Look Before You Fund: Litigation Funders Liable for Indemnity Costs

Lord Justice Christopher Clarke held litigation funders liable for the costs of successful opponents, assessed on an indemnity scale, in the case of Excalibur Ventures vs. Gulf Keystone Petroleum Limited because funders had supported a hopeless case that had been conducted unreasonably by Excalibur and its solicitors.  The Judge decided that indemnity costs should be awarded against the funders because they backed Excalibur’s claim in return for a share of the potential fruits of the litigation which would have amounted to very substantial sums running into hundreds of millions of dollars.  Indemnity costs are recoverable on the more generous rate of about 85%-90% of actual costs incurred.

The litigation funders’ obligation to contribute to the successful opponent’s costs should be up to the same amount that the funder paid to the unsuccessful Claimant.  This is known as the “Arkin cap”under which the public interest in commercial funding for litigation should be balanced against the right of a successful opponent to obtain recovery of costs from the unsuccessful party or its funder.  Thus, the amount recovered in respect of costs by the successful opponent will be an amount up to the total sum paid by the funder to the unsuccessful party, including legal fees and disbursements paid to Excalibur and, also, for the first time, amounts provided by the funders for Excalibur to pay security for the Defendant’s costs.  The Judge decided that if security for costs had not been paid, the litigation would have come to an end.

The Judge also decided that the funders’ liability is limited to the amount of costs incurred by the successful opponent during the period that the funder provided funding to the assisted litigant.

The Judge recognised that litigation funders are between the rock of indemnity costs and the hard place of champerty.  However, he observed that the message contained in his Judgment should cause litigation funders to avoid hopeless cases and focus on those with strong merits.

Litigation funders have been criticised for pursuing weak cases in the hope that opponents will back down and settle rather than face the huge cost and attrition of substantial commercial litigation.

The Gulf case was exceptional in that an impecunious Claimant who had given up any right to participate in and had no possible means of contributing to the development of four massive oil exploration ventures in Kurdistan received huge funding in pursuit of an illusory prospect of recovering a 30% share of assets said to be valued at US$1.65bn.  Funders backed Excalibur in the sum of £31.75m, only to find that they must contribute to the Defence costs estimated to be between £22m-£25m.

The message for litigation funders, in common with all other parties to substantial litigation, is to ensure that your lawyers perform a very careful and rigorous analysis of the merits of the case and the credibility of the evidence.

Harvey Rands