A High Court decision in the case of Excalibur Ventures LLC v. Texas Keystone Inc and others (2014) has condemned a group of litigation funders, who provided financial backing for a claim described by the Court as “replete with defects, illogicalities and inherent probabilities“, to joint and several liability for indemnity costs up to £31.75 million.
In December 2013, after a trial lasting 57 days, the Court dismissed Excalibur Ventures’s claim and ordered it to pay the defendants’ costs on the indemnity basis. A reason why the Claimant was ordered to pay costs on the indemnity basis, rather than the standard basis, was the way in which it and its solicitors, Clifford Chance, had conducted the case. The claim had failed on every point.
Excalibur Ventures had funded the legal costs of its claim through third party funding and the funders had also provided £17.5 million security for costs ordered by the Court.
Since Excalibur Ventures was a corporate shell with no money or assets, the successful defendants subsequently applied for non-party costs order against the funders, who had directly provided funds to Excalibur Ventures, and also — piercing the corporate veil — against those funders’ holding companies and ultimate beneficial owners.
The defendants’ application was made pursuant to Section 51 of the Senior Courts Act 1981 which provides that the Court shall have “full power to determine by whom and to what extent the costs are to be paid.”
Pursuant to this provision there have been a number of cases in which a non-party funder of an unsuccessful claim has been ordered to pay the successful party’s costs, even though the funder was not a party to the proceedings. However, except where a non-party funder has exercised an element of control over the conduct of the litigation, the Courts have imposed a cap on a non-party funder’s potential liability to the extent of the funding provided (known as the Arkin cap).
In this case the Judge stated that, “[T]he pursuit of objectively hopeless claims which required much time, labour and expense to refute is itself a ground for indemnity costs both against the litigant and his funder.”
The Judge determined that justice requires that the funders should, subject to the Arkin cap, be liable for the costs ordered to be paid by the Claimant which the funders had unsuccessfully supported. The Judge stated, “[I]n short, he should, absent special circumstances, follow the fortunes of those from whom he himself hoped to derive a small fortune. To do otherwise would, in my judgment, be unfair to the Defendants and their personnel, who were on the receiving end of claims and actions of the character that I described in the costs judgment.”
In determining whether the corporate veil should be pierced — so that the successful defendants could recover costs from the parents of impecunious corporate funders — the Judge stated that, “the economic reality is that the investments in the litigation were made” by the parent firms and “it is they which would have been the ultimate beneficiaries of success.” He added, “[T]he funding vehicles . . . do not appear to have had any independent interest separate from that of their owners.”
However, the Judge stated that each funder was liable only up to the amount of funding that it had provided and only in respect of costs that the defendants had incurred from the date when a funder first provided funding.
He noted that, “[T]he function of the [Arkin] cap is to limit the costs which the funder has to pay by reference to the money that he has put up to finance the action. He should be required to pay the successful defendant no more than he was prepared to put up in relation to the action himself. The cap bears no necessary relationship to the costs which the Defendants have incurred so as to fall to be reduced to the extent that they are covered.”
In relation to when a funder’s liability arose, the Judge stated that, “I do not think it appropriate to make an order the effect of which is that the [later funders] will be liable for costs which they have played no part in causing the defendants to incur. The fact that they are, in a sense, inheritors of the work of others is not sufficient reason.”
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Note: This is a general briefing and not an exhaustive treatment of the subject.