense (compare the dictum in Arnold). The principle seems firmly relegated to being only of ‘excepƟonal’ relevance. The express reference to “Recent case law” establishing this also suggests that Jackson LJ considered that the law has in fact changed. Turning to Carillion’s substanƟve complaint, Jackson LJ could see no answer to Carillion’s argument that a conƟguous extension of Ɵme might excuse the subcontractor during periods of culpable delay, while making it liable during periods when the subcontractor was actually performing addiƟonal work following a variaƟon, and where the Ɵme allowed for that new work had not yet been exceeded. The Court of Appeal also accepted that under some subcontracts, such as Emcor and Carillion’s, this could make a real difference. That was because Emcor’s liability to Carillion was not expressed in terms of liquidated damages, but by reference to the actual loss that Emcor’s delay had caused Carillion to suffer under the main contract: Carillion’s claim was for loss and expense caused by Emcor, which might include Carillion’s exposure to liquidated damages but also irrecoverable prolongaƟon costs under the main contract. Returning to the example given earlier, the main contractor’s loss suffered from day 100 to day 150 (the delay in compleƟng the original work) may not be the same as that suffered from day 150 to day 200 (the period when the scope of work has expanded to include the late variaƟon). For example, the main contractor may be scaling down its site presence towards the end of the period, perhaps while waiƟng for the delayed subcontractor to complete. Similar problems may arise for the subcontractor: if the delay starts at day 150 (as it would on the conƟguous approach), the subcontractor will be in breach of contract just as the scope of work expands, which might require addiƟonal resources. Applying the general principle that a subcontractor is not enƟtled to be paid its prolongaƟon costs during periods of delay, the subcontractor might end up being penalised in that scenario. Jackson LJ accepted that the conƟguous approach could lead to the situaƟon where “… one or other party will gain a windfall bene- fit” because the main contractor’s loss is unlikely to be the same in these different periods. There was no answer to the logic behind that argument. However, His Lordship noted that: “On the other hand, as Oliver Wendell Holmes famously observed in his lectures on The Common Law, ‘the life of the law has not been logic: it has been experience’. In pracƟce the system of awarding extensions of Ɵme conƟguously has worked saƟsfactorily, even though it is open to the criƟcisms which Mr Reed advances. It appears that no contractor or sub -contractor in a reported case has ever before felt the need to argue that awards of Ɵme should be non-conƟguous.” THE ARBITER SPRING 2017 9 UlƟmately, Jackson LJ agreed with the judge at first instance that these anomalies that could result from granƟng conƟguous extensions of Ɵme were not sufficient to displace the natural meaning of the words in Clause 11.3. Where does that leave delay claims? The immediate consequence of the Court of Appeal’s decision in Carillion is that an employer would do well to apply liquidated damages as soon as the original Ɵme for compleƟng the works has expired, if the contractor is at fault. If the employer waits, perhaps in the hope of ‘sorƟng out’ maƩers towards the end of the project, difficulƟes can arise if the project is further delayed because of something that is not the responsibility of the contractor. A conƟguous extension of Ɵme might then wipe out at least some of the period during which (at the Ɵme) the employer could have claimed liquidated damages - so the employer will have to wait and see if there is further culpable delay during the remaining period of the work (as conƟguously extended). The only really safe opƟon for the employer would be to enforce that right as soon as it arises, and while the contractor is sƟll in breach, by operaƟng the relevant contractual machinery. Some employers may hesitate to make such a claim during the works, perhaps out of concerns that the project might suffer further if the relaƟonship with the contractor becomes strained. However, the only way to be sure that liquidated damages are actually due is to cash them in. Beyond that issue, Carillion (and perhaps also Balfour BeaƩy) reflect a conƟnuaƟon of the more restricƟve approach to interpreƟng contracts heralded by Arnold v BriƩen, with commercial common sense taking a backseat. Could such a more literal approach have further implicaƟons on delay claims? The example deployed in Carillion was concerned with a situa- Ɵon where there are several causes of delay: the subcontractor had been guilty of inexcusable delay in compleƟng the original scope, but was then asked to perform addiƟonal work, which would push out the compleƟon date further. This brings to mind concurrent delay, although the situaƟon is not quite analogous (concurrent delay strictly speaking means two causes affecƟng compleƟon of (the same) work at the same Ɵme). The received wisdom in English construcƟon law is that where there are two concurrent causes of delay, one for which the contract is responsible, and one caused by the employer, then the contractor is enƟ- tled to an extension of Ɵme. This is frequently referred to as the Malmaison approach (a reference to Henry Boot ConstrucƟon (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999) 70 Con LR 32): “… it is agreed that if there are two concurrent causes of delay, one of which is a relevant event, and the other is not, then the Contractor is enƟtled to an extension of Ɵme for the period of delay caused by the relevant event notwithstanding the concurrent effect of the other event …” So where the contractor is prevented from working by extremely bad weather, but also lacks necessary labour or materials such that it could not have made any progress in any event quite regardless of the weather, the usual result is that the contractor is enƟ- tled to an extension of Ɵme. The contractor is not liable for liquidated damages, but cannot recover prolongaƟon costs (‘Ɵme but no money’). The quote from Malmaison set out above actually refers to the posiƟon as it was agreed between the parƟes. Subsequent cases, however, have treated the Malmaison approach almost as a legal principle. In De Beers UK Ltd v Atos Origin It Services UK Ltd  EWHC 3276 (TCC), the Court described it as a “… the general rule in construcƟon and engineering cases.” It should be recalled that a contractor’s enƟtlement to an extension of Ɵme - including in circumstances where there is concurrent delay - comes down to interpreƟng the relevant clauses in the contract. Consistent with the Malmaison approach, extension of Ɵme clauses have oŌen been construed as enƟtling the contractor to more Ɵme upon the occurrence of a parƟcular, specified event that is referred to in the contract. So long as that event has occurred, and it has caused delay to compleƟon, then the contractual enƟtlement to an extension of Ɵme arises, and it does not maƩer that some other event has also, concurrently, caused delay. In Steria Limited v Sigma Wireless CommunicaƟons Limited  B.L.R. 79, the Court described this reasoning as follows: “The raƟonale for such an approach is that where the parƟes have expressly provided in their contract for an extension of Ɵme caused by certain events, the parƟes must be taken to have contemplated that there could be more than one effec- Ɵve cause of delay (one of which would not qualify for an extension of Ɵme) but nevertheless by their express words agreed that in such circumstances the contractor is enƟtled to an extension of Ɵme for an effecƟve cause of delay falling within the relevant contractual provision.” That raƟonale depends on assuming that the parƟes must have contemplated something that they did not spell out in the contract. However, in both Carillion and Balfour BeaƩy, the Court of Appeal refused to look beyond the natural meaning of the words that the parƟes had included in their contract. A second reason for adopƟng the Malmaison approach that one finds in the case law is that many delaying events which are expressly referred to in extension of Ɵme clauses would otherwise be ‘acts of prevenƟon’ by the employer. At common law, where the employer by any act (which does not necessarily have to be a breach of contract) prevents the contractor from compleƟng the work on Ɵme, the employer can no longer insist on the original compleƟon date and Ɵme is then ‘at large’ - meaning the contractor has a reasonable Ɵme to complete the work. The Courts have suggested that it would be unfair not to give the contractor an extension of Ɵme under the contract if something happens that 10 THE ARBITER SPRING 2017 would otherwise be an act of prevenƟon at common law: see Walter Lilly v Mackay  EWHC 1773 (TCC), at 370. The prevenƟon principle is displaced in virtually any sophisƟcated construcƟon contract, by the inclusion of an extension of Ɵme clause. Ten years ago, Jackson J (as he then was) reviewed the authoriƟes relaƟng to the prevenƟon principle in MulƟplex v Honeywell  EWHC 236 (TCC). In so doing, he also idenƟfied the proposiƟon that any extension of Ɵme clause (which displaces the prevenƟon principle) that is ‘ambiguous’ should be construed in favour of the contractor. As to that proposiƟon, he noted that: “… it must be treated with care. It seems to me that, in so far as an extension of Ɵme clause is ambiguous, the court should lean in favour of a construcƟon which permits the contractor to recover appropriate extensions of Ɵme in respect of events causing delay.” That appears consistent with the explanaƟon given in Walter Lilly as to why, in line with the Malmaison approach, extension of Ɵme clauses tend to be construed so as to bite on the occurrence of a specified event, even though there is another effecƟve cause of delay for which the contractor is responsible. As regards establishing causaƟon, there has been some debate as to the correct test to be applied. The Commercial Court in Adyard Abu Dhabi v SD Marine Services  EWHC 848 Comm noted that true concurrency arose where delay was “… caused by two or more effecƟve causes of delay which are of approximately equal causaƟve potency.” In the words of Jackson LJ, ‘let us now draw the threads together’ and ask whether aŌer Arnold v BriƩen, Carillion and Balfour BeaƩy, this approach to construing extension of Ɵme clauses - to the extent that it depends on ambiguity in the wording - should sƟll be the default posiƟon. An extension of Ɵme clause might say that “If Event A occurs and causes delay to CompleƟon, the CompleƟon Date shall be extended to reflect the delay so caused.” Would the Court of Appeal today read this as meaning “If Event A occurs and causes delay to CompleƟon, the CompleƟon Date shall be extended to reflect the delay so caused, even if such delay would also have happened without Event A by reason of something for which the Contractor is responsible.”? The answer may be ‘Yes’, because the Malmaison approach has been the status quo for so long now. However, as this boils down to a point of contractual interpretaƟon, one cannot be sure of the outcome of any parƟcular case (and Jackson LJ has yet to decide a case raising this point). An (appropriately worded) extension of Ɵme clause could end up being read as meaning that the delay in quesƟon should not have happened without the occurrence of Event A, otherwise there is no extension of Ɵme. That result may be more likely where the concurrent event for which the contractor cannot be blamed was not caused by the employer. In that situa- Ɵon, the prevenƟon principle would not be relevant. In conclusion, there have been two Court of Appeal cases that apply a more restricƟve approach to interpreƟng construcƟon contracts. Whether this has more extensive implicaƟons, perhaps for concurrent delay, remains to be seen. SƟll stuck in the stone: third party funding in the Excalibur case by Robert BlackeƩ The last issue of The Arbiter featured an arƟcle which discussed Essar Oilfields Services Limited v Norscot Rig Management PVT Limited  EWHC 2361 (Comm), a Commercial Court decision from October 2016 regarding 3rd party funding. In that case a successful claimant had borrowed money from a third party funder in order to fund an arbitra- Ɵon claim. The arbitrator ordered the defendant to pay the premium which the claimant had to pay the third party funder. The court upheld the tribunal’s decision, confirming that arbitrators have a power to make such an order, even though the courts would have no power to do so had an analogous case been brought before the courts. Subsequently, the Court of Appeal has given its judgment in another case about third party funding, namely Excalibur Ventures LLC v Texas Keystone Inc and Others  EWCA Civ 1144. Since the case has an interesƟng background, and deals with different issues to Essar, I thought it might be of interest to our readers, even if it has less pracƟcal importance. Third party funding The situaƟon with which we are concerned is one where a funder provides a prospecƟve claimant with a non-recourse loan, which the claimant uses to bring a claim in liƟgaƟon or arbitraƟon. If the claim succeeds then the claimant must repay the loan, together with a substanƟal upliŌ. If the claim fails, then the claimant pays nothing, and the funder loses its investment. In England, 3rd party funding arises in what might be termed “David vs. Goliath” cases. A party believes it has a substanƟal claim, which it cannot afford to fund in any other way. Third party funding is also used in cases where a more substan- Ɵal claimant could afford to fund a claim but wants to preserve its cash-flow or de-risk the claim to some degree. The claimant in such a case therefore funds, or part funds, the claim by way of a third party funder. Other possibiliƟes also exist. These include so-called “porƞolio funding”. Rather than the lender provide funding on a case-bycase basis, the funder enters an agreement with a law firm to fund any case which the law firm acts in and which meets certain preagreed criteria (usually including that the law firm be acƟng on a THE ARBITER SPRING 2017 11 condiƟonal fee basis). Other potenƟal customers for “porƞolio funding” are businesses with large books of liƟgaƟon (parƟcularly high volume, low value liƟgaƟon). Non-party costs orders The Senior Courts Act 1981 provides: “51 Costs in civil division of Court of Appeal, High Court and county courts. … (3) The court shall have full power to determine by whom and to what extent the costs are to be paid.” This is the source of the courts’ jurisdicƟon to order a third party funder to pay the costs of liƟgaƟon which they have funded. CPR 44 provides: “(4) In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including – (a) the conduct of all the parƟes; (b) whether a party has succeeded on part of its case, even if that party has not been wholly successful; and … (5) The conduct of the parƟes includes – (a) conduct before, as well as during, the proceedings and in parƟcular the extent to which the parƟes followed the Prac- Ɵce DirecƟon – Pre-AcƟon Conduct or any relevant pre-acƟon protocol; (b) whether it was reasonable for a party to raise, pursue or contest a parƟcular allegaƟon or issue; (c) the manner in which a party has pursued or defended its case or a parƟcular allegaƟon or issue; and (d) whether a claimant who has succeeded in the claim, in whole or in part, exaggerated its claim.” The Arkin cap Arkin v Borchard Lines  1 WLR 3055 was a claim by a shipping company which claimed to have been put out of business by the anƟcompeƟƟve behaviour of its compeƟtors. Arkin’s lawyers acted on a “no-win no-fee” basis. In order to pay its expert witnesses, Arkin borrowed around £1.3m of non-recourse funding from a funder called MPC. Arkin agreed to pay MPC 25% of any monies recovered up to £5m, and 23% thereaŌer. The claim failed. The court made a third party costs order, ordering the funder, MPC to pay towards the defendants costs. But the court capped the funder’s liability at £1.3m - the amount which the funder had loaned, and this pracƟce has been followed in subsequent cases. The result is that a funder’s maximum exposure is 2 Ɵmes the amount loaned. If the claimant loses, then the money they have loaned the claimant is gone and the funder will have no recourse against the claimant. The funder can also be ordered to pay that same amount again to the successful defendant. No third party costs orders in arbitraƟon Unlike the courts, arbitrators seated in England have no power like that in secƟon 51(3) to order third party funders to pay costs. An arbitrator can only make awards against the parƟes to the arbitraƟon agreement. There is no power on the part of the court to order a non-party to pay the costs of an arbitraƟon. A defendant facing an arbitraƟon claim from an impecunious claimant who is supported by a third party funder would be well advised to seek an order that the claimant provide security for costs. The Excalibur case Excalibur was a nameplate company with no money owned by a former US special forces soldier called Rex Wempen and his brother. Shortly before the fall of Saddam Hussein, Wempen visited Northern Iraq and befriended various local Kurdish leaders, who later became members of the new regional government. Wempen idenƟfied an opportunity to invest in a contract with the new regional government to explore for oil in a previously unexplored block called “Shaikan”. Wempen introduced this opportunity to an established Texas oil company called Keystone. Keystone entered a “collaboraƟon agreement” with Excalibur, which provided for Excalibur and Keystone to bid for the Shaikan contract, with Excalibur to hold a 30% interest and Keystone to hold 70%. In the event, Excalibur consented not to be party to the Shaikan contract and withdrew, because Excalibur had no experience of oil exploraƟon, no funds, no access to funds and so no way of funding its 30% share of the exploraƟon costs, nor its share of the substanƟal up-front payment which any successful bidder would have to make to the regional government. A different consorƟum was awarded the PSC. One member of that consorƟum was “Gulf”, a company in which Keystone’s owners owned a minority share. That other consorƟum explored the field, and made a major oil discovery. Excalibur instructed Clifford Chance, who brought a claim against Keystone and Gulf in the Commercial Court in London, claiming (on a whole host of grounds, including alleging several frauds) that Excalibur was somehow enƟtled to an interest in the field, said to be worth over $1.75 billion. Over about three years, five different funders provided Excalibur with £31.75 million of non-recourse funding with which to fight the case. Some was used to pay Clifford Chance. Some was used to fund a series of payments into court which Excalibur was ordered to make as security for Keystone and Gulf’s costs. The result was a vast piece of liƟgaƟon with 5,000 pages of inter-solicitor correspondence, a 60 day trial and closing 12 THE ARBITER SPRING 2017 submissions 30,000 words longer than the Bible. Excalibur lost on every point. Excalibur’s case was “spurious”, “bad, arƟficial or misconceived”, “contrived … fallacious”, and “grossly exaggerated” and had been “pursued relentlessly to the biƩer end”. Certain of Excalibur’s factual witnesses had lied. Certain of Excalibur’s experts had given evidence which was “wholly inaccurate and misleading”. Clifford Chance was criƟcised for the “belligerent tone, volume, content and repeƟƟon of the correspondence” which was “voluminous and interminable, in some circumstances highly aggressive and in others unacceptable in content”. Excalibur was ordered to pay Keystone’s and Gulf’s costs on the “indemnity” basis. Keystone and Gulf’s claims against the funders Keystone and Gulf sought costs orders against the funders. At least some of the funders were special purpose vehicles whose funcƟon had been to lend money to Excalibur. They were just conduits through which the real funders had transmiƩed money to Excalibur and had few or no assets themselves. So Keystone and Gulf also sought orders against the immediate funders’ owners. Funders generally “follow the fortunes” The funders argued that they should not have to pay towards Keystone’s and Gulf’s costs on the “indemnity” basis. They had no control over the way Excalibur had conducted the liƟgaƟon. The funders had just provided finance, in good faith, based on legal advice and should not have to “follow the fortunes” of Excalibur. None of this made any difference. The funders were liable to pay on the indemnity basis, subject to the Arkin cap. The Court of Appeal said: “The argument for the funders boiled down in essence to the proposiƟon that it is not appropriate to direct them to pay costs on the indemnity basis if they have themselves been guilty of no discreditable conduct or conduct which can be criƟcised.” “. … a liƟgant may find himself liable to pay indemnity costs on account of the conduct of those whom he has chosen to engage – e.g. lawyers, or experts, which experts may themselves have been chosen by the lawyers, or the conduct of those whom he has chosen to enlist, e.g. witnesses, even though he is not personally responsible for it. The posiƟon of the funder is directly analogous. The funder is seeking to derive financial benefit from pursuit of the claim just as much as is the funded claimant liƟgant, and there can be no principled reason to draw a disƟncƟon between them in this regard.” “the derivaƟve nature of a commercial funder's involvement should ordinarily lead to his being required to contribute to the costs on the basis upon which they have been assessed against those whom he chose to fund. That is not to say that there is an irrebuƩable presumpƟon that that will be the outcome, but rather that that is the outcome which will ordinarily, in the nature of things, be just and equitable.” The funders’ due diligence This aspect of the case is interesƟng, not so much for the result (which seems unsurprising) but because in the course of argument some details emerged as to the due diligence which the funders had done before invesƟng nearly £32 million in the case. Of course, this was all ulƟmately irrelevant since (per the Court of Appeal): “… the existence of encouraging legal advice from a reputable source is not a ground for declining to make an order under secƟon 51(3) and by parity of reasoning it is no more a ground for declining to direct that costs be paid on an indemnity basis. Indeed it would be contrary to all principle that a party should be absolved of liability by reason of receiving legal advice which suggested that he did not aƩract it.” Nonetheless, the picture which emerges from the judgments is of a lack of rigour and sophisƟcaƟon on the part of the funders, parƟcularly given the sums involved. The Court of Appeal considered that the due diligence undertaken by the funders before agreeing to support the claim was “inadequate”, “superficial, feeble and rushed”. In his costs judgment  EWHC 4278 (Comm) the first instance judge made the point that: “This is not … a case where there have been understandable differences of recollecƟon such as occur in every trial. Many of the issues in the case did not depend on whose recollecƟon was right about a meeƟng aƩended by both sides”. The implicaƟon being that the problems with the claim could and should have been idenƟfied. The first prospecƟve funder had been approached by the Clifford Chance partner represenƟng Excalibur. The funder claimed that the partner had told him it was “the best case he had ever seen in his career”, that he had “never lost a case” that “he put [Excalibur’s] chances at 90%” and that, by advancing money, the funder would not be exposing itself to any further liability (which would not have been true, given the Arkin case). Clifford Chance also explained that it was undertaking the case on a 40% condiƟonal fee arrangement. The funder said it had asked if it would be possible to get a QC’s opinion, but to have been told by Clifford Chance that this would not be possible before the date by which funding was needed (there was no explanaƟon as to “why there was any deadline, let alone one which should prevent him from obtaining the second opinion which he had sought”). The funder agreed to provide an iniƟal tranche of funding, and conƟnued to provide further funding invesƟgaƟng any further into the merits as the case developed. Other funders did conduct some due diligence. One obtained an advice from Orrick, Herrington & Sutcliffe but this the first instance judge described as: “a very limited review … largely parasiƟc on the work of Clifford Chance”. Another funder “Blackrobe” (who also had the best name) apparently obtained some advice from Allen & Overy. The first instance judge described this advice as “curious” THE ARBITER SPRING 2017 13 since it described Excalibur as having a “high likelihood” of recovery, despite considering that in relaƟon to the criƟcal issue whether Gulf was a party to the CollaboraƟon Agreement, there was only a “medium likelihood” that Gulf would prevail on at least one of the three theories advanced by Excalibur; and Excalibur was then said to have only a “low to moderate likelihood of success” on the first two and a “low” one on the third. An “acute conflict of interest”? In the Court of Appeal Tomlinson LJ said (emphasis added): “I am parƟcularly unimpressed by [one of the funders’] plea that they relied not just upon the advice of one of the best known firms of solicitors in England, Messrs Clifford Chance, but also sought independent advice from Orrick. The advice of the laƩer was so heavily qualified and expressly dependent upon the analysis conducted by Clifford Chance as to be of very liƩle value. … The approach of Orrick to proof of the claim asserted amounted … to an asserƟon that they did not know what the evidence was going to be, but assuming that it stood up, all would be fine. Clifford Chance themselves had from the outset an acute conflict of interest, the extent of which worsened as their own investment in the case increased over Ɵme. It should have been obvious to any astute businessman …” What was the “acute conflict” referred to? First and foremost, a lawyer should be seeking to advance their clients’ interests. Excalibur was a nameplate company with no assets and so nothing to lose if it lost its case. If it could pursue the claim it might get an enormous pay off. If it couldn’t pursue the claim, it would get nothing. Excalibur’s interests were best served, then, by obtaining the funding it needed in order to pursue the claim, have its day in court and its chance to win big. If a lawyer acted for such a client under a normal retainer then the lawyer would get paid win or lose. So it would also be in the lawyers’ interest to see that the claim get the funding it needs to proceed. This might be moderated to some degree by the lawyer’s concern for their reputaƟon and future business. They would not want to become known for losing cases and, if they consistently overstate the merits of cases in order to obtain funding, it will become harder to obtain work, and funding for that work, in the future. The funder unlike the claimant or the lawyer who acts under a normal ‘pay come what may’ retainer, gains nothing and loses everything if it funds the claim and the claimant loses. Its only interest is in picking winners. Of course, it’s impossible to know for certain if a claim will win, and so in pracƟce, whether a funder provides funding depends on its assessment of the merits and its aƫtude to risk. Where a lawyer is working on a CFA (i.e. their fee, or part of it, will only be paid if they win) then they have an interest in winning / picking winners, and their interests and the funder’s interests become more closely aligned the bigger the CFA. This is, no doubt, why (judging from their websites) liƟgaƟon funders prefer to work with lawyers who are acƟng on CFAs. With a CFA, does any conflict worsen over Ɵme? Tomlinson LJ suggests that, because Clifford Chance was acƟng on a condiƟonal fee basis, rather than a tradiƟonal retainer, this will have made the conflict of interest between them and the funders worse “as [Clifford Chance’s] investment in the case increased over Ɵme”. Do the lawyers and the funders interests diverge as the CFA lawyers do more work? Consider a lawyer acƟng on a 50% CFA in a case which is going to cost £1 million to take to judgment. As Ɵme goes on, the amount which the lawyers sƟll need to “invest” in order to finish the case (i.e. 50% of the remaining costs) gets smaller, whereas the pay-off for winning stays the same. The effect is illustrated in the table below. It can be seen that the reason why the lawyer’s incenƟve to see the case through increases is not the sunk cost (per Tomlinson LJ the lawyers’ “investment in the case”) but the relaƟonship between the further investment which is required (which shrinks) and the pay-off for winning (which stays the same). At the beginning, you have to decide whether to “invest” £500,000 to have a chance of winning £1,000,000. A lawyer who was completely risk neutral would be happy to proceed provided he thought the chance of winning was at least 50%. But suppose you get to the point where all you need to pay to get your chance of winning £1,000,000 is £25,000. At that point a completely risk neutral lawyer would proceed so long as he thought the chance of winning was more than (25,000/1,000,000)=2.5%. The funders’ posiƟon is very similar. Assume that, in the above example, the lawyers’ discounted fees are met by the funder, and the client has agreed to repay 5 Ɵmes the sum advanced by the funder. Total "invested" by the lawyers Further "investment" required PotenƟal success fee PotenƟal profit on further "investment" Chance of winning required to proceed (assuming risk neutral) 0% £0 £500,000 £1,000,000 100.00% 50.00% 25% 125,000 £375,000 £1,000,000 166.67% 37.50% 50% 250,000 £250,000 £1,000,000 300.00% 25.00% 75% 375,000 £125,000 £1,000,000 700.00% 12.50% 90% 450,000 £50,000 £1,000,000 1,900.00% 5.00% 95% 475,000 £25,000 £1,000,000 3,900.00% 2.50% 97.50% 487,500 £12,500 £1,000,000 7,900.00% 1.25% 14 THE ARBITER SPRING 2017 As the case progresses, and the amount of further investment that is required from the funder shrinks, the rewards for winning stay the same, and the chance of winning which is required in order to jusƟfy the further investment shrinks. Hence the interests of the CFA lawyer and the funder do not diverge as the lawyer’s “investment” increases - they remain aligned. The posiƟon is slightly different if a new funder comes to the party late, when only a small further investment is required to finish the case. At that point, the client, the CFA lawyers and the exisƟng funder all have a strong interest in seeing that the case gets the further funding it needs, and so have an incenƟve to overstate the prospects of success. The new funder which is considering advancing a small sum will have less to gain from a win, and so should require a higher chance of winning in order to proceed. It remains true, however, that Tomlinson LJ’s suggesƟon that there was necessarily a conflict of interest between funder and the lawyers who act under a CFA, and that this worsens as the lawyers’ “investment” in the case increases is not correct. Of course, this makes no difference to the outcome - it is just a point of interest. Our understanding is that the modern pracƟce among funders is to get an independent opinion as to the merits of every case and not to rely upon the claimant’s lawyers (with the possible excepƟon of porƞolio funders where the lawyers are acƟng under a CFA). What the Excalibur funders stood to gain Another area which might be of interest is that the Excalibur judgment reveals just how much the funders stood to have gained if Excalibur had been successful. In Arkin, for comparison, the funder agreed to fund the cost of experts, which it expected would be £600,000. In the event, the cost was more like £1.3 million. In exchange the funder was to receive 25% of any recovery up to £5 million and 23% thereaŌer, plus anything which was recovered in respect of the costs of experts. The expected recovery was apparently $5 to $10 million. Assuming 100% of expert costs were recovered, the funder stood to recover a further $1.25 million (about £700k) to $2.4 million (about £1.4 million). That equates to about a 53% to 100% profit. It will be recalled that in the Essar case which was discussed in the previous arƟcle, the funder provided £647,000 of funding. The claimant (if successful) had to repay three Ɵmes the funding or 35% of the recovery, whichever was higher. In the event, the claimant had to pay the funder £1.94 million. So the funder made about a 200% profit. In Excalibur each funder had provided funding on different terms: It can be seen that the returns which the Excalibur funders stood to make were of a different order of magnitude to those in Arkin and Essar. Psari stood to make a profit of around 1,350%. The other funders stood to make a 600% profit, plus 25% annual interest on the sums they’d loaned (up to a further 35% profit since the first of these investors to advance any money was Hamilton in April 2012 and judgment was in September 2013, so Hamilton would have earned 17 months interest on that tranche of funding). All the funders claimed to have had advice to the effect that Excalibur had a good claim. The fact that the funders required such a high return relaƟve to the previous cases seems to suggest that the funders may actually have been rather more scepƟcal about Excalibur’s chances. The Arkin cap draws no disƟncƟon between costs and security The funders in Excalibur argued that a disƟncƟon should be drawn between funding which had been provided for the purpose of paying Clifford Chance, and funding which had been provided for the express purpose of paying into court as security for Keystone’s and Gulf’s costs. The laƩer, said the funders, should not count towards the Arkin cap. The court was not impressed with this argument. Tomlinson LJ cited with approval the following passages from the first instance judgment: “135. The provision of money to Excalibur in order that it may provide security for costs is not the equivalent of a payment of costs ordered at the end of the case. It was a form of funding of the claim in exchange for a return aƩributable to the monies provided for that purpose – in effect an investment. If the acƟon was to conƟnue it was, of course, beneficial for the Total "invested" by the funder Further "investment" required PotenƟal recovery if claim succeeds PotenƟal profit on the further "investment" Chance of winning required to proceed (assuming risk neutral) 0% £0 £500,000 £2,500,000 400.00% 20.00% 25% £125,000 £375,000 £2,500,000 566.67% 15.00% 50% £250,000 £250,000 £2,500,000 900.00% 10.00% 75% £375,000 £125,000 £2,500,000 1,900.00% 5.00% 90% £450,000 £50,000 £2,500,000 4,900.00% 2.00% 95% £475,000 £25,000 £2,500,000 9,900.00% 1.00% 97.50% £487,500 £12,500 £2,500,000 19,900.00% 0.50% Funder Funding Amount Excalibur would have to repay if it won the $1.481 billion claimed Psari £13.75 million $320 million (21.6% of Excalibur’s interest) Hamilton £10.00 million £70 million (7 Ɵmes the loan amount) +25% per annum interest on the loan amount Blackrobe £4.00 million Assumed to be £28 million (7 Ɵmes the loan amount) +25% per annum interest on the loan amount JH £4.00 million £28 million (7 Ɵmes the loan amount) +25% per annum interest on the loan amount THE ARBITER SPRING 2017 15 Defendants to have security rather than not. But conƟnuance of the acƟon was the last thing they desired. The provision of money for security was the only means by which that could happen and it resulted in the Defendants conƟnuing to incur the costs and suffer the detriment which the acƟon cast upon them.” “137. If the posiƟon were otherwise a funder whose sole contribuƟon was to provide money for security for costs, without which the acƟon would not have conƟnued, would be in the happy posiƟon of facing no possible exposure under secƟon 51; whereas those who funded the costs would bear that burden (alone). This would be the posiƟon even though, had the claim succeeded, the security for costs provider would have a right to share in the proceeds increased by a percentage reflecƟng what he had contributed in respect of security. In effect such a provider would have, so far as exposure to an order under secƟon 51 was concerned, a “free ride”, on the back of those financing the costs. This could not be just and cannot be right.” Using an SPV does not insulate a funder from liability A final point which arose in the Excalibur case concerns parent company liability. Some of the companies against whom Keystone and Gulf sought orders had no contractual relaƟonship with Excalibur. They had advanced money to their subsidiaries, and those subsidiaries had advanced the money to Excalibur. The parents argued that it was not legiƟmate to make costs orders against them, as to do so would amount to “piercing the corporate veil”, in circumstances where they had done nothing dishonest or reprehensible. The court at first instance, and the court of appeal, rejected this argument. Tomlinson LJ said: “… if an order under secƟon 51(3) is available only against a funder who has entered into a contractual relaƟonship with the funded liƟgant, then by use of a special purpose vehicle funders would be able to insulate themselves from exposure to the secƟon 51(3) jurisdicƟon and thus escape their responsibiliƟes.” “… in making an order under secƟon 51(3) the court is not feƩered by the legal realiƟes but can look to the economic realiƟes. The exercise of the discreƟon to make a non-party costs order does not amount to an enforcement of legal rights and obligaƟons to which the doctrine of corporate personality is relevant. The non-party has no substanƟve liability in respect of costs. The single quesƟon is whether in the circumstances it is just to make a discreƟonary order requiring the non-party to pay costs because of the nature of its involvement in the liƟgaƟon.” “The judge's approach gave effect to the proposiƟon that it is just and appropriate to make an order for costs against a person who has provided funding and who in reality will obtain the benefit of the liƟgaƟon.” Conclusions Whereas the Essar case is arguably of relevance to anyone who is choosing a dispute resoluƟon clause, the Excalibur case only really has a pracƟcal significance for liƟgaƟon funders. It confirms that funders will usually have to “follow the fortunes” of the party they fund, and pay indemnity costs if that party is ordered to pay indemnity costs. It confirms that the Arkin cap applies both to funding which is provided for legal costs and funding which is provided for security. It confirms that funders cannot escape third party costs orders by channelling funding through an SPV. The case is interesƟng insofar as it provides an insight into how an enormous case was conducted and funded, and the approach which the funders took. But it is important to note that the prac- Ɵce of liƟgaƟon funding has become more established and the pracƟce of funders has been refined such that the same circumstances are unlikely to arise today. The Court of Appeal in Excalibur heard submissions from the AssociaƟon of LiƟgaƟon Funders of England & Wales (the “ALF”) of which most liƟgaƟon funders operaƟng in England appear to be members. The Court of Appeal stressed that “the present appeals are concerned with commercial funding, but the funding here was not typical of that which is rou- Ɵnely undertaken by [ALF members] There were here four groups of funders, none of them members of the ALF. Only one of the funders had any experience of funding liƟgaƟon and this was its first foray into liƟgaƟon in the UK.” The ALF had been criƟcal of the Excalibur funders approach and, elsewhere in the judgment, the Court of Appeal said: “Making due allowance for schadenfreude, [the ALF’s] public comments on the judge’s judgment in this case reflect a recogniƟon that the funders here were inexperienced and did not adopt what the ALF membership would regard as a professional approach to the task of assessing the merits of the case”. The Excalibur case may therefore prove to have been something of an anomaly.