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Litigation funders liable for indemnity costs

Excalibur Ventures LLC v Texas Keystone Inc and others [2016] EWCA Civ 1144

"Justice will ordinarily require a non-party costs order against a funder not just where the funder substantially controls the proceedings but also where the funder stands to derive a substantial benefit from the proceedings"

The England and Wales Court of Appeal has held commercial litigation funders (as opposed to "pure funders") liable for the indemnity costs of the other party to litigation after the funders advanced GBP31.75 million to fund hopeless litigation. The court said that commercial funders follow the fortunes of the party they fund and their liability is not based only on their conduct but for being in the camp of the funded party: Excalibur Ventures LLC v Texas Keystone Inc and others [2016] FICR 28.

After a 60 day trial and a judgment of 323 pages comprehensively dismissing all claims ([2013] EWHC 2767 (Comm)), the trial judge, Christopher Clarke LJ, made an order under s 51(3) of the Senior Courts Act that the claimant pay the respondent’s costs on an indemnity basis, that the claimant provide further security for costs and the respondent have liberty to join the funders if security was not provided: [2013] EWHC 4278. Security was not provided, the funders were joined and the judge made an order that the funders be liable for claimant’s costs up to the amounts they had funded: [2014] EWHC 3436 (Comm).

The funders appealed the last decision, arguing that they should pay on the standard basis but should not have to follow the fortunes of the claimant and pay on the indemnity basis since they were guilty of no misconduct; that the indirect funders should not be treated as funders at all since there was no contract between them and the claimant and to treat them as funders would be to impermissibly disregard the corporate structure; that the amounts contributed for security should not be counted in the amount advanced; and those who only contributed security for costs should not be liable.

Speaking for the Court of Appeal, Tomlinson LJ said the rationale for imposing a costs liability upon a non-party funder is that he has funded proceedings substantially for his own financial benefit and has thereby become "a real party" to the litigation. It is ordinarily just that he should be liable for costs if the claim fails.

Funders who contribute only towards security for costs are liable to the amount they have contributed. Both the provision of security for costs, if ordered by the court, and the payment of the litigant's own lawyers and experts, are costs of pursuing the litigation which, if not met, will result in the litigation being unable to proceed. It is as must an investment in the litigation as amounts advanced for lawyers’ costs

Indirect funders in this case, with no contractual nexus to the party, were exactly the same as direct funders and their return on investment was exactly the same. They stood to gain in the same way and were equally liable. It is just and appropriate to make an order for costs against a person who has provided funding and who in reality will obtain the benefit of the litigation.

In making an order for non-party costs the court is not fettered by the legal realities but can look to the economic realities. The exercise of the discretion to make a non-party costs order does not amount to an enforcement of legal rights and obligations to which the doctrine of corporate personality is relevant. The non-party has no substantive liability in respect of costs. The single question is whether in the circumstances it is just to make a discretionary order requiring the non-party to pay costs because of the nature of its involvement in the litigation.

Read the full head note here.