A recent UK Court of Appeal decision provides useful guidance on commercial litigation funders' potential exposure to adverse costs orders.
The Court of Appeal upheld a costs order made against non-party litigation funders which required them to pay defendants' costs on an indemnity basis when the plaintiff's funded action failed catastrophically.
Proceedings were commenced in the UK High Court by Excalibur against Texas Keystone seeking US $1.65 billion in damages. Excalibur's claim concerned the alleged breach of an agreement under which, Excalibur argued, it would have received an indirect but significant interest in a number of profitable oil fields in Iraq. The proceedings were financed by a number of litigation funders.
Excalibur was unsuccessful at trial, failing on every point of its claim, in what the trial judge described as "a resounding, indeed catastrophic, defeat". The High Court ordered that the funders were jointly and severally liable to pay Texas Keystone's costs on an indemnity basis. The funders (not surprisingly) appealed this order.
The Court of Appeal upheld the High Court's costs order.1 The decision, which was handed down on 18 November 2016, provides authority for the propositions that:
- "commercial" litigation funders2 may be required to pay the successful party's costs on the same basis as the funded litigant, including where the funded litigant is ordered to pay costs on an indemnity basis;
- where a non-party commercial funder is ultimately responsible for the fundamental decisions regarding how a matter progresses, and stands to reap the rewards of a successful action, they should be required to bear the risks of that action also. This applies regardless of whether the litigation funder's own conduct is reprehensible or whether the relevant conduct is done on their behalf through others - for example, its lawyers; and
- a court may make non-party costs orders against parent and other related entities of litigation funders without regard to questions of separate corporate identity if it is just in the circumstances to do so.
This decision, although not binding on Australian courts, has the potential to impact the conduct of litigation funders in local proceedings.
The UK's Senior Courts Act 1981 provides the Court of Appeal, High Court and county courts with broad discretion in relation to costs. By virtue of s 51(3) of the Senior Courts Act 1981 (around which the present appeal was based):
(3) The court shall have full power to determine by whom and to what extent the costs are to be paid.
Most Australian courts are empowered in almost identical terms. For example, New South Wales courts are empowered to make similar orders under s 98(1) of the Civil Procedure Act 2005 (NSW), which provides that:
(1) Subject to rules of court and to this or any other Act:
(a) costs are in the discretion of the court, and
(b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and
(c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.
This power has been interpreted as wide enough to permit an Australian court to make costs orders against non-parties, including commercial litigation funders. Accordingly, and despite the fact that this decision falls outside of this jurisdiction, there is scope for it to be highly persuasive in local proceedings.
Litigation funders and insurers involved in Australian proceedings should be aware of their exposure to adverse costs orders against them, and should be on notice that they may be liable for the actions of their engaged solicitors and agents in funded proceedings despite having no direct involvement in their conduct.
Read the full judgment here.