Excalibur Ventures LLC v Texas Keystone Inc & Ors (Rev 2) [2014] EWHC 3436
This case is often the first experience that lawyers and observers have of litigation funding and it is not a good one. The case is now seen as the low water mark of funding and an example of what not to follow. The substantive litigation, started in December 2010, was commenced by Excalibur, a Delaware corporation, claiming an entitlement in a number of oil fields in Kurdistan, valued at $1.6 billion, against Texas Keystone and others under a Collaboration Agreement. The law firm for the claimant was Clifford Chance which gave the claim a degree of legitimacy – the case is somewhat apocryphal owing to the lead partner’s description of its potential as being a “once in a lifetime” investment opportunity.
By its judgment of 13 December 2013, the Court dismissed the claim and found against Excalibur on every point. Costs were awarded on the indemnity basis, with an immediate payment on account of £17.5m being ordered together with further security to be provided of £5.6m.
The result of the claim did not give the impression that it could be a funded case. However, Excalibur was effectively a nameplate for private individuals and there was no way that the case could have been litigated without financial support of third parties. There were in fact four groups of funders. Tellingly, none of them were part of the Association of Litigation Funders that self-regulated the industry. It is not true to say, though, that the funders were all inexperienced. For one of the funders, the case represented the eighth funding engagement. The funding was provided in different tranches over different periods of time and reflects one of the realities of funding which is that the original funding that is provided is simply not sufficient. This can be for a variety of reasons, but it is a central cause for a funder wanting to be as certain as it can be that the operating budget is accurate. The case is an example of another reality of funding – the claimant needed to provide large levels of security for costs. At one point in the litigation, the claimant was presented with a £9.5m demand which, if not paid, would bring the litigation to a close. This dilemma provides another critical lesson for a funder – once a funder is on board, it has to accept to go where the driver takes the bus. Getting off is an option that, whilst contractually possible with a claimant, is likely to spell the end of the litigation and trigger a large demand for costs from the opponent – along with a write-off of the investment. The security for costs demand prompted the entry into the case of an additional funder. The final lesson to be drawn from this mayhem is that it is usually very unattractive for the case, the claimant and for the funders involved to have to contract with a number of funders on different terms. Ultimately, in this case, an Inter Creditor Agreement was entered into which regulated the order and priorities of distributions. Security was also sought over Excalibur’s assets but since the claim represented the sole asset of Excalibur, this security was of questionable value.
As with many large commercial claims, a second security for costs application was made – during the trial itself which created a very serious problem for the funders. A further £8m was needed otherwise the past investment was lost. Also, the perceived winning post was fast approaching. The further security was ultimately provided such that the funders provided £14.25m in funding and £17.5m in security.
The evidence disclosed that all the funders were to make extremely healthy returns.
As it was, the defendant sought orders that the funders paid all the costs of the action and that the costs should be assessed on the indemnity basis. A critical question was whether the funders would have the benefit of the so-called Arkin cap, and how it should be applied. The Arkin cap was Court-made and had previously limited funders’ obligations for costs to the level of the funds that they had advanced. An open issue was whether the funds advanced should include the amounts of security for costs. The Arkin cap, understandably, has always been highly contentious. Another open issue in the case was whether later funders should be treated any different to earlier ones.
The case is important because of how the Court explained the purpose for indemnity costs – not as a penalty but “to afford the successful party a more generous criterion for assessing which of his actual costs should be paid by his opponent because of the way in which the latter, or those in his camp, have acted”.
The jurisdictional basis for an order for costs in these circumstances was under section 51 Senior Courts Act 1981. The test is whether it is just to exercise the power, and it is an exceptional costs order, but it is the overall justice of the situation that is decisive. Where a non-party “not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs”. The same is true for financially insecure companies – “generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails.”
Based on these principles, there was no doubt that the funders should pay the costs – the claim could not have been brought without their assistance and they were to benefit significantly.
The Court resolved the debate in regard to the Arkin Cap on the basis that the funders would retain the benefit of the cap, noting that “The position might be different if a funder had behaved dishonestly or improperly or if, as the Court put it in Arkin, "the funding agreement falls foul of the policy considerations which render an agreement champertous" e.g. if the funder has taken complete control over the litigation.” In short, a funder must “follow the fortunes of those from whom he himself hoped to derive a small fortune”. The Court also put it another way – “Whilst the funders had the choice of which claims to back and whom to instruct, the Defendants could not choose by whom to be sued or in what manner.”
A key point noted by the Court is how a funder may approach a case in the light of this outcome – “I entertain some doubt that my decision will send an unacceptable chill through the litigation funding industry, whose aim is not to finance hopeless cases but those with strong merits. If it serves to cause funders and their advisors to take rigorous steps short of champerty, i.e. behaviour likely to interfere with the due administration of justice, - particularly in the form of rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals - to reduce the occurrence of the sort of circumstances that caused me to order indemnity costs in this case, that is an advantage and in the public interest.”
In other words, provided a funder does not seek to interfere with the administration of justice, there is degree of judicial encouragement for a funder to exercise appropriate oversight over the litigation it funds.
A further disappointment for the funders in this case was that the Court held that the provision of security for costs should be seen as funding for the purposes of the Arkin cap. As the Court decided – “It was a form of funding of the claim in exchange for a return attributable to the monies provided for that purpose – in effect an investment.”
A minor positive for funders is the position adopted in respect of causation – ie Funder B who joins the fray after Funder A has not done anything which led the defendant to incur the costs before he participated and so should not be liable for the adverse costs during the time of Funder A. A further downside is that it is evident that the Court will disregard parent/subsidiary relationships when exercising its discretion as to whether to render a third party liable. The Court will follow the money.