24 October 2014Print This Post

High Court: making litigation funders liable for indemnity costs will not “chill” market

High Court: Arkin cap applied

Third-party litigation funders should be liable for indemnity costs awarded against funded claimants, the High Court has ruled.

Lord Justice Christopher Clarke doubted that his decision would send an “unacceptable chill” through the funding industry; rather, if it made funders more careful when selecting their investments, that was to be welcomed.

This was the latest ruling in the high-profile Excalibur case, a $1.6bn claim over interests in oil fields in Kurdistan which the judge ruled last December failed on every point. He ordered that Excalibur – which had £31.75m in finance from various funders – should pay indemnity costs.

The £17.5m which had been paid in as security for costs was applied to the judge’s order for payment on account, but a further £4.8m was outstanding – largely due to the award of indemnity costs – and the defendants were allowed to seek it from the funders. The hearing was essentially over whether the funders should be liable for indemnity costs given that they were not responsible for the conduct that led to the indemnity costs.

Having ruled that the funders should be subject to the Arkin cap – that is, only liable to the extent of their investment – Christopher Clarke LJ continued: “Justice requires that, when the case fails so comprehensively, not merely on the facts but because it was wholly bad in law, the funder should, subject to the Arkin cap, bear the costs ordered to be paid by the person whom or which he has unsuccessfully supported, assessed on the scale which the court thinks it just for that person to pay in the light of all the circumstances, including but not limited to that person’s behaviour and that of those whom that person engaged.

“In short, he should, absent special circumstances, follow the fortunes of those from whom he himself hoped to derive a small fortune. To do otherwise would, in my judgment, be unfair to the defendants and their personnel.”

He said that to make an order for indemnity costs “would not be to penalise but to recompense”. The sum in issue was not disproportionate to the funders’ contributions, he noted, and “certainly not disproportionate to the anticipated return”.

Christopher Clarke LJ said he recognised potentially competing public policies – access to justice could be curtailed if professional funders, concerned about the risk of indemnity costs, decline to fund, or only be prepared to do so at a higher cost or against some form of indemnity or an increased reward for success, even in relatively standard cases.

Alternatively, he said, they may seek to intervene in the proceedings in a manner which runs the risk that their agreement to support the litigation is champertous or close to it.

But he concluded: “I do not regard these considerations as compelling. Indemnity costs are awarded in circumstances (including but not limited to the conduct of a party and not necessarily involving dishonest, morally culpable or improper behaviour) which are outside the norm. This case was well outside it. The sums at stake were as huge as the deficiencies in it were egregious.

“I do not think it appropriate to reach some different conclusion because of any potential impact of my decision on possible future funders in quite different cases. I entertain some doubt that my decision will send an unacceptable chill through the litigation funding industry, whose aim is not to finance hopeless cases but those with strong merits.

“If it serves to cause funders and their advisors to take rigorous steps short of champerty, i.e. behaviour likely to interfere with the due administration of justice – particularly in the form of rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals – to reduce the occurrence of the sort of circumstances that caused me to order indemnity costs in this case, that is an advantage and in the public interest.”

The judge also ruled that the Arkin cap should be measured by reference to both the amount contributed in respect of costs and also of security for costs – otherwise those who provided funding just for security for costs would not face any costs exposure.

Further, he said that funders should only be liable in respect of costs that the defendants incurred after they made their contribution – here the various funders came on board at different times.

Chris Coffin, a partner at Withers who acted for the largest funder, Psari Holdings/Andonis Lemos, said: “This judgment will act as a clear warning to professional funders, who no longer have certainty over the scale of their liability, the extent to which they should exercise control in order to safeguard their investment or how far up the corporate chain the court may go to extract funds.”

By Neil Rose


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