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Professional funders have no control over their investments

Litigation backers are 'tied to claimants' fortunes'

27 October 2014

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The High Court has found that third party funders can be liable for indemnity costs.

The judgment in the Commercial Court gave a costs order of £23m, which may deter third party litigation funders from continuing to invest in cases and will potentially change the way they structure and monitor their business activities.

The litigation team at Withers represented Psari Holdings in the costs hearing stage of a case, stemming from litigation between Excalibur Ventures and Texas Keystone over interests in petroleum blocks in Kurdistan.

Psari provided funding to Excalibur in an unsuccessful claim against Keystone, but found itself, and its beneficial owners, liable for costs on an indemnity basis. The costs were far more than Psari originally committed to the case, though it, and its shareholder Andonis Lemos, accepted liability to pay the defendants' costs on the standard basis from the outset.

The order means funders can be made liable for indemnity costs which have been ordered against the funded party because of its conduct or that of its lawyers. Despite this order, Lord Justice Clarke highlighted that Psari and Lemos were not personally responsible for the indemnity costs order

Exercising control

Withers suggests that the judgment will act as a clear warning to professional funders, who no longer have certainty over the scale of their liability, the extent to which they should exercise control in order to safeguard their investment, or how far up the corporate chain the court may go to extract funds. In the future, funders and after the event (ATE) insurers may well consider making explicit provision for the treatment of indemnity costs in their funding and insurance agreements.

Jeremy Marshall, chief investment officer at Bentham Europe, commented: "The really novel finding of this case was that the funders were found not just liable for indemnity costs, but also for the funds put up as security of costs. By analogy, that would also include adverse costs cover that is offered by a small number of professional funders, of which Bentham Europe is one. In other words, the cap on funders 'overall liability actually includes the entirety of the funders' exposure - be it for claimants' or defendants' costs."

Marshall continued: "Excalibur remains a case very much on its own facts. It is something of a mystery as to how funders agreed to finance the case to the extent that they did and I suspect we have not yet seen the funders' final word on the subject. What the case does indicate is that funders are very much tied in to the claimants' fortunes - both good and bad - and they are unlikely to be able to wriggle or garner any sympathy from a judge when seeking to distance themselves at a later date.

"Indeed, a funder's attempt to backtrack from the claimant in itself reveals a telling point - namely that the funder had not satisfactorily performed its own due diligence. For that reason alone, it is unlikely that we will have Excalibur II any time soon."

Arkin principles

Andy Ellis, a costs lawyer and managing director of Practico, added: "The Excalibur costs judgment is an important refinement of Arkin principles. It establishes that sums provided to fund security for costs should be added to the amount advanced to fund the costs of prosecuting the claim to calculate the cap on third party funders' potential liability for adverse costs.

"The stinging judgment both as to the merits of the claims and the conduct of the claimants and their lawyers will, I expect, have more of a chilling effect on funding than the technical aspects of the calculation of potential exposure - but it should be remembered that this case was found to be outside the norm on numerous levels."

John van der Luit-Drummond is legal reporter for Solicitors Journal

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