Excalibur judgment will not deter third-party funders

The recent decision handed down by Lord Justice Clarke in the high-profile case of Excalibur Ventures LLC v Texas Keystone Inc, has been widely reported for the potential impact it will have on funders. In summary, His Honour held that the third-party funders who had backed Excalibur's failed claims in the matter were liable for the costs of the defendants on an indemnity basis, up to and including any amounts they had provided to the claimants to obtain adverse costs coverage.

The decision of Clarke J in the Commercial Court in London occurs in a case which has caught the media's attention for a number of reasons, including the abject failure of the claimant's case, the astronomical amount of damages sought by Excalibur, and the eye-watering quantum of funds required to conduct the case.

The proposition that a third-party funder may be held liable for any indemnity costs awarded against the funded party is novel, and has raised speculation as to whether it is another blow to the nascent third-party funding industry.

However, the impact of the decision on third-party funders will be negligible. Where third-party funders conduct due diligence on cases they are considering funding, that process should always involve considerable scrutiny of the legal team conducting the claim. The funder should always ensure that they are not only comfortable with the claim itself, but also those who are appointed to run it.

Subsequently, once the case is underway, funders should ensure that clear lines of communication are established to ensure that they are provided with timely and accurate updates as to the progress of the case. In circumstances where the case, or the conduct of it, goes awry, it does not seem to be inherently unfair that they should be held liable for that eventuality, including if it results in an indemnity costs award.

Further, it is clear from the judgment that the funders' exposure will still be limited to the 'Arkin cap'. The cap that was enunciated in that decision refers to the limit placed on the amount that may be recovered from a third party in an unsuccessful claim. The cap is to the extent or amount of that party's investment in the case.

Clarke J's recent decision holds that this cap can be measured by reference not just to the amount contributed by the funder towards paying the fees and other expenses of the claimant, but also to any funds provided to the funded party to acquire after-the-event (ATE) cover. This seems to make sense because, as was noted by Clarke J, in the event of success the funder will presumably be entitled to a return or profit on the funds provided, rightly categorised as an investment in the claim.

Overall, third-party funders should not be troubled by this decision. As has been noted by numerous commentators, Excalibur is a quite remarkable and somewhat novel case. It would seem rare that a claim funded to the extent it was could go so horribly wrong.

The recent decision may cause funders in the future to consider carefully whether they wish to provide extra funding to their client to acquire ATE cover, as it will increase the scope of the exposure they face if the funded claim fails.

The decision also serves as a timely reminder for funders that they should ensure their due diligence process remains robust and that they maintain a critical and vigilant eye over the conduct of any funded claims.

Otherwise, the decision would not appear to pose any serious concerns to established third-party funders, and I think that the muted reaction of the funding industry to it reflects this.

Simon Dluzniak is an investment manager at Bentham Europe

www.benthameurope.com