29 July 2016
Last week the Court of Appeal heard an appeal by a number of litigation funders against a costs decision arising from the Excalibur Ventures LLC v Texas Keystone Inc & Othrs1 litigation. The scope of the Court of Appeal's decision will impact upon litigation funders' future costs liabilities.
After the Court found in favour of the Defendants in the underlying dispute, Clarke LJ awarded indemnity costs against the Claimant as a consequence of the way it had pursued and conducted the litigation.
At the point at which that costs order was made, £17.5 million of security had already been provided by the Claimant. This security was discharged to the Defendants. However, the amount of security provided had originally been calculated by reference to the Defendants' costs budget and was calculated on the standard basis. Upon indemnity costs being awarded against the Claimant, there was a shortfall of some £5.6 million in the security that had been provided. In the absence of the Claimant agreeing to make up the shortfall, the Defendants were granted permission to join the Claimant's funders to the proceedings, which they did.
October 2014 hearing: Funders held to be liable for Claimant's indemnity costs2
The Defendants sought an order from the Court declaring the funders jointly and severally liable for the indemnity costs order against the Claimant. Whilst some of the funders accepted that they should be liable for the Defendants' costs, they disputed whether their liability should be assessed on the indemnity basis. At this point the Defendants were referred to as the "Costs Claimants" and the funders were referred to as the "Costs Defendants".
Although Clarke LJ noted in his judgment that he did not regard the Costs Defendants as having behaved in a "morally reprehensible manner", he nevertheless held that they should be subject to the same indemnity costs order as the Claimant. In reaching this conclusion, Clarke LJ added that an indemnity costs order was one of the risks the funders faced when advancing money to this particular Claimant to continue its claim and noted that "none of this…was the Defendants' doing".
The Court also considered how the so-called "Arkin cap" (the cap which limits a funder's adverse costs liability to the amount it has advanced to the funded party) should be applied in circumstances where the funders had additionally provided funds for security for costs purposes. Clarke LJ held that the Arkin cap should be calculated by reference to both the amounts advanced to the Claimant for its litigation costs plus any amounts contributed to provide security for costs.
February 2015 hearing: Funders given permission to appeal3
During a further hearing to determine the terms of the October 2014 costs order, Clarke LJ granted the funders permission to appeal on two fundamental points:
- whether the Court was wrong to order the funders to pay indemnity costs in circumstances where they had not had conduct of the litigation or been guilty of discreditable conduct and had received confident advice from the Claimant's solicitors (the "Indemnity Costs Issue"); and
- when applying the Arkin cap, whether sums provided by way of security for costs should be included (the "Arkin Cap Issue").
Appeal submissions on the Indemnity Costs Issue
It was argued by Counsel for two of the Costs Defendants at last week's appeal hearing that the net result of Clarke LJ's judgment was that in addition to funders taking on the funding risk, they were also liable for the risk of misconduct by the funded party and/or their solicitors.
It was not the case that the funders must "follow the fortunes" of the funded party, particularly in circumstances where they had received extraordinarily positive advice from the Claimant's solicitors.
It was submitted that updates were not requested from the Claimant's solicitors as to how the litigation was proceeding as the funders did not want to appear champertous. Counsel for a second set of funders added that had they taken more of an active role in the litigation, it would only have increased costs further.
Conversely, Counsel for the Costs Claimants argued that funders should not be immune from indemnity costs orders in circumstances where they had known or ought to have known that the case being advanced was hopeless. Even if the funders had not known how hopeless the case was, it was further submitted that the due diligence they had carried out had been woefully inadequate – which, in itself, made it just to make the funders liable for the indemnity costs order.
The funders, it was submitted, had a "real interest" in the litigation, having invested heavily in it to see a significant financial return. Further, by effectively purchasing a share of the litigation, the funders left themselves exposed to the risk that they would "follow the fortunes" of the Claimant in victory and in defeat. It did not, therefore, follow that the Costs Defendants should be able to distance themselves from the conduct of the Claimant.
Appeal submissions on the Arkin Cap Issue
On the question of how to apply the Arkin cap, Counsel for the Costs Defendants argued that the provision of security for costs had the effect of providing an "advantage" to the Costs Claimants as a means of securing payment and the funders should be given credit for providing that "secure pot" to the Costs Claimants. Consequently, amounts provided by way of security should not be factored in when calculating the limit of the funders' liability under the Arkin cap.
By contrast, the Costs Claimants submitted that the purpose of the cap is to afford funders protection but that funders should not benefit from any further protections. It ultimately made no difference to the Costs Claimants whether the funds advanced were used for the Claimant's litigation costs or for security for costs and, from a funder's perspective, funding security for costs was effectively a "natural hedge".
It was further submitted that the Costs Claimants had been entirely blameless in this litigation and should not be left out of pocket. The Costs Defendants on the other hand had recourse by way of a potential claim against the Claimant's solicitors and at least one such action had already settled on confidential terms.
When judgment is handed down (which is unlikely to be before the Autumn), the decision should provide some certainty as to the precise scope of funders' liability in circumstances where indemnity costs are awarded against a funded party and may have a material bearing on the terms on which future funding is made available.
1  EWHC 3767 (Comm)
2  EWHC 3436 (Comm)
3  EWHC 566 (Comm)