27 October 2014Print This Post

The lessons of the Excalibur ruling

Coffin: significant judgment for the professional funding market

By Chris Coffin, Lesley Timms and Andrew Dunkley of Withers, who acted for funder Psari in the Excalibur costs case

The judgment in Excalibur Ventures v Keystone et al will give third-party litigation funders a number of reasons to consider how they structure and monitor their funding activities.

Last week’s judgment comes at the tail-end of an epic $1.6bn claim by Excalibur Ventures LLC against Texas Keystone Inc. After a 57-day trial, the judge dismissed all of Excalibur’s claims and ordered it to pay the defendants’ costs on the indemnity basis. This was in part because of the way in which Excalibur and its solicitors (Clifford Chance) had conducted the case.

Excalibur funded the huge legal costs of its claim through third-party funding from Psari Holdings Limited (represented by Withers in the costs’ hearing), Hamilton, Platinum (or PPCO), Blackrobe and Blackrobe Capital, Huron and PPVA and JH.

As Excalibur was a shell with no money or assets, the defendants applied for non-party costs orders against the funders’ holding companies and/or ultimate beneficial owners. Psari accepted from the outset (“to its credit”, the judge said) that it would pay the defendants’ costs on a standard basis, but did not accept paying costs on the indemnity basis.

The judge decided that the funder should bear the costs ordered to be paid by the person from whom the funder hoped to derive a return. This was subject to the Arkin cap, under which a professional funder is only be liable for the winning party’s costs to the extent of the funding provided. Whilst the funders could choose which claims to back, the defendants could not choose by whom to be sued.

The judge made clear that his intention was not to penalise the funders who, in the case of Psari and its owners, “were not personally responsible for the matters which caused me to order indemnity costs”. The decision was driven by the unique characteristics of this case and the way in which it had been run by the claimant and its legal advisers.

The case also considered whether the defendant could look past shell subsidiaries to the funder above. The judge held that in determining what was “just” in this case, he should not disregard the role of the parent companies; on this occasion, parent and subsidiary should stand together.

In relation to the provision of security for costs, the judge determined that the court will not allow any one funder a “free ride” on the back of those financing the costs by virtue of the fact that its funding was provided through a particular or different mechanism.

Finally, as to the timing of the funding, the judge ruled that in order to succeed in a claim for costs against a non-party, those costs must “to some extent” have been caused by the non-party. This decision will leave the receiving party in the unenviable position of having to divide its costs into periods of investment and then apportion the costs incurred as between each funder.

This is a significant judgment for the professional funding market. It may require funders to reconsider how they fund claims and, once they have provided the funding, how they monitor their investment to ensure that they too are not unwittingly exposed to the consequences of improper behaviour of the funded party and/or its legal representatives.

Practical points for funders and ATE insurers:

  • Indemnity costs: professional funders and insurers should not need to be caught out, provided that they understand the case and the lawyers that they are investing in.
  • Merits: funders must take their own view on each case. Getting a second opinion is also important.
  • Control: funders can be held financially responsible for the conduct of the lawyers and experts – even where there is no champertous control.
  • Monitoring: ongoing appraisal of the merits and risks of a case is important, especially where further funding may be required.
  • Timing: funds provided for later elements of a case are less exposed to adverse or indemnity costs. This may make it attractive to raise funds in tranches where the funding commitment is very large.
  • Security: successful security for costs applications by the defendant are particularly dangerous, forcing the funder to either invest more capital, accept dilution or let the claim collapse. ATE insurance may mitigate this risk.
  • Subsidiary shell companies: these do not protect the parent fund from adverse cost liability.
  • Funders and ATE insurers should consider making explicit provision for the treatment of indemnity costs, such as:
    • Requiring an indemnity from the lawyers/experts for indemnity costs caused by their conduct;
    • Solicitors and counsel must notify the funder or insurer if a risk of indemnity costs arises; or
    • Specific insurance.

By admin


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