In a keenly anticipated decision in Excalibur Ventures LLC v Texas Keystone Inc & Others [2016] EWCA Civ 1144, the Court of Appeal has upheld a High Court decision and held a claimant's nine commercial litigation funders jointly and severally liable for the defendant's costs on the indemnity basis.

In doing so, it approved the general approach that commercial funders should ordinarily be required to contribute to costs on the same basis upon which they are assessed against who they choose to fund.

Substantive dispute

This decision on costs arose out of substantive litigation commenced in December 2010 by the Claimant, Excalibur, against four defendants. In those proceedings, Excalibur claimed entitlement to an interest in a number of lucrative oil fields in Kurdistan, and sought specific performance by the defendants of a Collaboration Agreement, alternatively damages in the order of US $1.6 billion.

Excalibur was, as the Court of Appeal put it, "nothing more than a brass plate"; it had no assets. As such, the proceedings were pursued (and could only have been pursued) with third party funding. Excalibur ultimately obtained £31.75 million of funding to pursue its claim, £14.25 million of which went to meet the fees of its solicitors, barristers and experts; with £17.5 million being advanced by way of security for the defendants' costs.     

In a judgment in September 2013 running to over 300 pages, the trial judge found that Excalibur's claim failed on every point.

Costs decision

Handing down his costs judgment in December 2013, the trial judge made clear that in his view the litigation was unmeritorious, calling the claims advanced by Excalibur "speculative and opportunistic", "an elaborate and artificial construct… replete with defects, illogicalities and inherent improbabilities". He said that "all these spurious claims were pursued relentlessly to the bitter end"; the litigation pursued "as if it was an act of war". Excalibur's claim was, he said, "based on no sound foundation in fact or law and it has met with a resounding, indeed catastrophic, defeat."  

He therefore used his discretion under CPR 44 , to order the claimant to pay the defendants' costs on the indemnity, rather than standard, basis (i.e. shifting the burden onto the claimant to show that the defendants' costs were unreasonable). He also ordered that claimant give security for c. £5 million shortfall between the defendants' actual costs and the amount for which security (which had been calculated on the standard basis) had already been given.

In the event, that further security was not given, and after three further days of hearing, the judge exercised his discretion under CPR 51 to make an order that Excalibur's funders be jointly and severally liable for the Defendants' costs on the indemnity basis.

The appeal

The funders, who fell into four distinct sub-groups, appealed primarily on the basis that they should not have to "follow the fortunes" of the Claimant and be liable on the indemnity (rather than standard) basis.

Court of Appeal decision   

Funders 'follow the fortunes' of those they fund

Delivering the leading judgment (with which Lady Justice Gloster and Lord Justice David Richards agreed), Lord Justice Tomlinson gave short shrift to the argument by one group of funders that no order should be made against them at all, saying that "the suggestion that these funders, whose stake in this litigation was very substantial, ought not to be responsible for the successful parties' costs is simply hopeless".

He also found that the decision to award costs on the indemnity (rather than standard) basis was "plainly and obviously just, correct and appropriate". The funders argued that indemnity costs were inappropriate if they had not themselves been guilty of discreditable conduct. However, this argument held no sway with the Court. "The funder", it pointed out "chooses which claims to back, whereas… a defendant does not choose by whom to be sued, or in what manner". The court therefore agreed with the trial judge's proposition that "if, then, the funder's witnesses turn out to be liars or the litigation is conducted unreasonably, so that the court awards costs on an indemnity scale, it is just and equitable that the funder should pay on that scale".

The Court of Appeal could see "no principled basis upon which the funder can dissociate himself from the conduct of those whom he has enabled to conduct the litigation and upon whom he relies to make a return on his investment". The Court also particularly agreed with the judge's general approach that a commercial funder should ordinarily be required to contribute to costs assessed against those he funds on the same basis. Whilst it did not go as far as to say this was an irrebuttable presumption, this was the outcome which the Court considered would ordinarily be just and equitable.

No distinction between funding the claim and funding security

In addition, one of the funder groups argued that, insofar as it had advanced funds to allow Excalibur to give security for the defendants' costs and those funds had in fact been paid over to the defendants, it should have no further liability to the defendants. The Court rejected any such attempt to distinguish between, on the one hand, funds advanced to pay Excalibur's own costs of the litigation and, on the other, funds advanced to give court-ordered security for the defendants' costs of the litigation.     

Funder includes those who obtain the benefit of the litigation

Finally, one of the funder groups contended that, because (as a result of its group structure) those providing the funds had no direct contractual relationship with Excalibur, it was inappropriate to regard them as litigation funders.

The court rejected this submission, and found it was just and appropriate to make an order for costs because the entities concerned had provided funding and would, in reality, obtain the benefit of the litigation. Justice required that a non-party costs order be made in these circumstances because the funder stood to derive a substantial benefit.   

What funders and funded parties can learn from this case

It is clear from the judgments of both the Court of Appeal and the High Court that this litigation was fiercely contested, driven by speculative claims in which the claimant sought enormous reward for what was essentially an introduction. The litigation could not have been pursued without third party funding, but this was not 'pure funding' for access to justice, but commercial funding with a view to investment returns. Although the various funders provided funding on different terms, the Court noted that they stood to make significant returns of between 700% and 1,450% on their investment.

Whilst the Court did not seek to criticise funders motivated by commercial considerations, it nonetheless evidently considered there were public policy reasons for funders following the fortunes of those they fund, and so where costs are awarded on the indemnity basis, funders may also be liable on that basis.

As the Court noted though, the effect of an indemnity costs award against a funder is mitigated by the protection of the Arkin cap - i.e. the principle that a funder is potentially liable for the costs of the opponent party only to the same value as the amount of funds he has advanced. The Court was not asked in this appeal to revisit the Arkin cap, and that remains a pragmatic solution to cap a funder's exposure.

The Court also considered that the possible exposure to indemnity costs should encourage funders to mitigate that risk by taking rigorous steps (short of champerty) to analyse facts, law and witnesses in funded cases, to reduce instances of indemnity costs being awarded.  

Finally, the court's rejection of one of the funders' arguments on the effect of their corporate structure indicates that the Court will not allow funders to use special purpose vehicles to insulate themselves from exposure to non-party costs orders.