The Court of Appeal has upheld a judge’s order imposing indemnity costs on third-party funders.
In Excalibur Ventures LLC v Texas Keystone Inc & Others  EWCA Civ 1144, the claimant used commercial third-party funding to pursue a claim of US$1.65 billion, including claims for breach of contract, business torts, breach of fiduciary duty, and fraud. The latter claims included allegations of personal dishonesty against a representative of one defendant. The claim was not only unsuccessful, but was characterised by the first-instance judge as “speculative and opportunistic”, “objectively hopeless” and “based on no sound foundation in fact or law”. The judge found that to a large extent, the facts and matters which led to the defeat of the action were known to the claimant before commencing the proceedings, which he said were an “elaborate and artificial construct” rooted in misrepresentations. He ordered the claimant to pay indemnity costs and, when the claimant failed to do so, gave permission for the defendants to join the funders to the action with a view to recovering costs from them. At the costs hearing, he ordered the funders to pay indemnity costs from the date of their first contribution to the claimant’s costs. The funders appealed.
The Court of Appeal rejected the appeal. Under the funding agreements, the funders stood to gain up to seven times the value of their funding if the claimant had been successful. The judge had been justified in ordering them to pay indemnity costs, taking into account the character of the claim, its size and its effect on the defendants. The Court of Appeal further commented that a commercial funder seeks to derive financial benefit from the claim and cannot distance himself from the conduct of the claimant he has chosen to back and on whom he relies to make a return on his investment. The derivative nature of his involvement should ordinarily lead to him contributing to costs on the same basis on which they were assessed against the funded litigant. Funders could protect themselves by conducting due diligence and including in their funding agreements provisions enabling them to withdraw if they ceased to be satisfied as to the merits of the dispute. The court noted in this regard that the funders in this case were not members of the Association of Litigation Funders of England and Wales and did not follow its Code of Conduct, which addresses both of these points.