Litigation Funders Responsible For Indemnity Costs In Excalibur Ruling

Summary and implications

On 18 November the Court of Appeal upheld a first instance decision making a group of litigation funders liable to pay the costs of the action it funded on the indemnity basis. The ruling increases the exposure of funders in cases that don't succeed. It also sends a clear message to funders that their fortunes will follow those of the entity they back, irrespective of the funders' conduct.

Indemnity costs

Losing parties are generally required to pay the winning side's costs on one of two bases: the standard basis or the indemnity basis. Standard basis is the default and generally results in the unsuccessful party paying in the region of 65-70% of its opponent's costs. However in certain circumstances (usually where the losing party has behaved badly and/or lost on all aspects of its claim) a court can make the more onerous order for "indemnity" costs. This results in the loser paying a higher percentage (in the region of 80-90%) of the winner's costs.

Summary of issues

Four funders financed a US$ 1.6bn claim by Excalibur Ventures (an oil exploration firm) against two US oil companies. Excalibur claimed that the oil companies cheated it out of an exploration deal in Iraq. The claim was rejected by the court on every point. Excalibur's conduct was heavily criticised and it was ordered to pay costs totalling £31m on the indemnity basis.

Excalibur having no assets, the successful defendants sought a third party indemnity costs order against the funders, or in the case of two of the funders, their parent companies. Two funders had set up special purpose vehicle (SPV) subsidiary companies, which themselves had no assets, to advance funds received from the parent companies to fund the litigation.

It is long established that third party costs orders can be made against funders but the funders in this case argued that they should not be liable on the indemnity basis, because they themselves had not behaved badly. It was also argued that the parent companies which had provided funding via subsidiaries should not be made liable, as that would disregard separate corporate existence and involve piercing the corporate veil.

Decision

The Court of Appeal upheld the order for indemnity costs against the funders and the parent companies. Tomlinson LJ's reasoning was that it would be unfair if a successful party's damages were limited because the counterparty was funded. He pointed out that the funder can choose which...