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Follow your leader – funders must pay for indemnity costs, says Court of Appeal

Perrin: Excalibur is a graphic illustration of the risks of litigation funding

Perrin: Excalibur is a graphic illustration of the risks of litigation funding

Third-party funders should normally be liable for indemnity costs when they are awarded against funded claimants, the Court of Appeal has ruled in a decision that makes a clear statement placing litigation funding in the mainstream.

Upholding a significant High Court decision [1] from two years ago, Lord Justice Tomlinson said there was “no principled basis upon which the funder can dissociate himself from the conduct of those whom he has enabled to conduct the litigation and upon whom he relies to make a return on his investment”.

This was the latest ruling in the high-profile Excalibur case, a $1.6bn claim over interests in oil fields in Kurdistan which failed on every point. The then Mr Justice Christopher Clarke ordered that Excalibur – which had £31.75m in finance from various funders – should pay indemnity costs subject to the Arkin cap – that is, only liable to the extent of their investment.

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.

Giving the unanimous judgment of the court [2], Tomlinson LJ associated himself with the judge’s general approach that “the derivative nature of a commercial funder’s involvement should [his emphasis] ordinarily lead to his being required to contribute to the costs on the basis upon which they have been assessed against those whom he chose to fund.

“That is not to say that there is an irrebuttable presumption that that will be the outcome, but rather that that is the outcome which will ordinarily, in the nature of things, be just and equitable.”

Tomlinson LJ said he was “comforted” to find that the chairman of the Association Litigation Funders (ALF), Leslie Perrin, agreed with this.

The ALF intervened in the Court of Appeal, although none of the funders involved in the case were members. Indeed, the judge noted that they were “inexperienced and did not adopt what the ALF membership would regard as a professional approach to the task of assessing the merits of the case”.

The judge said he was also “sceptical” about the argument made by the funders in the case that the ruling would have an adverse impact on access to justice.

“I do not myself think that commercial funders are greatly motivated by the need to promote access to justice, and nor do I suggest that they should be. They are, as it seems to me, making an investment and are motivated by largely commercial considerations. Those whose money they invest would no doubt be aggrieved if it were otherwise.

“However insofar as the argument has any traction, it has I consider been resolved by the decision of this court in Arkin.”

On another key point, Tomlinson LJ saw “no basis upon which a funder who advances money to enable security for costs to be provided by a litigant should be treated any differently from a funder who advances money to enable that litigant to meet the fees of its own lawyers or expert witnesses”.

Tomlinson LJ also commented on the ALF’s suggestion that “to avoid being fixed with the conduct of the funded party, the funder would have to exercise greater control over the conduct of the litigation throughout and that this runs the risk that the funding agreement would be champertous”.

He said: “I understand why this concern is raised but I consider that it is unrealistic. As the judge pointed out, champerty involves behaviour likely to interfere with the due administration of justice. Litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest.

“What the judge characterised as ‘rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals’ is what is to be expected of a responsible funder – as the ALF to some extent acknowledges and as did some of the funders in this case in their evidence presented to the judge – and cannot of itself be champertous…

“Rather than interfering with the due administration of justice, if anything such activities promote the due administration of justice.

“For the avoidance of doubt I should mention that on-going review of the progress of litigation through the medium of lawyers independent of those conducting the litigation, a fortiori those conducting it on a conditional fee agreement, seems to me not just prudent but often essential in order to reduce the risk of orders for indemnity costs being made against the unsuccessful funded party.

“When conducted responsibly, as by the members of the ALF I am sure it would be, there is no danger of such review being characterised as champertous.”

Mr Perrin welcomed the ruling. He said: “Professional funder members of the ALF have always known that claims evolve over time and recognise the legal and commercial importance of maintaining an active oversight of cases throughout.

“Their aim is to ensure, to the extent possible, that they are only ever funding meritorious claims being conducted properly by all concerned. No sensible, experienced funder has any interest in funding speculative claims that do not have good chances of success.

Excalibur is a graphic illustration of the risks of litigation funding, particularly for the sources of capital that may be attracted to funding on an ad hoc basis.”