UK: Excalibur v Keystone - Practical Points For Funders And Insurers

Judgment has been handed down in Excalibur Ventures v. Keystone et al., a Commercial Court case which is likely to change the way that third party litigation funders structure and monitor their business activities.  Withers represented Psari Holdings Ltd in the costs hearing stage of the case, which stemmed from litigation between Excalibur Ventures LLC and Texas Keystone Inc. and Gulf Keystone Petroleum Limited over interests in petroleum blocks in Kurdistan.

Psari, alongside US based professional funders, provided a total of £30 million to fund Excalibur's claim, which was unsuccessful  The judge ordering Excalibur to pay Gulf's legal costs on the indemnity basis.  Given that Excalibur was an empty shell of a company, Gulf applied to the Court for an order that Excalibur's funders pay its costs.

The order means that funders (which will now include the person or entity from where the funds originated), can be made liable for indemnity costs which have been ordered against the funded party because of its conduct or that of the claimant's lawyers. However, funders must still be careful not to exercise control over the conduct of litigation in order not to offend against the rule of champerty.

There are a number of practical points for funders and ATE insurers that stem from the case:

  • Indemnity costs are not the norm. Although the Excalibur judgement does increase the potential risks involved in funding, there is no reason why a professional funder or insurer should be caught out, provided that they understand the case and the lawyers that they are investing in.
  • Funders must take their own view on the merits of the case, rather than relying on the views of the solicitor and any other funders already involved in the case. Getting a second opinion is also important – but this needs to be from someone who has a good enough view of the case. Funders should remember that individual solicitors may be incentivised to push the case as far as it will go – even where the firm is engaged on a total or partial CFA basis. Internal incentives for the partner concerned and commercial incentives for the firm are not the same thing.

  • Funders can be held financially responsible for the conduct of the lawyers and experts in the event that indemnity costs are awarded – even where there is no champertous control. This highlights the importance of proper due diligence, and the need to understand how the lawyers propose to take the claim forward.
  • Ongoing appraisal of the merits and risks of a case is important, especially where further funding is or may be required. There is a risk that lawyers being paid by the hour may try to pressure funders to throw good money after bad.
  • Timing is now more important – funds provided for later elements of a case are less exposed to adverse or indemnity costs following Excalibur. One way round this is to raise funding in tranches from the outset. However, it may be that this is only viable or worthwhile for cases requiring especially large funding commitments.
  • Security for costs applications by the defendant are particularly dangerous for funded claims. If successful they can pose acute dilemmas, forcing the funder to either invest more capital, accept dilution or let the claim collapse. An effective way for a funder to reduce the risk of a security for costs application succeeding is to require adequate ATE insurance from the outset.
  • Funds can no longer rely on subsidiary shell companies to protect the parent fund from adverse cost liability. The court was prepared to look at the 'economic reality' to get at the 'ultimate beneficiaries of success'. This potentially raises questions about the internal apportionment of liability for group accounting purposes. However, there may still be advantages to internal subsidiaries, such as protecting the parent from any claims made by the funded party.

It is likely that funders and insurers will wish to take practical steps to manage the additional risk that Excalibur has created. As Clarke LJ noted, there are two ways to do this – charge more, or pass the risk on through the contractual arrangements around the deal. This could take the form of:

  • An indemnity from the lawyers/experts for indemnity costs caused by their conduct;
  • Requirements on both solicitors and counsel to notify the funder and or insurer in the event that a risk of indemnity costs arises; or
  • Specific insurance.

Going forward, funders and ATE insurers should consider making explicit provision for the treatment of indemnity costs in their funding and insurance agreements. This could involve any of the mechanisms set out above or making clear that it is rolled into the price of funding or cover. With our direct involvement in the Excalibur case and substantial expertise in the litigation funding and ATE insurance industry, Withers is well placed to assist funders or insurers who would like to review and update their documentation.

To discuss any aspects of this further, please contact Andrew Dunkley, our litigation funding specialist, by emailing

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.

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