The court backed the ruling of a High Court judge, who had found a group of litigation funders jointly liable to pay the litigant’s costs assessed on the indemnity basis. The court had decided to adopt this more burdensome method of assessing costs as a result of the litigant’s “speculative and opportunistic” claim, which had been “based on no sound foundation in fact or law” and “met with a resounding, indeed catastrophic, defeat”.
Legal costs expert Keith Levene of Pinsent Masons, the law firm behind Out-Law.com, said that the decision reflected the fact that third party funding was now a mainstream feature of modern litigation.
“Money to enable security for costs should not be treated any differently from money advanced to enable a litigant to meet the fees of its own lawyers or expert witnesses – what matters is the total value of funding,” he said.
“A costs order can be made against a person who has provided funding and who, in reality, will receive the benefit of the litigation, even if they are not a party to the funding agreement – for example, a funder’s parent company. The funder could not dissociate himself from the conduct of those whom he had enabled to litigate and on whom he relied to make a return on his investment,” he said.
Third party funding is the funding of legal proceedings by an entity that is not involved in the dispute, typically in return for a share of the damages received or the settlement sum.
Excalibur Ventures LLC, a company based in Delaware, USA, had begun a legal challenge in the English courts against a number of oil exploration companies which, it claimed, owed it some $1.6 billion from an interest in an oil field in Kazakhstan. Its case was financed by a number of third parties which, the judge said, had little experience of funding litigation, particularly in the UK.
Following its defeat, the trial judge ordered Excalibur to pay its opponents’ costs on the indemnity basis. The effect of this was that the security that had been paid to the courts to cover the costs was no longer adequate, as it had been provided based on costs being recovered on the standard basis. Excalibur never made up the shortfall, so the court gave its opponents permission to pursue the funders for the balance on a ‘joint and several’ basis, which means that any one of them could be ordered to pay the full sum. The shortfall is currently estimated at about £4.8 million.
The funders argued that they were not liable for this sum on a number of grounds. These included that they should not be required to “follow the fortunes” of Excalibur, and should only be liable for costs awarded on the standard basis; that they should not be required to provide additional funding for the sole purpose of providing security for costs; and that a parent company could not be made subject to a costs order.
The Court of Appeal dismissed all of these arguments. In particular, Lord Justice Tomlinson said that it was “incorrect” for a funder to argue that it was responsible only for its own conduct.
“The funder is seeking to derive financial benefit from pursuit of the claim just as much as is the funded claimant litigant, and there can be no principled reason to draw a distinction between them in this regard,” he said. “I can see 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.”
“For my part, I am sceptical about the argument deployed here by the funders that the imposition of a requirement to pay costs on an indemnity basis will have an adverse impact upon 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,” he said.
It was the responsibility of a commercial funder to undertake sufficient due diligence and assess whether the risks of funding the case were worth the financial outlay, he said.
The Association of Litigation Funders (ALF), which represents the interests of commercial litigation funders in England and Wales, welcomed the judgment, which it described as “a graphic illustration of the risks of litigation funding”.
“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,” it said in a statement on its website. “Their aim is to ensure, to the extent possible, that they are only ever funding meritorious claims being conducted properly by all concerned.”
“In the ALF’s view the risks involved in litigation funding are not easily managed by anyone other than professional funders, staffed by experienced litigation and arbitration experts, who ‘live and breathe’ the asset class,” it said.