Weapon of War

Indemnity Costs

It has been well recognised since the train-crash trial of Three Rivers District Council v The Governor & Company of the Bank of England that indemnity costs will be awarded against an unsuccessful party whose claim, or conduct, is a departure from the norm. It is an increasingly common feature of commercial litigation in London that speculative, opportunist and weak claims of massive size are brought by impecunious claimants, backed by litigation funders and after-the-event insurance, with the intention of bullying a defendant into settlement to avoid years of litigation and millions of pounds of costs. This judgment is unlikely to turn the tide, but might bring some moderation to the current appetite for excess.

Indemnity costs will be ordered against an unsuccessful party who aggressively pursues allegations of dishonesty, lacking foundation in fact, which are irreconcilable with documents, or in respect of far-fetched or thin claims, attracting publicity, by way of large scale and expensive litigation calculated to put pressure on the opponent to settle. The court found that Excalibur’s claim and conduct suffered from all of these defects. The judge said that the litigation was ‘gargantuan’, without sound foundation in fact or law, and ended in ‘catastrophic defeat’. He said Excalibur pursued the Gulf litigation ‘as if it was an act of war’ by zealous solicitors whose ‘highly aggressive’ conduct ‘completely overstepped the mark’. The court found that this was intended to drive Gulf to settle.

However, Gulf fought back, incurring costs of £16m to win every point. Commenting on the amount of Gulf’s costs, the court acknowledged that Gulf was fully entitled to employ all of the legal resources available to it to defend a grossly exaggerated claim, and to employ a very great deal of expense, labour and time to refute ‘bad, artificial or misconceived… spurious claims… pursued relentlessly to the bitter end’.

The Funders

It is well established that those who fund litigation by an unsuccessful party will be liable to pay the successful party’s costs. The funders have already paid £17.5m into court by way of security for costs. The further security of £5.6m has not been paid.

As a consequence, Gulf has brought proceedings against each of the companies which paid or agreed to pay to fund Excalibur and against the beneficial owner of a special purpose vehicle used for litigation funding. These proceedings are pursued under section 51 of the Senior Courts Act 1981.

One funder, and its beneficial owner, accept liability for the defendants’ costs assessed on the standard basis, but are seeking to persuade the court that they should not have to pay on the indemnity scale. The difference is over £5m.

Two professional funders contend that they have already paid more than their fair share, and the other two professional funders have not put in evidence but have acknowledged service of proceedings.

Although the funders have long since abandoned Excalibur, and its lawyers, who told the court that they had not been paid since the end of the 56-day trial, the funders are now directly the subject of claims that will be heard in June 2014.

Lesson Learned

The Excalibur litigation has been a huge and catastrophic investment for the funders. The funders’ losses are believed to include estimates of £30m for claimant’s legal fees and expenses and after-the-event insurance premium. The funders have also paid £17.5m for security for costs, and are now being pursued for additional amounts estimated at £5.6m.

Funders must choose claimants and legal advisers very carefully if they wish to avoid paying indemnity costs to defendants who refuse to roll over.

Harvey Rands