Is the party over for litigation funders?

The Commercial Court’s judgment in Excalibur Ventures v Keystone et al is likely to change the way third-party litigation funders structure and monitor their business activities.

The judgment comes at the end of an epic US$1.6bn claim
by Excalibur Ventures LLC against the US oil company, Texas Keystone Inc.

In October 2013 the judge dismissed all of Excalibur’s claims and ordered it to pay the defendants’ costs on the indemnity basis. One of the reasons given for this order was the way in which Excalibur and its solicitors, Clifford Chance, had conducted the case.

Shell of a claimant

Excalibur funded its claim through third-party funders who also provided the £17.5m security for costs ordered by the court. Psari Holdings Limited, represented by Withers in the costs hearing, was one of the professional funders. The funding from other professional funders, Hamilton, Platinum (or PPCO), Blackrobe and Blackrobe Capital, Huron and PPVA and JH, was provided mainly towards security for the defendants’ costs.

As Excalibur was a shell with no money or assets, the defendants applied for a non-party costs order against the funders’ holding companies and/or ultimate beneficial owners.

The application was made pursuant to section 51 of the Supreme Courts Act, under which a number of funders of unsuccessful claims have been ordered to pay the winning party’s costs, even though the funders were not a party to the proceedings.

Save where a funder has been champertous (ie exercised an element of control over the conduct of the litigation), the courts have imposed the ‘Arkin cap’ on a funder’s potential liability under section 51. This rules that a professional funder can be liable for the winning party’s costs, but only to the extent of the funding provided (Arkin v Borchard Lines Limited).

Psari – and its shareholder and director Mr Lemos – accepted from the outset (“to its credit” as the judge said) that it would pay the defendants’ costs on a standard basis, but did not accept that it should have to pay costs on the indemnity basis.

Unintentional punishment

In deciding to order indemnity costs, the judge said justice requires that the funder should, subject to the Arkin cap, bear the costs ordered to be paid by the person whom he unsuccessfully supported. To do otherwise would be unfair to the defendants, who could not choose by whom to be sued or
in what manner.

The judge made it clear that his intention was not to penalise the funders, who, in the case of Psari and its owners, “were not personally responsible for the matters which caused me to order indemnity costs” and were not “consciously aware of the legal sink hole which underlay Excalibur’s case”. The decision was also driven by the unique characteristics of this case and the way in which it had been run by the claimant and its legal advisers.

The following were key issues in the judge’s decision:

n The corporate veil: the judge decided that the funding vehicles did not appear to have any independent interest from that of their owners, nor would they have any assets of their own from which to satisfy any order made against them. Therefore, the judge held that he should not disregard the role of the parent companies.

n Provision of security: the judge held that the provision of money to the claimant in order that it may provide security for costs was, in effect, an investment. The general rule now appears to be that the court will not allow any one funder a ‘free ride’ on the back of those financing the costs.

n Timing of the funding: the judge’s view was that costs must “to some extent” have been caused by the non-party. In circumstances where a funder enters later than others, that later funder should not be liable to pay
for any of the costs the receiving party had incurred before their entry.

The effect the judgment may have on the professional market is potentially significant and may require professional funders to reconsider how they fund claims and, once they have provided
the funding, how they monitor their investment to ensure
they are not unwittingly
exposed to the consequences
of improper behaviour of the funded party and/or its legal representatives. SJ