Excalibur Ventures LLC v Texas Keystone Inc, Texas Keystone Inc v Psari Holdings Ltd (also known as Psari Holdings Ltd v Association of Litigation Funders of England and Wales) [2016] EWCA Civ 1144, Judgment 18 November 2016

A group of nine commercial funders who had funded a hopeless action, were required to pay the defendants’ costs on an indemnity basis, despite the fact that they – unlike the fundee – had not conducted themselves discreditably or in a way that could be criticised. Further, funders who had provided security for costs were not to be treated differently from funders who had previously provided funds for the claimant’s own legal team’s fees.

Excalibur claimed to be entitled to an interest, worth in the order of $1.6 billion, in a number of oilfields in Kurdistan. However, Excalibur’s claim failed on every issue. The judge described its defeat as ‘resounding, indeed catastrophic’ and described the claim as ‘essentially speculative and opportunistic’ involving ‘a range of bad, artificial or misconceived claims which required a great deal of expense, labour and time to refute’.  Excalibur was ordered to pay the defendants’ costs on the indemnity basis.

Excalibur’s action was supported by a number of commercial – albeit mostly inexperienced – litigation funders, who advanced £31.75 million over the course of 2 ½ years to March 2013. £14.25 million was advanced to cover Excalibur’s solicitors’ fees and disbursements, and £17.5 million was advanced to enable Excalibur to satisfy orders for security for costs.

One issue before the judge was whether funds made available as security for costs should count towards the Arkin cap (i.e. whether in these circumstances a funder risks losing the amount advanced plus the same again). The judge concluded that money provided for security was just as much an investment in the claim as money provided to defray Excalibur’s own costs and that both forms of investment should count equally towards the Arkin cap.

The trial judge ordered the claimant to provide additional security for costs in the sum of £5.6 million. The security was not provided and the funder’s were joined to the action pursuant to section 51 (3) Senior Courts Act 1981.  The funders were required to pay the defendants’ costs up to the Arkin ceiling of £31.75 million and on the indemnity basis.

The funders appealed on two main grounds. Firstly, some funders argued that they should not have to ‘follow the fortunes’ of the fundee, so that they should only be liable for costs on the standard basis. Secondly, some funders argued that their contribution made for the sole purpose of providing security for costs should not count towards the Arkin cap.

The appeal was unsuccessful on both points:

Firstly, the Court of Appeal found that the judge directed himself separately and correctly as to applicable principles under section 51 (3) (when considering making the costs order against non-parties), and under CPR 44 (when considering the basis on which to award costs). The funders’ argument which ‘boiled down in essence to the proposition that it is not appropriate to direct them to pay costs on the indemnity basis if they have themselves been guilty of no discreditable conduct or conduct which can be criticised’, was rejected. The court considered that that argument overlooked the fact that the conduct of the parties was but one factor to be taken into account in the overall assessment, also that it looked at the issue of conduct only from the funders’ point of view. It was not acceptable to ignore the nature of the action and the effect upon the defendants.  Further, it was wrong for the funders to assume that they were responsible only for their own conduct. Litigants regularly find themselves liable to pay indemnity costs on account of the conduct of others – including solicitors and experts. The derivative nature of a professional funder’ involvement should ordinarily lead to a requirement that he should pay on the same basis as the fundee that he enabled and from whom he hoped to derive significant financial benefit.

Secondly, the Court of Appeal found that there is no basis on which to treat funding provided as security for costs differently from funding provided to meet the fundee’s own legal team’s costs, for the purpose of calculating the Arkin cap.  In doing so the court rejected the argument that a funder who advances money to enable the provision of security for costs has accepted the risk that the amount advanced may be used to defray the successful party’s costs, and thus that funder has ‘paid his whack’ already and should not be liable for an additional amount in excess of what he has already paid. The funders’ argument ignored the fact that whether funding is used for security or for the payment of the fundee’s own legal team, it is advanced to meet costs which, if not met, will result in the litigation being unable to proceed. The money advanced for the purpose of providing security was as much an investment in the litigation as money advanced for the purpose of paying Excalibur’s lawyers’ bills (and indeed was advanced on the same terms).

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