“Rigorous steps short of champerty”: the Excalibur standard for control by funders

“Rigorous steps short of champerty”: the Excalibur standard for control by funders

Fears that funders might take control of claims have fuelled calls for regulation of their activities in international arbitration.  James Clanchy, a member of the ICCA-QMUL Task Force on Third Party Funding (TPF) in Arbitration and the Lexis®PSL Arbitration team, considers the implications of the Court of Appeal’s recent decision in Excalibur Ventures LLP v Texas Keystone Inc and others, in which funders were penalised for failing to exercise adequate control over proceedings in the Commercial Court.

TPF’s advance around the world was one of the big arbitration stories in 2016.

In June, the government of Singapore announced that it intended to abolish the common law tort of maintenance and champerty and in November it introduced legislation to permit and regulate TPF in international arbitration.

Meanwhile, following a public consultation, the Hong Kong Law Reform Commission (LRC) recommended that the law at that seat also be amended to confirm that maintenance and champerty do not apply to arbitration and to permit TPF subject to certain safeguards.  A Bill to amend the Arbitration Ordinance was published on 30 December 2016 and will be put forward to the Legislative Council for review on 11 January 2017.

See our previous blog posts ‘Singapore and Hong Kong open their doors to arbitration funders’  and ‘Hong Kong ready to embrace Third Party Funding’.

The debate about control in Hong Kong

One of the major issues in the Hong Kong consultation was the extent to which funders should be permitted to control the claims which they funded.  The LRC’s report notes concerns that excessive influence by a funder would not be in the interests of the funded party and could compromise the integrity of an arbitration.  A funder, on the other hand, advocated freedom of choice in the level of control which a party should be able to cede to it in their funding agreement.

The LRC has recommended “light touch” regulation.  In relation to the control issue, it has proposed that the new code of practice for funders in arbitration should adopt the approach of the Hong Kong courts in insolvency cases, in which funded parties retain control of proceedings.  The LRC has also noted that the English courts have made it clear that a funded party should retain control.

Champerty as a benchmark in the English courts

The Hong Kong LRC’s report was published shortly before the English Court of Appeal decision in Excalibur Ventures LLP v Texas Keystone Inc and others [2016] EWCA Civ 1144.  See our analysis, ‘Funders’ liability – the final word? (Excalibur v Texas)’.

In upholding an award of indemnity costs against funders in a case which it agreed was hopeless on both facts and law, the Court of Appeal endorsed the approach of the judge at first instance (Christopher Clarke LJ) and quoted his comments on the effect of his decision:

If it serves to cause funders and their advisors to take rigorous steps short of champerty, i.e. behaviour likely to interfere with the due administration of justice, - particularly in the form of rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals - to reduce the occurrence of the sort of circumstances that caused me to order indemnity costs in this case, that is an advantage and in the public interest."

Tomlinson LJ in the Court of Appeal went further, rejecting a protest from the Association of Litigation Funders (ALF) that exercising greater control over the conduct of litigation would run the risk that a funding agreement would be champertous.  He said:

rather than interfering with the due administration of justice, if anything such activities promote the due administration of justice. For the avoidance of doubt I should mention that on-going review of the progress of litigation through the medium of lawyers independent of those conducting the litigation, a fortiori those conducting it on a conditional fee agreement, seems to me not just prudent but often essential in order to reduce the risk of orders for indemnity costs being made against the unsuccessful funded party. When conducted responsibly, as by the members of the ALF I am sure it would be, there is no danger of such review being characterised as champertous.

Control is normal in arbitrations funded by insurers

The activities listed by Christopher Clarke LJ and Tomlinson LJ form part of the routine of a ‘before the event’ legal expenses (BTE) or liability insurer who funds the costs of bringing or defending a claim in an arbitration.

Lawyers who act for insured parties in arbitrations are used to compiling calibrated risk assessments, reports, costs estimates and budgets, as well as conducting regular reviews for the insurer, revisiting earlier assessments of the merits and consulting the insurer on strategy, including settlement options.  Throughout the arbitration, they will work closely with the insurer’s in-house claim handler and/or its outsourced case manager alongside their client’s own in-house counsel.

A BTE insurer, which has exercised its discretion in favour of supporting a claim, will naturally wish to be part of the claimant’s team, to check that the prospects of success remain good, to discuss any changes to the agreed strategy, and to ensure that its money is being well spent.

A certain amount of control of a party’s lawyers by its insurer overcomes the risks of total control of the case by the party’s lawyers, a situation which proved disastrous in Excalibur.

The Excalibur standard and the regulation of TPF in arbitration

The Excalibur case concerned a costs order made against funders, as permitted in English court rules.  No such order would be possible in arbitration, though the Hong Kong LRC is one of the bodies which has been considering such a reform.  In its newly released Investment Arbitration Rules, SIAC has not included a power to award costs against a funder, which had been proposed in its draft rules published last year.

The Court of Appeal’s decision, and Tomlinson LJ’s strictures, are nevertheless important in the ongoing debate about the regulation of TPF in international arbitration.  The case confirms that it is in the interests of justice for the party funding the costs of bringing a claim to conduct rigorous and ongoing reviews.

Against that background, it would make no sense either to leave the control of the claim entirely with the funded party, or to allow it and its funder to reach whatever agreement they liked about control.

In Hong Kong, a draft code of practice for funders, prepared by the Department of Justice for consultation and published with the new Bill at the end of December, contains a section on control, which includes an undertaking by the funder not to “control or direct the funded party as to the conduct of the arbitration, including, without limitation, as to the negotiation and conclusion of any settlement”.  The draft Code does not contain an undertaking that the funder will take rigorous steps short of champerty, including ongoing reviews of progress.  Contrary to the Excalibur standard in the English courts, a funder could give free rein to the funded party’s lawyers while remaining in compliance with the Code.

Meanwhile insurance continues to play a far more significant role in the funding of costs in international commercial arbitrations than does the new TPF.  This is confirmed by case statistics from funders and from insurers as well as by the large numbers of in-house lawyers employed by insurers to work exclusively on cases which they fund.  See my blog post, ‘Third Party Funding in Arbitration: the first 125 years’.

Those who seek to regulate the activities of the new funders could benefit from studying the practices of the insurer-funders whose close control of their cases meets the Excalibur standard.  They could look beyond their own fields of practice, notably in investment and project disputes, and endeavour to learn from the long experience of practitioners in other types of commercial arbitrations, as I urged in my blog post, ‘The Silo Effect in Arbitration’.

The reputation of international arbitration can only be enhanced by efforts to provide access to justice and, at the same time, to ensure that the interests of justice are served.  The Excalibur standard for control by funders is a good reference point.

The views expressed by the author are his personal views and are not necessarily those of the proprietor or of the ICCA-QMUL Task Force on TPF.

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About the author:

James is an arbitration specialist. He has more than 25 years’ experience of ad hoc, trade association, institutional and investment arbitrations as a solicitor in London and Paris, as a former Registrar of the London Court of International Arbitration (LCIA), and as a case assessor for legal costs insurers and third party funders. His background as a lawyer is in international trade, commodities, shipping and insurance.

He trained at Withers in London and then spent four years in the firm’s Paris office. He was admitted as an avocat at the Paris bar (1994 – 2008). Returning to London, he spent more than 13 years at Holman Fenwick Willan in its Trade & Energy group. As Registrar and Deputy Director General of the LCIA in 2008 – 2012, he oversaw the administration of more than a thousand commercial arbitrations and assisted with a review of its Arbitration Rules. He subsequently spent two years at Thomas Miller Legal, assessing and managing a wide range of commercial and investment claims on behalf of insurers and funders. Returning to private practice in 2015, he spent a year in Stephenson Harwood’s International Arbitration group where he assisted on ICC and LCIA arbitrations, principally oil and gas disputes.

James is a Fellow of the Chartered Institute of Arbitrators. At LexisNexis, James works on the Lexis®PSL Arbitration module.