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Professional litigation funders liable for indemnity costs in US$1.6 billion energy dispute

23/10/14

On 23 October 2014, Christopher Clarke LJ handed down judgment concerning the costs liability of professional litigation funders in Excalibur Ventures v. Texas Keystone & Ors, a US$1.6 billion dispute concerning oil rights in Iraqi Kurdistan, which was tried in the Commercial Court over 5 months.

The Claimant, Excalibur, alleged that it was entitled to a 30% share in the rights of four oil fields in Kurdistan. The Judge dismissed the claim and awarded the Defendants their costs on an indemnity basis, saying that the claim had met a “resounding, indeed catastrophic defeat” and had been “an elaborate and artificial construct…replete with defects, illogicalities and inherent improbabilities”. The Judge was highly critical of the way that the case had been conducted by Excalibur.

Excalibur was a shell company with no assets. A number of different professional litigation funders (the “Funders”) funded Excalibur so that it could pursue its claim. They provided £31.75 million of funding to Excalibur. If the claim had succeeded, some of the Funders expected returns of up to £320 million.

Excalibur (through the Funders) had previously put up security for the Defendants’ costs in the sum of £17.5 million, but because the Defendants were awarded their costs of the action on an indemnity basis, a shortfall was likely to arise between the security provided and the Defendants’ final recoverable costs after assessment on the indemnity basis.

Accordingly, the Defendants applied to join the Funders to the proceedings for the purposes of a costs order against the Funders. The Funders resisted the applications, some saying that they were not liable to pay a costs order at all, others saying that they were liable to pay a costs order only on the standard but not the indemnity basis.

The Defendants’ applications gave rise to a number of issues that the Court has not previously considered in respect of professional litigation funding, including whether professional funders should themselves be liable for costs on an indemnity basis, how their previous provision of security affected the analysis, and how the Court should distinguish between the different funding contributions of the different funders.

The Judge ordered that the Funders were liable to pay the Defendants’ costs of the action on an indemnity basis. He held that while the Funders were not themselves personally responsible for the matters which caused him to order indemnity costs against Excalibur, that was not itself sufficient reason for precluding an order for indemnity costs against the Funders in the circumstances of the case.

Although the Funders had received and relied on very positive legal advice on the merits of Excalibur’s claim, in the Judge’s view “the 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.

Likewise, although the Funders were not themselves aware of Excalibur’s unreasonable conduct during the course of the litigation, once they had taken the commercial decision to leave the case in the hands of Excalibur and its solicitors, the Funders had to bear the burden of the costs that they caused the Defendant thereby to incur, to be assessed on the same scale as applicable to those to whom the Funders had entrusted their fortunes. Absent special circumstances, a professional funder should “follow the fortunes of those from whom he himself hoped to derive a small fortune.

The Judge recognised that there were public policy considerations if professional litigation funders were exposed to the risk of costs assessed not only on a standard, but also on an indemnity basis. He did not, however, consider that his decision would send an “unacceptable chill through the litigation funding industry”: to the contrary, if the decision “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.”

The judgment is here.

Richard Eschwege appeared for the Defendants, Texas Keystone and the Gulf Keystone companies, instructed by Jones Day and Memery Crystal.

Harry Matovu QC also acted for the Gulf Keystone companies in the trial of the main action, instructed by Memery Crystal.