Recently, the Court of Appeal dismissed the appeal of the litigation funders in Excalibur Ventures LLC v Texas Keystone Inc, holding them liable for indemnity costs.

The appeals were the result of a “speculative and opportunistic” claim by Excalibur to a share in a number of oil fields in Kurdistan in the sum of US$ 1.6 billion.

Excalibur entered into a conditional fee agreement with its solicitors, Clifford Chance LLP. Excalibur had no assets and therefore the action could not have been pursued without third party funding. Funding was obtained from four groups of commercial funders, only one of which had any experience of funding litigation and this was its first foray into litigation in the UK. The funders advanced £31.75 million to enable the claim to be pursued to the conclusion of trial. Of this amount £14.25 million was provided to meet Clifford Chance’s fees and disbursements and £17.5 million was to comply with orders for security for the defendants’ costs of the action.

This was complex and expensive litigation with a 60-day trial. The litigation was gargantuan in scope but the claim failed on every material issue. The trial judge, Christopher Clarke LJ, described the litigation as having met with “a resounding, indeed catastrophic, defeat”. The quantum of the claim was also grossly exaggerated with the judge finding that the value was worth a maximum of US$ 3.3 million. Taking into account the egregious manner in which the litigation was pursued, Christopher Clarke LJ directed Excalibur to pay the defendants’ costs on an indemnity basis.

The £17.5 million security for standard basis costs was inadequate. The judge therefore ordered Excalibur to provide additional security in the sum of £5.6 million, failing which he gave leave to the defendants to join the funders of the proceedings with a view to seeking costs orders against them pursuant to the discretion afforded to the court by section 51(3) of the SCA 1981.

The judge heard three days of argument on the question of whether costs orders should be made against the funders, and if so on what basis. He concluded that all of the funders should be jointly and severally liable to pay the defendants’ costs on the indemnity basis, subject to them only being liable in respect of costs incurred after the date of their first contribution.

The funders’ liability was subject to the “Arkin cap” i.e. limited to the extent of the funding provided, pursuant to Arkin v Borchard Lines Ltd (2005). A question which arose was whether funds made available solely for the purpose of enabling a litigant to put up security for costs, counts towards the Arkin cap. The court held that money provided to Excalibur to enable it to provide security for costs was an investment in the claim, just as much as money provided to pay Excalibur’s own costs and should equally count towards the Arkin cap.

Funders who had not entered into direct funding agreements with Excalibur or Clifford Chance but who had provided, on back-to-back terms, the funds contracted to be provided by related companies, were also jointly and severally liable with their associated companies. The court looked to the economic reality of the situation; the companies who provided the funds made an investment in the litigation and would have been the ultimate beneficiaries of success.

On appeal, the funders contended that they should not have to “follow the fortunes” of Excalibur. In essence, the funders proposed that it was not appropriate for them to pay costs on the indemnity basis if they have themselves been guilty of no discreditable conduct. However, the Court of Appeal agreed with the trial judge that, except in special circumstances, the funder’s fortunes follow the claimant from whom the funder hoped to derive a small fortune.

Tomlinson LJ delivered the unanimous judgment of the Court of Appeal concluding that he could see “no principled basis upon which the funder can dissociate himself from the conduct of those whom he has enabled to conduct the litigation and upon whom he relies to make a return on his investment.” The funder seeks to derive financial benefit from the claim just as much as the funded claimant litigant, and there is no principled reason to draw a distinction between them in this regard.

The Court of Appeal emphasised that the derivative nature of a commercial funder’s involvement should ordinarily lead to the funder being required to contribute to the costs on the basis upon which they have been assessed against those whom he chose to fund. It is not an irrebuttable presumption but it is the outcome which will ordinarily be just and equitable.

The court disagreed that a decision against the funders would have an adverse impact upon access to justice. Commercial funders are making an investment and motivated by largely commercial considerations, not the need to promote access to justice. In any event, the court held that the argument that funders may be deterred by the fear of disproportionate costs is solved by the Arkin cap.

The Association of Litigation Funders (ALF) intervened in the appeal on the basis that the decision raised policy issues in litigation funding. The court rejected the argument that in order to avoid being fixed with the conduct of the funded party, the funder would have to exercise greater control over the litigation throughout and risk falling foul of the doctrine of champerty. The court encouraged on-going review of the progress of litigation and did not consider that this would be characterised as champertous.

Commentary

The decision may send a chill through the litigation funding industry but it is a clear reminder to funders and their advisors to pursue only those cases with strong merits. Funders should conduct a thorough due diligence in assessing the merits of claims before they invest and continue to monitor and review those cases which they have already invested in. Further, as promoted by the Court of Appeal in this decision, it is prudent to undertake an on-going review of the litigation by lawyers independent of those conducting the litigation.