A third-party funder has lost out on $15m (£12m) after the High Court ruled that its entitlement came out of damages after a deduction for contributory negligence was made, rather than before.
Andrew Lenon QC, sitting as a deputy High Court judge, said the funder should have made explicit provision for the possibility in the funding agreement.
But the funder, ChapelGate Credit Opportunity Master Fund, still walked away with $46m (including costs and interest) after the party it backed, Singularis Holdings, won a $204m claim for negligence and breach of contract against Daiwa Capital Markets Europe.
This was reduced by 25% to take account of Singularis’ contributory negligence, resulting in an award of damages of $153m.
The agreement was only made shortly before trial, after Singularis’s liquidators informed its solicitors, Jenner & Block, that the cash reserves in the insolvent estate were unlikely to be sufficient to support the litigation through to its conclusion.
The funding agreement provided that, if the case went to trial, ChapelGate – a hedge fund managed by Orchard Global Asset Management – would receive 600% of its investment or, if greater, 30% of the proceeds. It provided funding of about £3.4m in all.
The question of whether ‘proceeds’ was calculated before or after the contributory negligence reduction came down to the interpretation of two provisions in the funding agreement. If the former, ChapelGate would be entitled to a further $15m.
One clause said proceeds meant “all gross revenues and any other value (excluding VAT and disregarding any netting, set-off or other reduction including, without limitation, by reason of a counterclaim or costs order against the claimant)”.
Mr Lenon ruled that reduction by reason of contributory negligence was “fundamentally different” from those specified in the clause, “in that a finding of contributory negligence is not based on a claim against the claimant and does not denote any liability on the part of the claimant to anyone else”.
He added that Daiwa did not plead its defence of contributory fault on the basis that it was a set-off and the trial judge did not characterise Singularis’s contributory fault as such.
The second provision was that “there shall be added to the amount of proceeds the amount of any reduction in the amount of any award by reason of a set-off for any reason, including counterclaims, or as a result of a costs order against the claimant or as a result of any other quantifiable order”.
The judge said this clause was “pulling in the same direction” as the first one and should be construed consistently.
“There is no obvious reason for including two equivalent provisions saying approximately the same thing in slightly different terms and they appear to be an example of ‘torrential’ drafting.”
He found that it too was primarily concerned with set-off rather than, as ChapelGate submitted, examples of “any reduction in the amount of any award”.
This meant a reduction in damages for contributory negligence was not to be ignored in calculating the proceeds and ChapelGate’s share.
Mr Lenon said the wider factual context supported this conclusion. It was “readily understandable” that ChapelGate would seek to protect itself against the risk of a counterclaim emerging out of the blue or of an adverse costs order.
This was “separate from the risk of a claim failing on its merits and may not be detectable as part of ChapelGate’s due diligence”.
Further, both Singularis and ChapelGate knew Daiwa was running a contributory negligence defence and so the funding agreement should have expressly dealt with the impact of a finding on the definition of proceeds, rather than relying on a “strained construction” of the other two clauses.
“In these circumstances, the question ‘Why did the parties not say it?’ is, in my view, a pertinent one… [It] reinforces the conclusion that, on the correct construction of the funding agreement, no such adding back was intended.”