What is the worst that could happen?

Question: What’s the worst that could happen? Answer: Excalibur

The litigation funding industry has been waiting for the Court to hand down a costs ruling on the now notorious funded case of Excalibur Ventures v. Keystone et al. The case related to interests in the profits generated by an oil field in Kurdistan.

The claimant received litigation funding from a series of third party litigation funders during the life of the case. The amount claimed was supposedly in excess of £1bn and the case became notorious because it appeared to be the largest case in the funding market (requiring almost £32m of funding), which concluded by the court dismissing the claim on every point.

It is well-established law that a third party litigation funder may be on the receiving end of a non-party costs order if a funded case is lost. Last week, Christopher Clarke LJ handed down the long-awaited High Court ruling on the extent of the Excalibur Third Party Funders’ liability for adverse costs.

The risk of incurring a liability for adverse cost is a critical risk that many funders will examine before committing to fund a case. This is why most funders will insist on the existence of a suitable After-the-Event insurance policy to cover the adverse costs risk before providing funds, so that their exposure to a non-party costs order is reduced.

Leaving aside the judge’s own comment that he didn’t expect this judgement to have chilling effect on the funding market and how this case just proves funders should be picking winners, there are several findings within the judgment that inform us a great deal about third party funders’ potential adverse costs exposure on unsuccessful cases:

1. The “Arkin cap” remains intact.

In Arkin v Borchard Lines [2005] EWCA Civ 655 the Court of Appeal considered the issue of a third party funder’s liability for adverse costs and concluded that, unless the agreement was champertous, the funder’s liability for a non-party costs order should be capped at a sum equivalent to the amount invested in the case. Christopher Clarke LJ’s judgment in Excalibur has affirmed the Arkin principle that a funder’s liability for adverse costs should be capped in this way.

Ever since Lord Justice Jackson, in his Review of Civil Litigation Costs, expressed unease about the fact that a funder’s liability for adverse costs is capped by the ruling in Arkin, funders have been nervous another court decision would abolish the principle and give funders unlimited exposure to adverse costs. Many see the introduction of the cap in the Arkin case as the catalyst that kick-started the growth of the UK Third Party Funding market. Funders say that the uncertainty created by losing the Arkin cap would threaten the very viability of the market.

With the existence of ATE insurance and ever increasing empirical data on adverse costs exposures, it is difficult to say how damaging the removal of the Arkin cap would be to the funding market, however it is clear that this latest judgement in Excalibur serves to provide more certainty that the Arkin protection continues.

2. This decision confirms that funders are liable for indemnity costs based on the behaviour of their counter-party or the legal representatives of the counter-party, even if that behaviour is entirely beyond their control.

Did any funder seriously expect they might be able to avoid indemnity costs by pleading they were not directly responsible for the underlying actions or inactions that give rise to such an order? That is doubtful. Most funders appreciate that when you provide funding for litigation you are not just backing the horse to win the race but you are also backing the horse itself.

At one level it might seem harsh because funders are forever being told that they cannot interfere, yet they are exposed to the consequences of decisions or actions they may well be forbidden from preventing. Moreover, in all likelihood, the offending actions or inaction may even amount to a breach of the Litigation Funding Agreement itself. However, Christopher Clarke LJ is right that funders follow the fortunes of their counter-party. They share in the upside returns and it is right that they share in the downside consequences in the same fashion – albeit the Arkin cap provides a vital role in helping funders quantify that downside risk.

Most Litigation Funding Agreements will include a right of recourse against the funded party for breaches of the agreement that expose the funder to adverse costs. Whether funders can in reality collect on those entitlements is another matter, but that might go some way to explaining why the Courts prefer to leave the risk of collection against the funded party with the funder and not the prevailing opponent who has successfully argued for indemnity costs on a case which was enabled by the funder.

3. The funders were liable from the point that they became involved in the case.

In this case there were several funders that came on board at different times in the case.

This is interesting because it was at least arguable that the funders should be liable for their pro-rata share of retrospective costs because the costs themselves don’t crystallise until the outcome of the case is determined.

This decision could help funders decide to positively support later stage cases where top-up funding is needed.

4. Providing security for costs is the same as providing funding for own costs when it comes to liability for adverse costs.

This is potentially a very significant issue. By their nature, a large number of cases that require funding will involve a security for costs issue. Many funders will have agreed to provide security for costs, expecting that their liability for adverse costs is simply the amount of funding provided for security for costs. In fact, it now appears that their liability is potentially double that amount, under the Excalibur interpretation of the Arkin cap.

The decision is not illogical but it will be a shock to some who may not have considered that possibility.

The concern about the decision is one of public policy. This has knock on effect for access to justice because the parties who face security for costs are those SMEs who have the smaller cases where the economics are tighter. Many cases struggle already to source funders to provide security and now funders will have to account for double the risk.

The answer lies with the increased use of ATE insurance and, in particular, an insurer’s Deeds of Indemnity. The latter serves as a guarantee to the opponent that the insurer will provide an indemnity for adverse cost as ordered by the court, subject to an offset against the ATE policy. Funders can finance the cost of an ATE insurance policy with a Deed attached and in that way the funder’s liability for adverse costs under Arkin is capped at the funded premium (and associated costs of a Deed of Indemnity). This results in a lower Arkin exposure than the funder providing the adverse costs indemnity and security for costs directly.

In summary, this judgement is like showing a funder how bad life could get. Although that is painful to contemplate, once understood, at least funders can plan properly for the worst. If you have any questions about litigation funding or this particular example, please contact TheJudge on 0845 257 6058 or email info@thejudge.co.uk.