Excalibur Ventures LLC v Texas Keystones Inc & ors [2014] EWHC 3436 (Comm), 23 October 2014

The professional third party funders of a losing claimant were subject to a costs order on an indemnity basis as a result of, inter alia, the poor conduct of the claimant and its instructing solicitors during the course of proceedings. The professional funders were held liable for the defendants’ costs to the extent of the funding provided by each individual funder. No distinction was made regarding the mechanism through which the funding was provided.

The most recent development in the Excalibur litigation saga relates to a substantial costs order made against the third-party funders. The underlying litigation involved a claim made by Excalibur Ventures LLC (Excalibur) against Texas Keystone Inc and others (the defendants), in which Excalibur alleged that it was entitled to an interest in a number of profitable oil fields in Kurdistan and sought an order for specific performance of an agreement under which it could exercise this interest or damages in the sum of USD 1.6 billion. At first instance, Christopher Clarke J (as he then was) dismissed all of Excalibur’s claims and ordered that it pay the defendants’ costs on an indemnity basis. An indemnity costs order was made to reflect Excalibur’s poor conduct (and that of its instructing solicitors) during the course of the proceedings. Excalibur’s legal costs had been funded by a number of independent third-party litigation funders (the Funders), who between them had provided funding for Excalibur’s legal costs and GBP 17.5 million in security for costs as ordered by the court at first instance. The defendants sought an order that the Funders be held jointly and severally liable for the costs of the claim, assessed on an indemnity basis. Some of the Funders accepted liability for the costs but contested the claim that they should be liable for costs on an indemnity basis while others disputed liability or did not participate in the costs proceedings.

Should the Funders be ordered to pay any of the defendants’ costs on an indemnity basis?

Christopher Clarke J held that the purpose of ordering indemnity costs was not to penalise the Funders. Indemnity costs were appropriate because this was an exceptional case due to the size of the damages sought, the fact that Excalibur’s case lacked any real legal merit and the poor conduct of Excalibur and its legal representatives. In these circumstances ordering indemnity costs achieved justice for the defendants. Furthermore, the Funders had freedom of choice over whether or not to extend funding to Excalibur, but the defendants had no choice as to whether or not they were to be sued. Therefore, unless there were exceptional circumstances in favour of the Funders which dictated otherwise, their fate was tied to that of those they were funding. There were no exceptional circumstances applicable here in favour of the Funders, so the judge found that they had to pay costs on an indemnity basis, subject to the Arkin cap (which is discussed in more detail below).

Should a cap be applied to the defendants’ costs?

The judge upheld the principle laid down in Arkin v Borchard Lines Ltd (nos 2 and 3) [2005] 1 WLR 3055, that a professional funder who financed part of an unsuccessful claim should only be potentially liable for the opposing party’s costs to the extent of the funding provided. The judge noted that the Funders had not sought to exercise control over the litigation, nor had they acted improperly. Therefore he found that there was no reason to depart from the principle laid down in Arkin.

Should the costs order differentiate between the various Funders who contributed to Excalibur’s costs at different stages of the proceedings?

One of the peculiarities of this case was that some Funders had only provided funding for security for costs orders made during the course of the proceedings, whereas other Funders had provided funding to cover both security for costs orders and legal costs generally. The question before the Court was whether the Arkin cap should be measured by reference to the amount contributed to Excalibur’s ordinary legal costs or to that amount plus the amount contributed to satisfy security for costs orders. The judge held there was no distinction to be drawn between the two, and the mechanism by which the funding was provided was irrelevant and that to have found otherwise would have been to protect the funder who contributed to a security for costs order to the detriment of a funder who contributed to normal legal costs.

How should costs be apportioned between the various Funders?

The judge held that the timing of a Funder’s contribution to the case was a relevant factor when considering the amount of costs that that Funder was liable for. Funders should not be liable for costs that were incurred prior to the date on which they contributed to the funding of the case. The rationale was that it would be unjust for a Funder to be liable for costs which that Funder played no part in causing the defendants to incur. The judge did not think that the fact that these Funders inherited the earlier work product was a sufficient reason to make them liable for costs incurred prior to the date on which their funding contribution was made.

Comment: This case has an important impact on the development of professional litigation funding, and such funders should be aware that the actions of the claimants they are funding and their respective legal representatives may make the funders liable for indemnity costs. Having said that, it is worth bearing in mind that the Excalibur case was an exceptional case, in terms of the size of the damages being sought, the lack of legal reasoning underpinning Excalibur’s claims and the consistently poor conduct of Excalibur and its legal representatives, which had a significant impact on the decision reached (most notably the decision to award indemnity costs).

The judge was clearly alive to the need to balance justice to the defendants in this particular case against the need to ensure that the case did not give rise to legal principles which would discourage professional funders from providing funding as this could lead to problems with access to justice more generally. Indeed, the judge noted that, due to the exceptional nature of the Excalibur case, he did not believe that the principles introduced in this case would affect the majority of professionally funded cases.

The decision is also important as it upholds previous authorities such as the Arkin cap and the principle that a professional funder will not be liable for costs incurred prior to its contribution, which provides welcome certainty to this area.