Memery Crystal in historic Court of Appeal ruling on indemnity costs

Our article ‘Look Before You Fund‘, explained that the High Court held Excalibur’s litigation funders liable for Gulf Keystone’s defence costs assessed on the indemnity basis because they had supported Excalibur’s hopeless case that had been conducted unreasonably by both Excalibur and Excalibur’s solicitors.

The High Court’s decision was a landmark finding against the funders and it was therefore of little surprise that they sought to reduce their liability and to put Gulf Keystone to yet further expense of appeal.

The Appellants in this case comprise New York hedge funds and associated companies (‘Platinum Funders’), and a Greek shipping and property magnate and his Cayman Island SPV (‘Psari Funders’).

The Association of Litigation Funders (‘the ALF’) also intervened to support the Appeals on behalf of its members.

The primary issues on appeal were as follows:

• whether the Appellants should follow the fortunes of Excalibur (i.e. be liable to pay Gulf Keystone’s defence costs on the indemnity basis); and

• whether funding for the express purpose of providing security for costs can serve to reduce or extinguish the Appellants’ costs liability.

Following the Fortunes

Lord Justice Tomlinson, who gave the leading judgment, held that he could “see no principled basis upon which the funder can dissociate himself from the conduct of those whom he has enabled to conduct the litigation and upon whom he relies to make a return on his investment” (paragraph 24).

The Court of Appeal said “that the derivative nature of a commercial funder’s involvement should ordinarily lead to his being required to contribute to the costs on the basis upon which they have been assessed against those whom he chose to fund” (paragraph 27).

This clear statement leaves the litigation funding community in no doubt that they need to do adequate due diligence on exactly who and what they are funding.

Funding for the Express Purpose of Providing Security for Costs

The Platinum Funders submitted that money paid to Excalibur for security for costs ultimately received by Gulf Keystone in part satisfaction of their final costs should not be ignored as the amount of security is ultimately recovered by the successful party.

Tomlinson LJ held that he could “discern no principle whether of fairness, justice or otherwise pursuant to which the Platinum funders’ investments earmarked for the provision of security should be treated any differently …  To do so would subvert the funding model which appears to be accepted by the ALF in consequence of the Arkin compromise” (paragraph 32).

Interests of Justice

His reference to the “Arkin comprise”[2] balances the interests of justice in permitting the commercial funding of litigation with fair recompense to a party who has prevailed against a funded litigant.  The compromise provides that funders are liable to pay the successful party’s costs up to a sum equal to the amount of funding they have provided to the funded litigant.

The “misguided” intervention of the ALF

The Court of Appeal did not accept any of the ALF’s criticisms of the High Court’s decision and characterised some of its submissions as ‘unrealistic’, “misguided”, “unpersuasive”, and “unworthy”.

The message

The Court of Appeal Judgment sends a clear message to the litigation funding community that they will suffer the same fate as their fundees if they lose.

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[1] Excalibur Ventures LLC & Ors -v- Psari Holdings Limited & Ors [2016] EWCA Civ 1144

[2] Arkin v Borchard Lines [2005] EWCA Civ 655