Third party funding: a chink in the armour?

Third party funding: a chink in the armour?
Are third party funders more exposed than previously thought? Christopher Coffin, partner in the litigation team at Withers, considers what the decision in Excalibur Ventures v Texas Keystone means for the future of third party funding.

Original news

Excalibur Ventures LLC v Texas Keystone Inc and others [2014] EWHC 3436 (Comm), [2014] All ER (D) 300 (Oct)

The claimant company brought proceedings concerning an allegedly lost opportunity to develop oil reserves in Kurdistan. Its claim was funded by a number of parties (the costs defendants). The claim was dismissed in its entirety and an order was made for indemnity costs. The Commercial Court made orders as to how the costs should be divided between the costs defendants.

What is the significance of this decision?

It decided a number of questions which are relevant to third party funding which had not previously come before the court. It was uncharted territory for everybody. One question was whether a third party funder is bound by the costs order that is made against the person they are funding. The court had never been asked if an indemnity costs order made against the losing party also applied to the funder.

The difference between standard and indemnity costs is usually about 15%. So if you are ordered to pay costs on an indemnity basis, you would probably be paying about 85% rather than 70%. In this case that 15% difference was worth about £4m. The court decided that the funders should pay indemnity costs.

How might this affect the way in which third party litigation funders operate?

It means funders are much more exposed than they thought they were. As well as the indemnity point, there is the issue of the corporate veil. The funders thought they could put money into a company which would be the corporate funder. The question here is whether a court can make the person who invested money in the corporate funder also liable for costs? And, if so, how far back can you go? The judge in this case said the parent company should be liable.

This means funders need to be far more rigorous about the cases they take on and they need to monitor the cases they fund more carefully. They might want to:

  • impose more reporting requirements
  • require the solicitors acting for the person they are funding to give them an indemnity if they are ordered to pay indemnity costs
  • tighten up the corporate structure

Are we seeing a trend in actions against third party funders?

There is an increase in cases in which people win and are then looking to the funders for the costs. Professional funding is increasing rapidly. Sometimes they are funding people who could pay for the case themselves but who do not want the risk. However, a number of funded cases are brought because the people behind them cannot afford to do it.

How has third party funding changed the legal landscape?

It tends to be used only for the bigger cases. Funders want at least a 60% chance of success and want to know that, if they win, the losing party is able to pay. There is a large number of cases in which people have a good case but don’t want to risk their own resources. Funders are meeting that demand.

What should lawyers do next?

It depends on who you are advising. If you are advising the funder, you need to tighten up your take-up and monitoring requirements. Maybe you need to tighten up the corporate structure. And maybe you should ask the solicitors for an indemnity.

If you are acting for the person funded, make sure that, if you lose, you are not going to land your funder with indemnity costs.

If you are on the other side, you know you have a very good chance of the funder paying the costs.

The next thing that will be tested is whether the funder is liable beyond the amount they are funding. At the moment there is a limit on the amount that the funder pays out (the amount they have put in by way of funding). A lot of people will say that this principle is there for the taking. It could be that the funders’ liability becomes unlimited.

Christopher Coffin is a partner at Withers and a litigation and arbitration specialist with 30 years' experience of large cases. He was the lead partner in the litigation team which represented Psari Holdings in Excalibur Ventures v Texas Keystone.

Interviewed by Neasa MacErlean.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on Lexis®PSL Dispute Resolution. Click here for a free one week trial of Lexis®PSL

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