Funders set to pay indemnity costs

Third party funders are set to be liable for indemnity costs awarded against the party they have funded following the judgment of Lord Justice Christopher Clarke in Excalibur Ventures last week.

The court considered that the defendants, who had had a defend a case which failed comprehensively on both the facts and the law, should clearly be recompensed for the costs they had incurred in defending the action.  The funders had contributed monies to the claimant both for costs and for security for costs applications.  The 2013 costs judgment ordered that the claimant pay the defendant’s costs on an indemnity basis but there was a shortfall of some £4.8 million.  The matter came back before the court following the funders being joined as costs defendants to determine whether they should be ordered to pay the shortfall in costs given that it was essentially only due as a consequence of the indemnity costs order. The question for the court was should funders have to pay indemnity costs when they have been hands off in the litigation and they had no  involvement with any of the factors listed in the costs judgment which had resulted in the indemnity costs order?

Lord Justice Christopher Clarke made it very clear that they should be liable for the indemnity costs but that his decision to make the third party costs order was not an attempt to penalize the funders but to recompensate the defendant.  In making the order he noted:

  • the shortfall was not disproportionate to the total monies contributed by the funders
  • the shortfall was not in any way disproportionate to the return the funders had been anticipating had the claimant been successful
  • the funders were to be subject to the Arkin cap ie they would only be liable to the extent of their investment
  • when funders are involved in any impropriety or speculative litigation this may support the court exercising its discretion to make such an order; such discretion will be exercised following the principles set out in Dymocks Franchise v Todds [2004]
  • the fact that security provided during the proceedings is not adequate to pay the costs due at the end of the proceedings is not a basis to make a non-party costs order (applying Petromec v Petroleo Braisleiro Petrobas [2006] EWCA Civ 1038 at [14])
  • in practice, when making an order for security for costs, a court will not order such to costs to be paid on an indemnity basis.  However, when making a non-party costs order against funders which was to include costs due under a costs order made an indemnity basis, such an order could be made.  To hold otherwise would provide an escape route for funders such that they could avoid indemnity costs simply by providing funding for security for costs only

There is little comfort for third party funders in this judgment and the message to be taken must be that when funding a case, a funder cannot simply bury their head in the sand.  Reliance on comments made by the solicitor of the party they are funding will not enable a funder to escape the costs liability.  As the judge said in this case, ‘ it is Mr Lemos’s misfortune that the advice he was so confidently given was the polar opposite of what I have decided’.

For those cases in which there is more than funder, it is also important to remember that when determining whether to make a non-party costs order the court will have to determine whether in all the circumstances it is just to make the order. It does not have to be on the basis of joint and several liability as the court has a discretion as to the form of order, the proportion of costs to be made and the quantum of any award (Nelson v Greening [2007] EWCA Civ 1358).

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