On 18 November the Court of Appeal upheld a first instance
decision making a group of litigation funders liable to pay the
costs of the action it funded on the indemnity basis. The ruling
increases the exposure of funders in cases that don't succeed.
It also sends a clear message to funders that their fortunes will
follow those of the entity they back, irrespective of the
Losing parties are generally required to pay the winning
side's costs on one of two bases: the standard basis or the
indemnity basis. Standard basis is the default and generally
results in the unsuccessful party paying in the region of 65-70% of
its opponent's costs. However in certain circumstances (usually
where the losing party has behaved badly and/or lost on all aspects
of its claim) a court can make the more onerous order for
"indemnity" costs. This results in the loser paying a
higher percentage (in the region of 80-90%) of the winner's
Summary of issues
Four funders financed a US$ 1.6bn claim by Excalibur Ventures
(an oil exploration firm) against two US oil companies. Excalibur
claimed that the oil companies cheated it out of an exploration
deal in Iraq. The claim was rejected by the court on every point.
Excalibur's conduct was heavily criticised and it was ordered
to pay costs totalling Ł31m on the indemnity basis.
Excalibur having no assets, the successful defendants sought a
third party indemnity costs order against the funders, or in the
case of two of the funders, their parent companies. Two funders had
set up special purpose vehicle (SPV) subsidiary companies, which
themselves had no assets, to advance funds received from the parent
companies to fund the litigation.
It is long established that third party costs orders can be made
against funders but the funders in this case argued that they
should not be liable on the indemnity basis, because they
themselves had not behaved badly. It was also argued that the
parent companies which had provided funding via subsidiaries should
not be made liable, as that would disregard separate corporate
existence and involve piercing the corporate veil.
The Court of Appeal upheld the order for indemnity costs against
the funders and the parent companies. Tomlinson LJ's reasoning
was that it would be unfair if a successful party's damages
were limited because the counterparty was funded. He pointed out
that the funder can choose which claims to back whereas a defendant
does not choose by whom to be sued, or in what manner.
The judge said it was appropriate to make an order against any
entity which had provided funding and would in reality receive the
benefit of the litigation; therefore the costs orders against the
parent companies were upheld. He pointed out that if recourse were
only available against the entity which entered into the
contractual arrangement, funders would be able to avoid exposure
through using SPVs.
The judgment emphasised that in order to mitigate potential
costs liability and avoid paying for the conduct of the funded
party, funders should do thorough due diligence before funding a
case and continue to closely review and monitor cases as they
progress. Tomlinson LJ also said that engaging independent lawyers
to conduct an ongoing review of cases seemed to him to be "not
just prudent but often essential in order to reduce the risk of
orders for indemnity costs".
Implications for parties seeking funding
Given the prospect of indemnity costs orders and the clear
message from the court about the necessity of thorough and ongoing
review of cases, funders may increase their levels of due diligence
and seek independent legal advice. They may seek to pass on the
costs of this heightened review by requiring a higher proportion of
their clients' winnings. In other words funding could become
more expensive. It may also become harder to secure funding, as
funders become more cautious.
On other hand the litigation funder Burford Capital said in
response to the judgment that responsible funders are already
taking the steps suggested by Tomlinson LJ and that in
Burford's view the decision is to be welcomed as it will
dissuade opportunistic, inexperienced funders (such as those in the
Excalibur dispute) from backing unmeritorious claims.
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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