Litigation funders ordered to pay indemnity costs

A High Court decision handed down yesterday (23 October) has significant implications both for third parties who fund litigation on commercial terms and for defendants who face claims brought with the benefit of such funding: Excalibur Ventures LLC v Texas Keystone Inc and others [2014] EWHC 3436 (Comm).

The judgment suggests that, where a claim is unsuccessful, the funder will normally be liable for the defendant's costs on the same basis as the funded party. In particular, where the claimant has been ordered to pay indemnity costs, for example because a claim was found to be speculative, the funder will normally be liable on the same basis - regardless of whether the funder bears any personal responsibility for the factors which led to the order for indemnity costs. This is good news for defendants.

The decision also illustrates that the court is entitled to look to the economic realities in exercising its discretion to make a non-party costs order. Accordingly, in appropriate circumstances, a costs order may be made not only against the funder named in the funding agreement but a third party that provided the funds and stood to benefit (here, the funder's parent company).

There are however two bits of good news for funders.

• First, the court applied the so-called Arkin cap to limit each funder's costs liability to the amount it had contributed. In determining each funder's contribution for these purposes, however, the court took into account amounts provided toward security for costs as well as payment of the claimant's costs.
• Secondly, it held that each funder should be liable only to the extent the defendants' costs were incurred after the date of that funder's contribution. If this approach is adopted in other cases, it may act as an important limit on a funder's potential liability, particularly where funding is provided at a late stage.

Background

Excalibur brought a claim against various defendants claiming an interest in a number of oil fields in Kurdistan. The claim was said to be worth some US$1.6 billion and was brought with the benefit of third party litigation funding. The claim failed on every point. Excalibur was ordered to pay the defendants' costs assessed on the (more favourable) indemnity basis including because, as the court found, the claim was essentially speculative and opportunistic, with no sound foundation in fact or law, the quantum was grossly exaggerated, and the claim involved unsuccessful allegations of dishonesty.

The court gave leave to join the funders to the proceedings in respect of the costs issues. The funders had provided, in aggregate, £14.25 million to fund Excalibur's own costs and £17.5 million by way of security for the defendants' costs. This funding was provided by a number of different funders in various tranches and on various terms, but each funder was to receive a share of any proceeds of the litigation (in the case of a number of the funders, capped at seven times the funding provided).

The defendants applied for orders that each of the funders should be held jointly and severally liable for the costs of the action, assessed on the indemnity basis. Most of the defendants' costs had been met by the security ordered (£17.5 million) but there was an estimated shortfall of about £4.8 million, in large part representing the difference between standard and indemnity costs.

Decision

The court (Christopher Clarke J) ordered that the funders were jointly and severally liable to pay the defendants costs on the indemnity basis, save that each funder was liable:

• only up to the amount of funding that it had provided, including both toward Excalibur's own costs and as security for costs; and
• only in respect of costs that the defendants had incurred from the date on which the funder first provided funding.

Notably, in respect of two of the funders, the court ordered that their parent companies, which had produced the money provided under the funding agreements, should be jointly and severally liable with their subsidiary companies.

Liability for costs

The court's power to award costs against third parties to an action arises from section 51 of the Senior Courts Act 1981, which provides that the court has "full power to determine by whom and to what extent" costs are to be paid. This gives a broad discretion.

The principles on which the court exercises that discretion were summarised in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2014] 1 WLR 2807. The ultimate question is whether, in all the circumstances, it is just to make the order. Where a non-party not merely funds the proceedings but substantially also controls or is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. It is no defence for the funder to say there was no impropriety in promoting a claim because it received encouraging advice from its lawyers; whilst "impropriety or the pursuit of speculative litigation" might of itself support the making of such an order, it was not a pre-requisite for such an order.

Here the judge said he had no doubt but that the funders should be liable for the defendants' costs. The claim could not have been brought without their assistance and they stood to benefit from its success to the tune of a healthy multiple of their investment.

Indemnity costs

The funders argued that there was no proper basis for making them liable for costs on the indemnity basis when they bore no responsibility for any of the factors that had led to the court ordering Excalibur to pay indemnity costs.

The judge rejected this argument. Although the funders had not acted improperly, that did not preclude an order that they should pay indemnity costs. On the contrary, justice required that where a case failed so comprehensively, not merely on the facts but because it was wholly bad in law, the funder should (subject to the Arkin cap) bear the costs assessed on the scale which the court thinks it just for the funded party to pay in light of all the circumstances, including the behaviour of the funded party and its advisers. That is a risk the funder takes.

The judge recognised there are potentially competing public policies, in that if funders are exposed to the risk of indemnity costs, they might decline to fund, or only at a higher cost, which could mean access to justice was curtailed. Alternatively they might seek to intervene in the proceedings in a manner which runs the risk that the funding agreement was "champertous or close to it".

The judge said, however, that he did not regard these considerations as compelling. He added:

"I entertain some doubt that my decision will send an unacceptable chill through the litigation funding industry, whose aim is not to finance hopeless cases but those with strong merits. If it serves to cause funders and their advisers to take rigorous steps short of champerty, ie behaviour likely to interfere with the due administration of justice - particularly in the form of rigorous analysis of law, facts and witnesses, considersation of proportionality and review at appropriate intervals - ... that is an advantage and in the public interest."

Cap on liability

In Arkin v Borchard [2005] 1 WLR 3055 the Court of Appeal held that a professional funder who financed part of a claimant's costs of litigation (£1.3 million in respect of the cost of expert evidence) should be potentially liable for the defendant's costs, but only to the extent of the funding provided. The court said it could see no reason in principle to take a different approach where the funder had financed most or all of the claimant's costs, but it reached no decision on that point.

The aim of the so-called Arkin cap is to strike a balance between two competing principles: (i) that funders who cause the defendant to incur costs should be liable for those costs; and (ii) that access to justice should be promoted, and so third parties should not be discouraged from funding cases by potential exposure to excessive costs.

In the present case, the judge said, it was appropriate to apply the Arkin cap. The position might be different if a funder had behaved dishonestly or improperly or if, as the Court of Appeal put it in Arkin, "the funding agreement falls foul of the policy considerations which render an agreement champertous", eg if the funder has taken complete control of the litigation. In such cases, it may be that there should be no cap at all.

On the facts, the cap was not relevant to a number of the funders, since the amounts they had put in (including both claimants' costs and security for costs) were greater than the £4.8 million shortfall, but it would effectively limit the liability of those that had contributed less.

Timing

On the question of when each funder's liability should begin, in circumstances where they contributed different amounts at different times, the court held that each funder should be responsible only to the extent that the defendants' costs were incurred after their contributions were made. They had not done anything that led to the earlier costs being incurred, and there was no good reason to depart from the usual approach of requiring a causal link between the funding and the costs incurred.

Parent company liability

As noted above, in respect of two of the funders, orders were made against not only the companies which were party to the relevant funding agreements, but also their parent companies which had ultimately provided the funding. The court rejected the submission that this would pierce the corporate veil in circumstances where there was no justification for doing so.

The judge referred to Axel Threlfall v ECD Insight [2013] EWCA Civ 144 in which the Court of Appeal drew a distinction between a company's legal rights and obligations, which were the subject of separate corporate personality, and the exercise of discretion to make a non-party costs order, which left rights and obligations intact. In exercising its discretion, the court was entitled to look to the economic realities.

Here, the investments were in reality made by the parents and they would have been the ultimate beneficiaries of success. The subsidiaries had no independent interest and no source of funds other than their parents, and would in all probability not have any assets to satisfy any order made against them. It those circumstances, it was appropriate to make an order against the parents.

Note: This decision was upheld on appeal. See our blog post on the Court of Appeal decision here.