In Excalibur Ventures LLC v Texas Keystone Inc & Others [2014] EWHC 3436 the Commercial Court has given a warning to third party funders that they can be liable to pay the costs of the winning party where they fund a hopeless case. Excalibur sued Gulf Keystone Petroleum and other companies (the defendants) for US $1.6 billion in relation to an interest in a number of oil fields in Kurdistan. The Court held that the claim failed on every point and ordered Excalibur to pay the defendants' costs on the indemnity basis. The judge held that the case was well outside the norm for various reasons including that it was speculative and opportunistic with no sound foundation in fact or law, included unsuccessful allegations of dishonesty and was met with a "resounding and catastrophic defeat".

The claim was funded by a number of professional funders who together provided Excalibur with £31.75 million so that it could pursue the claim. The funders had also provided security for costs amounting to £17.5 million. However, there was a costs shortfall of £4.8 million which largely represented the award of indemnity costs to the defendants. The defendants asked the Court to compel the funders to meet this shortfall as Excalibur had no funds of its own.

The Court agreed to do so given that the claim was speculative and opportunistic, with no sound foundation in law or in fact. The claim could not have been brought without this third party funding and each of the funders stood to benefit financially if the claim succeeded. The judge criticised the funders for not exercising any control over the way in which Excalibur pursued the claim. The liability of each of the funders was limited to the amount of funding each had provided.

The judge said that this case was well outside the norm and doubted that his decision would send an “unacceptable chill” through the funding industry whose aim is not to finance hopeless cases but those with strong merits. The judge hoped that this decision would encourage funders and their advisors to take rigorous steps short of champerty in the form of rigorous analysis of law, facts and witnesses and review of the case at appropriate intervals.

However, following closely on the heels of the Supreme Court's decision in Marley v Rawlings [2014] UKSC 2, this is another example of the judiciary being proactive and holding non-parties who fund litigation responsible for the consequences of doing so, whatever they may be. In the future such funders will need to be more thorough before agreeing to fund cases and should be more involved in the conduct of those cases.