Excalibur Ventures LLC v Texas Keystone Inc & Ors [2016] EWCA Civ 1144
It was inevitable that Excalibur would reach the Court of Appeal and it was notable that the Association of Litigation Funders (ALF) intervened in the proceedings, making written submissions only. The Court described the two forms of third party funding – “pure funding” which was in the public interest provided that its essential motivation was to enable the funded party to litigate – and commercial funding. Whilst it was true that commercial funding facilitated access to justice, it was an incidental by-product and not the essential motivation. “The commercial funder is an investor who hopes to make a return on his investment. For that reason, justice will usually require that, if the funded proceedings fail, the funder or funders must pay the successful party's costs.” Reference was made to a Privy Council case (Dymocks) where a non-party who funded the proceedings and “substantially also controls or at any rate is to benefit from them” was expected to pay the successful party’s costs, noting that the non-party “is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is "the real party" to the litigation”.Funders would strenuously argue that they are not the “real parties” to the litigation, but there can be no argument that they do stand to benefit from the litigation.
The Court noted that none of the Excalibur funders were members of ALF, and none had previous experience of English litigation. The Court also stated that the action could not have been pursued without third party funding. The claim failed on basic grounds – a failure to establish a contract and a failure to show that Excalibur could have performed its obligations. These fundamental deficiencies should have been obvious to all, including the funders, before they agreed to advance funds, particularly since the jurisdictional flaw was evident from a prior decision of the Court in relation to US arbitration proceedings. The funders’ due diligence appeared seriously lacking here, but they had got themselves entwined in a case that grew and grew and they did not seem to have the desire to extricate themselves. Ultimately the costs of the defendants were greater than the amounts that had been paid as security, and the trial judge ordered that the funders be joined for the purposes of costs such that the successful defendants could seek to recover their costs from them. As the Court of Appeal found “The suggestion that these funders, whose stake in this litigation was very substantial, ought not to be responsible for the successful parties' costs is simply hopeless”.
A principal ground of appeal of the funders was that funds contributed for the express purpose of providing security for costs should not count towards the Arkin cap. Their other main argument was that it was 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. Taking the second argument first, the Court of Appeal found there were at least 3 reasons why this argument was flawed – the conduct of the parties was only one reason for the award of indemnity costs, but more tellingly, it looked at the issue only from the funders’ point of view and assumes that the funder is responsible only for his own conduct. As the Court put it “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.” As to the first, that a funder who advances money to enable the provision of security for costs has paid his whack, the Court was not impressed. Such funds should be treated in the same way as any other funding.
Ultimately the Court of Appeal laid down a key assumption that regulates all commercial funding – “the derivative nature of a commercial funder's involvement should 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”. The Court of Appeal did not have much sympathy with arguments deployed as to the potential implications for 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.” The approach outlined here was clear – funders could not expect to escape the costs consequences of failed cases by seeking to make arguments that access to justice would somehow be weakened.
In their submissions, ALF had raised the concern that to avoid being fixed with the conduct of the funded party, the funder would have to exercise greater control which could lead to arguments over champerty. The Court of Appeal stated “champerty involves behaviour likely to interfere with the due administration of justice.” They accepted that rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals was what was to be expected of a responsible funder and could not of itself be champertous. Indeed, “rather than interfering with the due administration of justice, if anything such activities promote the due administration of justice.” Ongoing review of the progress of the litigation is “not just prudent but often essential”. Interestingly, the Court of Appeal made reference to this review being through the medium of lawyers independent of those conducting the litigation. It was not made clear whether the inbuilt assumption here was the the funders needed to instruct their own lawyers or whether such a review could be conducted by the funders themselves. However, the outcome needed to be that the review was conducted responsibly, and then there was no danger of such review being characterised as being champertous.
In practice, it is not uncommon that funders and lawyers have different approaches to how litigation should be progressed. The critical issue is how to police these differences. The ALF Code of Conduct mandates clarity in respect of the funders’ ability to terminate funding agreements, but of course not every disagreement on strategy should lead to the termination of the contract. However, in the midst of complex litigation, satellite arguments in respect of the funding is not helpful. Both parties need to be commercial but to maintain their integrity and attempt to resolve the issue quickly and professionally. There is a risk that this period can be a cause of intense frustration for all parties, and it must be handled well. However, once it is appreciated that the debate is being had for the benefit of the case – and the claimant – it ought to be possible to approach matters in a sensible fashion. The key is to avoid jeopardising the case itself, and since this in the interests of all parties, the issue should be swiftly addressed.
Throughout this case, the sceptre of the Arkin cap being scrapped was ever-present. It was likely that it was going to be a case that had all the hallmarks of a defendant being prejudiced at the hands of funders that would unseat the cap. The Court of Appeal made reference to “those who consider that the Arkin cap is unduly generous to funders who, some think, should not have their exposure capped but rather left at large, or perhaps in the discretion of the court”. Whilst there were some uncomfortable moments, the cap remained in place, although it did seem clear from the judgment that funders could not expect it to stay intact for long. And so it proved to be the case as becomes clear in time…