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On 18 November 2016, the Court of Appeal brought an end to the long running Excalibur Ventures LLC v Texas Keystone Inc and others litigation, providing some useful guidance on the extent to which third party litigation funders may be liable to pay the costs of a successful defendant in a funded claim. In short, funders may be liable for indemnity costs awarded against their funded clients even when they themselves have been guilty of “no discernible conduct”. The court considered that the derivative nature of a funder’s involvement should ordinarily lead to it being required to contribute to costs on the same basis as the funded claimant.
The underlying claim was described at first instance by Clarke LJ as a “resounding, indeed catastrophic defeat” for Excalibur; it failed on every point and was both speculative and opportunistic. As a result, the defendants were awarded their costs to be assessed on the indemnity basis. Whereas the funders had provided security for the defendants’ costs, the fact that the defendants were awarded indemnity costs meant that there was a shortfall of approximately £4.8 million. The funders accepted they must pay the defendants’ costs (subject to the “Arkin cap” (discussed below)), but argued it was inappropriate to direct them to pay indemnity costs because they were not guilty of discreditable behaviour themselves.
The Court of Appeal disagreed. It explained this argument suffered two essential defects. First, the parties’ conduct was only one of many factors to be taken into account in the evaluation; the character and nature of the claim and its size and effect on the defendants were also essential issues. Second, the funders had chosen to back a speculative and opportunistic claim; they had every opportunity to carry out a rigorous analysis of the law, facts and witnesses before deciding whether to invest and at key points throughout; they could not disassociate themselves from those they had chosen to fund.
The judgment also clarified other noteworthy points. In calculating a funder’s liability under the “Arkin cap” (the principle that a funder’s liability for adverse costs is limited to the amount invested) all funds advanced, whether in respect of security for costs or any other litigation costs, should be taken into account. Also, when exercising its discretion to make a third party costs order, the court held there was no reason to limit an order for non-party costs to only those funders with the contractual relationship with the litigant; the court will look to the economic realities of the situation. In this instance, the parent companies of two funders were made jointly and severally liable for the defendants’ costs despite not being party to the funding agreement.
Positively, whilst the judgment reflects a financial loss to the funders, the clarification of the applicable principles is an acknowledgement of the growing role of third party funding in high value commercial litigation. However, to those contemplating funding litigation, the judgment highlights the importance of conducting a thorough analysis of the claim at the outset and of performing periodic reviews of the litigation strategy to reduce the risk of indemnity costs orders.