The UK Court of Appeal has held the funders of a losing claimant subject to a costs order on an indemnity basis as a result of the conduct of the claimant and its instructing solicitors. In Excalibur Ventures LLC v Texas Keystone Inc & ors (2016) EWCA Civ 1144, each funder was liable for the defendants’ costs “to the extent of the funding” advanced. No distinction applied to funds earmarked solely for the provision of security for costs or to funders with no contractual relationship with the funded litigant.
In the underlying proceedings, an oil exploration firm founded by brothers Eric and Rex Wempum, Excalibur Ventures LLC (the “Claimant”), sought to recover its $1.6 billion interest in the Shaikan oilfield in Iraq from Gulf Keystone Petroleum Ltd and Texas Keystone Inc. (the “Defendants”) by way of an order for specific performance of a Collaboration Agreement or damages. The asserted claims sounded in both contract and tort, and included fraud by concealment and by misrepresentation. Four groups of litigation funders including Psari Holdings Limited, Platinum Partners Credit Opportunities Master Fund LLP, Blackrobe Capital Partners LLC, and Platinum Partners Value Arbitrage Fund LP (the “Funders”) advanced, between them, £32 million to meet the Claimant’s legal costs including £17.5 million for the provision of security for costs.
At first instance, in the High Court, the claims failed on every point. Clarke LJ described the action as “replete with defects, illogicalities and inherent improbabilities.” The Claimant was ordered to pay the Defendants legal costs on an indemnity basis—calculated as 85% of the Defendants’ legal costs—as opposed to the lower rate, standard basis. Having determined that the £17.5 million previously paid into court would be insufficient on the indemnity basis, the Claimant was ordered, and failed, to advance an additional £5.6 million in funding. The Defendants then sought non-party costs orders against the Funders. The Funders either contested liability to meet the Defendants' legal costs altogether, accepted liability and contested the indemnity basis, or did not participate in the costs proceedings at all. Clarke LJ held the Funders jointly and severally liable to pay the Defendants' costs on the indemnity basis, subject to their only being liable in respect of costs incurred after the date of their first contribution.
On appeal by the Funders, the Court of Appeal considered (i) whether costs orders should be made against the Funders and if so, on what basis, (ii) whether funds made available for the purpose of enabling a litigant to furnish court-ordered security for costs should be distinguished, and (iii) whether funds who had no direct funding agreement with the Claimant but had provided funds on back-to-back terms through the direct funders were liable with their associated companies that directly provided funding.
The Funders contested liability for indemnity costs because they had been guilty of no discreditable conduct. The appellate Court accepted that the Funders did nothing discreditable in the sense of being morally reprehensible or improper. Nonetheless, the argument suffered three fatal defects. First, it overlooked that under CPR 44, the conduct of the parties is only one factor to be taken into account when considering on what basis, if any, a costs order should be made. Secondly, the argument looked at the question from only one point of view, that of the Funder. It ignored the character of the action and its effect on the Defendants. Thirdly, it assumed that the Funder is responsible only for his own conduct. In fact, a litigant may find himself liable to pay indemnity costs on account of the conduct of those whom he chosen to engage such as lawyers or experts, or those he has chosen to enlist, such as witnesses.
The Association of Litigation Funders, as amicus curiae, suggested that, to avoid being fixed with the conduct of the funded party, funders would need to exercise greater control over the litigation process. Funders might then run the risk that their funding agreements were void for champerty. Champerty is a rule of public policy which proscribes the improper support of litigation by an otherwise disinterested party in return for a division of the spoils. The common law condemns champerty because of the abuses to which it may give rise. The champertous maintainer might be tempted, for his own personal gain, to inflame damages, suppress evidence or suborn witnesses. The appellate court rejected this argument, holding: “champerty involves behaviour likely to interfere with the due administration of justice. Litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest.”
The Funders who advanced funds to enable Excalibur to furnish court-order security for costs argued that, having part-satisfied the order for costs against Excalibur, they should face no further liability. Those funders had not assumed the risk of being made liable to meet costs in an additional amount in excess of the amount advanced for that specific purpose. The Court of Appeal rejected that argument as well, holding that (i) the provision of funds to provide security for costs is not the equivalent of a payment of costs ordered at the end of a case. Rather it is a form of funding the claim in exchange for a return—in effect, an investment (ii) no distinction is made between categories of costs—all funds advanced are used in pursuit of the common purpose and (iii) it is incorrect to consider that these funders had already discharged a liability to the Claimant. The proper analysis is that the Funders had enabled the Claimant to discharge, pro tanto, its own liability to the Defendants.
Finally, three funders who had not entered into a direct funding agreement with Excalibur but instead provided the funds contracted to be provided by their associated companies on back-to-back terms (i.e., on the basis that in return for their advance, they would receive the rewards in the event of success) argued that that to treat them as funders impermissibly pierced the corporate veil. Having set out the funders commitments and expected investment returns in the judgment, the judge rejected this argument, holding that (i) the court looks to the economic reality of the situation, (ii) the making of a non-party costs order does not amount to an enforcement of legal rights and obligations to which the doctrine of corporate personality is relevant, and (iii) if an order were available only against a funder who had entered into a contractual relationship with the funded litigant, funders could insulate themselves from exposure by use of special purpose vehicles.
The Court of Appeal ruling may act to greatly increase the liability exposure of litigation funders in unsuccessful cases. As a result, funders may be minded to revise assumptions in their funding models, increase due diligence as to the merits of claims or take an interventionist approach to the litigation process.
Should Funders Revise Assumptions in Their Funding Models Which Estimate Costs Prospectively and on a Standard Basis?
The Court of Appeal was clear that to award costs against an unsuccessful party on an indemnity scale is a departure from the norm. In assessing the funding model, accordingly, one considers whether the case at issue falls outside the norm. Excalibur was such an exceptional case. “Countless” factors militated strongly in favor of indemnity costs against the Funders, including the unmeritorious claims and poor conduct of the Claimant and its legal representatives, Clifford Chance. Claimants counsel later settled the Funders negligence suit for an undisclosed sum. Circumstances taking a case out of the norm have included reliance on deficient expert evidence, the pursuit of serious, wide-ranging allegations of dishonesty by the Defendant (in one case, before HM Treasury, Parliament and the Governors of the Bank of England) or of speculative, grossly exaggerated and opportunistic claims.
Should Funders Increase Due Diligence as to the Merits of Claims?
The due diligence undertaken by the Funders in this case was certainly inadequate. However, the Court is unlikely to consider it necessary to investigate whether a funder knew or ought to have known of the egregious features of the case which give rise to indemnity costs. An enquiry into the adequacy of a funder's due diligence would be unsatisfactory and often impossible—funded parties are disinclined to waive privilege over relevant communications. Any enquiry into the adequacy of the due diligence undertaken would also give rise to the prospect of undesirable satellite litigation. The judge did however, make clear that rigorous analysis of the claim is expected of a responsible funder. In addition, on-going review of the litigation by lawyers independent of those conducting the litigation, a fortiori those conducting it on a conditional fee agreement, seems “often essential in order to reduce the risk of orders for indemnity costs being made against the unsuccessful funded party.”
Should Funders Take a More Interventionist Approach to the Litigation Process?
The judge was sensitive to the need to ensure that, “commercial funders who provide help to those seeking access to justice which they could not otherwise afford are not deterred by the fear of disproportionate costs consequences if the litigation they are supporting does not succeed.” Accordingly, while this decision should not send a chill through the litigation funding industry, it provides important guidance on the extent of funders’ liability: (i) commercial funders will ordinarily be required to contribute to costs on the same basis as their funded party, even where those costs are calculated on a higher indemnity basis; (ii) a funder may be accountable for wrongdoing by those it has funded engaged or enlisted; (iii) a costs order may apply to a parent ‘funding the funder’; and (iv) on-going review by independent lawyers should reduce the risk of an indemnity costs order against an unsuccessful funded party. Ultimately, funders should be prepared to follow the fortunes of their funded party.