Excalibur Ventures LLC (“Excalibur”) v Texas Keystone Inc and Others (“Texas and Others”)

Following the recent judgement of the Court of Appeal in England and Wales, commercial litigation funders can be liable for the costs of an action on the same basis as the funded litigant, even where the funded litigant is ordered to pay costs on an indemnity basis.

The law before the judgement

The position of a commercial litigation funder had been considered by the Court of Appeal in Arkin v Borchard Line Ltd (Nos 2 and 3), [2005] 1 WLR 3055. Known as the “Arkin Cap” this decision was authority for the proposition that a commercial funder, who financed part of a claimant’s costs of litigation, would be liable for costs if the action was unsuccessful, to the extent of the funding provided. It was thought that this balanced the competing principles of costs following success and access to justice.

In light of the judgement in Excalibur, it would appear that such a limitation on exposure to costs has been called into question.

The facts

When Excalibur brought their claim against Texas and Others for some US $1.65 billion in damages for an alleged breach of an agreement, they surely couldn’t have expected the scathing review of their action by Gloster J, who referred to it as “essentially speculative and opportunistic… based on no sound foundation in fact or law….replete with defect, illogicalities and inherent improbabilities”. The claim was that in making an introduction between Texas and another of the Defendants “Gulf”, Excalibur had an interest in an oil field that became the subject of a deal between the two defendants. The case failed on all points of the claim.

The funding arrangement in place was extremely complex, but essentially consisted of four groups who in various ways provided either the funds to cover the legal fees or to cover the security for costs, as required by the court. All in all, the sum advanced between November 2010 and March 2013 was about £31.75 million. At the conclusion of the case, referred to in Gloster J’s opinion as “a resounding, indeed catastrophic, defeat”, costs were awarded on an indemnity basis in favour of the defendants. Generally, costs awarded on the indemnity basis need not be "proportionate". Any doubt as to the costs is resolved in favour of the receiving party. So this type of award is much more favourable to the receiving party. Indemnity costs are usually only awarded where there is disapproval of conduct by the paying party.

The Appeal

The trial judge concluded that, in looking at the economic realities of the situation, the investment by the funders in the litigation meant that where there was success, they were the ultimate beneficiaries. As such it was only proper that they also be joint and severally liable for the costs awarded against Excalibur. The funders appealed this point, their position being that, whilst it was accepted that the litigation was manifestly ill-founded, they should not be joint and severally liable for the costs on an indemnity basis, where they were not guilty of any discreditable conduct.

The Decision

The appeal by the funders was unsuccessful. The decision, handed down on 18 November 2016, held the following:

  1. “Commercial” litigation funders, namely those who fund litigation in order to make a profit, may be required to pay the successful party’s costs on the same basis as the funded litigant, even where those costs are to be paid on an indemnity basis;
  2. Where a non-party commercial funder substantially controls the proceedings, and stands to reap the rewards of a successful action, they should be required to bear any risks associated with that action also. If the conduct is deemed by the Court to be worthy of criticism, then it will not make a difference that the conduct is done on behalf of the funders, say through their lawyers, rather than by the funder themselves; and
  3. Where the litigation funder has also received contributions by parent, sister or subsidiary companies, the costs orders can also be made against these entities regardless of whether or not they enjoy a separate corporate identity.

The third point made above raises an interesting, but ultimately sensible, point of law. The effect of this part of the judgement is to make it clear that funders will not be able to protect themselves from these indemnity basis costs orders by using Special Purpose Vehicles, with no assets, to transfer money to litigants.

The effect

The law on litigation funding is still being developed both north and south of the border.

With the position of the litigation funder now much more exposed it remains to be seen whether the growth in numbers of funders for small and medium sized cases will continue. Undoubtedly even those funders who only deal in the largest of litigation cases will be aware of the potential for much higher levels of loss. The real damage however could be a reduction in access to justice for smaller claims, where the funder simply cannot assume the financial risk.