Court of Appeal dismisses litigation funders’ costs appeal in US$1.6bn energy dispute

18/11/16

The Court of Appeal has dismissed the costs appeal by the litigation funders in Excalibur Ventures v Texas Keystone & Ors, a US$1.6 billion dispute concerning oil rights in Iraqi Kurdistan. The Excalibur litigation was one of the largest and longest-running cases in the Commercial Court in recent years.

The Claimant, Excalibur, alleged that it was entitled to a 30% share in the rights of four oil fields in Kurdistan. Excalibur was a shell company with no assets. A number of professional funders (the “Funders”) provided £31.75 million to Excalibur so that it could pursue its claim. If the claim succeeded, some of the Funders expected returns of up to £320 million.

The trial Judge, Christopher Clarke LJ, 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”. He was highly critical of the way that the case had been conducted by Excalibur.

Excalibur (through the Funders) had previously put up security of £17.5 million for the Defendants’ costs, but a shortfall was likely to arise between the security provided on the standard basis and the Defendants’ final recoverable costs on an indemnity basis. The Defendants sought a non-party costs order against the Funders to make up the expected costs shortfall, which the Judge granted. He held that, absent special circumstances, a professional funder should “follow the fortunes of those from whom he himself hoped to derive a small fortune”, and while the Funders were not themselves personally responsible for the matters which caused him to make the indemnity costs order against Excalibur, that was not sufficient reason to preclude a similar order against the Funders in the circumstances of the case.

The Funders appealed. The Association of Litigation Funders also intervened, on the basis that the judgment raised a number of issues of public policy concerning the provision of litigation funding.    

The Court of Appeal agreed with the trial Judge that it was the character of the claim, looked at objectively, which could justify an indemnity costs order against the Funders even if they were not guilty of any discreditable conduct. The Court upheld the ‘follow the fortunes’ approach and emphasised that the derivative nature of a commercial funder’s involvement in a claim should ordinarily lead to the funder being required to contribute to costs on the basis upon which they have been assessed against the party whom the funder chooses to fund.

The Court also rejected the argument that a consequence of the Judge’s approach was that a funder would have to exercise greater control over the conduct of the underlying litigation such as to run the risk of champerty. The Court said that an on-going review of the progress of litigation by a funder&rrsquo;s lawyers would often be essential to reduce the risk of indemnity costs orders, but when conducted responsibly there was no danger of such a review being characterised as champertous.   

The judgment appears here.