UK: Excalibur Judgment Changes Playing Field In Litigation Funding Market

Background to the underlying claim

The claim against the non-party funders is the tail end of an epic $1.6bn claim by Excalibur Ventures LLC against the US oil company, Texas Keystone Inc.  Excalibur contended that it had been unlawfully cut out of a deal with Texas which would have given it a 30% interest in four petroleum blocks in Kurdistan. After a 57 day trial the longest heard in the history of the Commercial Court, the judge handed down judgment in October 2013 in which he dismissed all of Excalibur's claims and ordered it to pay the defendants' costs on the indemnity basis. One of the reasons why Excalibur was ordered to pay costs on the indemnity, rather than standard, basis was the way in which Excalibur and its solicitors, Clifford Chance LLP, had conducted the case.

The funders

Excalibur funded the huge legal costs of its claim through third party funding and the funders also provided the £17.5m security for costs ordered by the Court.

Psari Holdings Limited - and its sole shareholder and director Mr Lemos - was represented by Withers LLP in the costs' hearing, was one of the professional funders. Psari provided c. £13.5m of funding, the majority of which went towards paying legal fees. The funding which came from the other professional funders, referred to in the judgment as Hamilton, Platinum (or PPCO), Blackrobe and Blackrobe Capital, Huron and PPVA and JH, was provided for and applied mainly towards security for the defendants' costs.

As Excalibur was a shell with no money or assets, the successful defendants applied for non-party costs order against not only the three professional funders who had directly provided funds to Excalibur (namely, Psari, Hamilton and Blackrobe) but also against those funders' holding companies and/or ultimate beneficial owners – in other words, the people who provided the funds to the funders who funded the claim.

The Defendants' Application

The defendants' application was made pursuant to Section 51 of the Supreme Courts Act which provides that the Court shall have "full power to determine by whom and to what extent the costs [of a party] are to be paid". As a result of this statutory provision, there have been a number of cases in which a funder of an unsuccessful claim has been ordered to pay the winning party's costs, notwithstanding the fact that the funder was not a party to the proceedings. 

Save where a funder has been champertous (i.e. exercised an element of control over the conduct of the litigation) the Courts have imposed a cap on a funders' potential liability under Section 51 – the so-called Arkin Cap, Arkin v Borchard Lines Limited being the seminal case in which this cap was first introduced. The main principle established by the Court of Appeal in Arkin is that a professional funder can be liable for the winning party's costs but only to the extent of the funding provided. The purpose of the Arkin cap was to provide a satisfactory medium between two competing principles: that costs should follow the event and ensuring access to justice.

In the light of the above well-established principle, Psari and Mr Lemos accepted from the outset ("to its credit" as the judge said) that it should and would pay the defendants' costs on a standard basis. However, Psari did not accept that it should have to pay costs on the indemnity basis.

By contrast, the other funders disputed any liability at all. They contended that a distinction should be made between funds provided for Excalibur's costs and expenses of prosecuting the action on the one hand, and further provided to enable Excalibur to provide security on the other hand. . They also claimed that that no order should be made against PPCO and PPVA which provided their subsidiaries with the funds to support Excalibur, but did not themselves agree with Excalibur to do so.

Issues raised

The defendants' claim raised four important and novel points of law:

1. Standard vs indemnity debate
Where a losing party is ordered to pay costs on the indemnity basis as a result of its and its solicitors conduct, and this conduct was not known by or attributable to the funders – indeed, the Judge found that the funders had behaved entirely properly throughout the claim, stating specifically that "I do not regard Mr Lemos as having behaved in a morally reprehensible manner or with any impropriety" – should the funders be automatically fixed with the Claimant's liability to pay costs on the indemnity, rather than standard basis? In other words, should the funder have to pay more than it would have had to pay had the Claimant and its solicitors behaved properly, by virtue only of the fact that the Claimant did not in fact behave properly in circumstances where a properly acting funder cannot interfere in the conduct of the claim?

2. The corporate veil
In circumstances where there has been no misconduct by the funder or its directors, shareholders or associated companies, does Section 51 give the Court power to exercise its discretion to make a costs order not only against the losing party's funder, but also against that funder's funder, shareholder or director (or anyone else who may have funds with which to pay the losing party's liability)?

3. Security vs costs
Where a funder has only paid security for costs, or paid more by way of security for costs than it has paid towards the losing party's legal fees, and that security is then paid to the winning party, has that funder's liability to pay any additional shortfall in the defendants' costs been discharged?

4. Timing
Should the Court differentiate between funders who invest at different stages of the litigation?

How the Court determined the issues

In relation to the standard vs indemnity debate, the Judge decided that, in a case of this kind, justice requires that the funder should, subject to the Arkin cap, bear the costs ordered to be paid by the person whom or which he has unsuccessfully supported. In short, absent special circumstances, he should follow the fortunes of those from whom he himself hoped to derive a return. To do otherwise would, in the Court's view, be unfair to the defendants. Whilst the funders had the choice of which claims to back and whom to instruct, the defendants could not choose by whom to be sued or in what manner. The judge made it clear that his intention was not, therefore, 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, in particular, its size (in terms of value), its merits and the way in which it had been run by the Claimant and its legal advisers. 

In relation to the corporate veil issue, the Judge did not agree with the Platinum funders' claim that to treat PPVA as the funder would be to pierce the corporate veil in circumstances where there was no justification for doing so. The economic reality was that the investments in the litigation were made by PPVA and PPCO and it was they who would have been the ultimate beneficiaries of success. Indeed, 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. The Judge recognised the wide discretion afforded to him by Section 51 and held that, in determining what was 'just' in this case, he should not disregard the role of the parent companies; on this occasion, parent and subsidiary should stand together (see footnote 1).

In relation to the third issue (regarding the provision of security), the judge determined that the function of the Arkin cap is to limit the costs which the funder has to pay 'by reference to the money that he has put up to finance the action'. The Judge held that the provision of money to the Claimant in order that it may provide security for costs was not the equivalent of a payment of costs ordered at the end of the case; it is a form of funding of the claim in exchange for a return attributable to the monies provided for that purpose – in effect, an investment. Again, the decision as to this element of the claim was driven mainly by the circumstances of this particular case and the specific arrangements that the funders had in place with regards to the provision of security. Nonetheless, 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 by virtue of the fact that its funding was provided through a particular or different mechanism. This 'would not be just and could not be right'.

Finally, as to the timing of the funding, the Judge favoured the approach of Morrit LJ in Globe Equities and later adopted in the case of Goodwood, namely that, in order to succeed in a claim for costs against a non-party, those costs must 'to some extent' have been caused by the non-party (see footnote 2). Accordingly, in circumstances where a funder provides funding later in the litigation than other funders, that later funder should not be liable to pay for any of the costs that the receiving party had incurred prior to the date of that party's funding. This is notwithstanding the fact that the later funder stands to inherit all the work (and benefit) that had been done prior to the provision of its funding. This decision will therefore leave the receiving party in the unenviable position of having to divide its costs into periods of investment and then, within those periods, apportion the costs incurred as between each funder.

The potential impact on the professional funding market


The effect that 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 that they too are not unwittingly exposed to the consequences of improper behaviour of the funded party and/or its legal representatives.

The Judge has recognised that there are competing public policies of ensuring a fair deal for the winning party without curtailing access to justice. He acknowledged that, if professional funders are exposed to the risk not only of standard but also of indemnity costs, they may decline to fund or only be prepared to do so at a higher cost or, perhaps more likely against some form of indemnity or an increased reward for success even in relatively standard cases. Alternatively, they may seek to intervene in the proceedings and run the risk of champerty. However, in this particular case where the sums at stake were so high and the deficiencies in the case were egregious, he decided that it would be unfair to leave the receiving party out of pocket because of the impact it may have on possible future funders in different cases.

In concluding, the judge doesn't think that his decision will send an unacceptable chill through the litigation funding industry, but stated that, if it causes those funders and their advisors to take rigorous steps short of champerty, to reduce the occurrence of the sort of circumstances that caused him to order indemnity cost in this case, that is, in his view, an advantage and in the public interest. Clearly, this judgment was heavily influenced by the relatively (and thankfully) rare peculiarities of this particular case, its faults and its failings.
 


Footnotes

  1.  It was also relevant to the judge's decision on this point that the Platinum funders had the benefit of ATE insurance policies
  2. Although he did not apply the same 'causation' reasoning when determining the funders' liability for indemnity costs having acknowledged that the funders did not know of the Claimant's and its advisors' faults and failings which led him to order the Claimant to pay indemnity costs in the first place.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.