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Liability of commercial funders for a non-party costs order: Excalibur Ventures v Texas Keystone Inc [2016] EWCA Civ 3436 (Comm) - Ali Tabari

Ali Tabari Ali Tabari

The Court of Appeal recently handed down judgment in Excalibur Ventures v Texas Keystone Inc [2016] EWCA Civ 3436 (Comm), which is an important case on the liability of third-party litigation funders for a non-party costs order under CPR 46.2

The background

The High Court litigation had seen Excalibur [‘E’], essentially a shell company, pursue Gulf Keystone for various relief arising from a dispute about oil fields in Kurdistan. E’s solicitors were on a Conditional Fee Agreement, and received third-party funding in the region of £31.75m by the time the 60-day trial finished. The funding arrangements were quite complex and do not require repeating in order to explain the principles set out in the judgment.

After a long and complex trial, E’s claim failed in its entirety, and a crushing judgment from the trial Judge described it as a ‘speculative and opportunistic’ claim which suffered a ‘resounding, indeed catastrophic, defeat.’ The solicitors for E were criticised for their ‘aggressive and unacceptable correspondence’. E was ordered to pay the Defendants’ costs on the indemnity basis; despite E having been ordered to pay security for the Defendants’ costs, there was a shortfall of almost £5m.

The first-instance Judge found that the funders were liable for a non-party costs Order on the indemnity basis, pursuant to CPR 46.2 and s.51(3) Senior Courts Act 1981, but subject to the Arkin cap (i.e. that the funders’ liability should be limited to the sum which they had invested in the action on behalf of E). There were appeals from the various lenders on various grounds, as set out below. 

Arguments in the Court of Appeal

It was common ground between all parties that: 

  • Parties who purely fund the litigation but have no interest in its outcome should not face a costs Order, but it will be an important factor if the funder has a vested interest in the outcome; 
  • The Court has a wide discretion under CPR 46.2; and 
  • The Court can take into account whether the funder is considered to be the real party interested in the outcome of the litigation, or there is some other conduct which makes it just and reasonable to make the order.

Three of the appellant funders accepted their liability for a non-party costs order, but disputed the indemnity costs order, arguing that a standard-basis costs order was appropriate. One appellant (‘Platinum’) argued that, because it had only contributed funds for payment of security for costs, that sum should not count towards its Arkin cap (i.e. because it was simply security for costs provided in response to the opponent’s application, rather than being a positive contribution to its own party’s fighting fund). 

The judgment

The Court emphasised that funders would follow the fortunes of the party they funded. Even if the funder were not guilty of any reprehensible conduct, there was no reason to disassociate its outcome from that of its lawyers and client. Funders such as those in this case were not particularly interested in access to justice, but in securing a good return on a commercial investment, and they must face the consequences of failure with those whose cases they fund. 

The Court also criticised the ‘feeble’ due diligence carried out by the funders into the merits of E’s claim, and encouraged funders to apply greater scrutiny to the prospects of a claim as it develops (which can be properly done without straying into champerty), even if represented by top-flight lawyers. 

The argument about security for costs was also rejected. The Court’s approach was that if a funder provides security for costs, it is also gambling on a positive outcome and a commercial success for themselves; it would be wrong to excuse them of the risk of their party losing and there being any liability for costs over and above the amount of security ordered, for example when the security is assessed prospectively on the standard basis but the final costs order is on the indemnity basis. 

Summary 

The key points to take away from this judgment, and to advise any funding clients on, are as follows:

  • If a commercial funder backs a party which then loses at trial, the funders’ fortunes generally mirror those of their party, regardless of the funders’ conduct;
  • There is an obligation on funders to demand proper ongoing scrutiny of a case’s merits, and to reconsider their position if those merits drop sufficiently low;
  • The position of a commercial funder providing funds for a party’s ongoing costs and disbursements is no different to a funder simply providing funds which have been ordered as a result of an application for security for costs. Either way, there is a commercial gamble being undertaken, which brings with it an inevitable risk factor.

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12/12/2016
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