Jeremy Mash

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22 December 2016

Litigation funding update

1.Third party funders liable for indemnity costs; "Arkin cap" can take account of security for costs 

The Court of Appeal has upheld the High Court's decision that a claimant's third party funders were jointly and severally liable for indemnity costs awarded against the claimant (Excalibur Ventures LLC v Texas Keystone Inc and others [2016] EWCA Civ 1144).  The court confirmed that a funder could be liable even where it had no part in the conduct which led to the award of indemnity costs; however, it suggested that where a funder sought to assert control over a paying party's behaviour in order to avoid an award of indemnity costs, this would not be regarded as champertous.  It commented that “rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals” was to be expected of a responsible funder and promoted the due administration of justice.

A costs order may also be made against a third party who provided funds and stood to benefit from the litigation, even if it is not named in the funding agreement (here, the parent companies of some of the funders).  The court rejected the argument that this “impermissibly disregarded” the parent companies’ separate corporate existence or pierced the corporate veil.

The Court of Appeal also confirmed that where a funder has provided security for costs, that can be included in the "Arkin cap" (the rule that a funder's liability for the funded party's costs will be capped at the amount of funding it provided, following Arkin v Borchard Lines Ltd [2005] EWCA Civ 655).  The court did not consider how the funder's exposure was to be measured where security was provided by means of an insurance policy, bond or guarantee (as opposed to money being paid into court, as was the case here), nor the appropriateness of the Arkin cap generally.

Olswang acted for the intervener, the Association of Litigation Funders.  The judgment is here.

2.Costs of obtaining third party funding can be recoverable in arbitration

In Essar Oilfields Services Limited v Norscot Rig Management PVT Limited [2016] EWHC 2361 (Comm), the Commercial Court held that the costs of obtaining third party funding, which may be the share of damages paid over the funder, can be recovered in arbitration proceedings.  However, in doing so, the court stressed that the decision whether it is reasonable to award such costs will be at the arbitral tribunal's discretion.  One situation where a tribunal may be inclined to award such costs is where a party's conduct has left the other party with no choice but to seek third party funding in order to enforce their rights.  

The tribunal in an ICC administered arbitration awarded the claimant its costs of obtaining third party funding, which amounted to £1.94m.  The tribunal ruled that, pursuant to section 63 of the Arbitration Act 1996, unless the parties had agreed otherwise, the tribunal was free to determine what costs to award as it sees fit.  It also held that section 59(1)(c) of the 1996 Act, which provides that tribunals are free to award "other costs of the parties", could cover third party funding costs.  This provision is replicated in the ICC Rules. 

The respondent challenged the award, arguing that the tribunal had exceeded its powers.  In rejecting the challenge, the court refused to accept arguments that the term "other costs" in section 59(1)(c) should be limited to particular forms of costs.  Provided a category of costs was incidental to the arbitration proceedings, they could fall under "other costs", and it was for the tribunal to determine whether or not to award the successful party those costs.

This is a significant decision given that the costs of obtaining third party funding are highly unlikely to be awarded in court proceedings.  By contrast, the costs paid to the funder may be recoverable in an arbitration.  The decision here was made in respect of an ICC arbitration, and the court did rely in part on the wording of the ICC Rules, but comparable provisions exist in, for example, the LCIA Rules.  It is therefore likely to have wider implications for arbitration at large.

The judgment is here.

3.Claimant ordered to disclose identity of third party funder so security could be sought against it

The Commercial Court has ordered a claimant to disclose the identity of its litigation funder so that the defendant could apply for security for costs against it (Wall v The Royal Bank of Scotland plc [2016] EWHC 2460 (Comm)).  

The claimant brought the claim as assignee of a company he had owned and controlled, which was by then in insolvent liquidation.  The claim was complex and valued at £700 million.  The defendant sought an order that the claimant: (1) provide the name and address of any third party or third parties who were funding the litigation on his side; and (2) confirm whether any such funder fell within CPR Rule 25.14(2)(b).  Rule 25.14(2)(b) gives the court power to order security for costs against a third party who funds a claim in return for a share of the proceeds of the litigation.  

The judge held that the power to order a party to identify a third party funder was inherent in Rule 25.14.  It was clear from previous authority (Reeves v Sprecher [2007] EWHC 3226 (Ch) and Raiffeisen Zentralbank Osterreich AG v Crossseas Shipping Ltd [2003] EWHC 1381 (Comm)) that the court had the power to grant ancillary orders to make a remedy work.  Accordingly, where there was good reason to believe that a claimant had funding falling within Rule 25.14(2)(b), the court could order the claimant to identify the funder so the defendant could apply for security for costs against it.

Here, the claimant did not appear to have the resources to fund such expensive and complex litigation, so the judge inferred that he had the benefit of third party funding, particularly as it seemed unlikely that anyone would be willing to fund the litigation altruistically.  The defendant would be materially prejudiced if deprived of the opportunity to apply for security.

The court also held that neither the existence nor the exercise of the power infringed the claimant's right to privacy under Article 8 of the European Convention on Human Rights.  Article 8 was not engaged, as the claimant had no reasonable or legitimate expectation of privacy regarding the identity of his funder.  The judge pointed in particular to the fact that if the defendant were already in possession of a costs order, the identity of the claimant's funder would be apt to come out for the purposes of section 51(1) of the Senior Courts Act 1981, which gives the court power to make costs orders against non-parties.

The judgment is here.

4.Olswang webinar: Third party funding: the future of litigation and international arbitration?

Olswang LLP (London) and Holborn Law LLC (Singapore) have put together a short, practical and interactive webinar with Harbour Litigation Funding which covers the following:

  • What is third party funding and how does it work?
  • How can third party funding benefit you and your business?
  • What impact will the Court of Appeal's judgment in Excalibur v Texas Keystone have on third party funding?
  • What international developments have there been in third party funding?
  • What do you need to know about third party funders and their terms?
  • Q&A session.

For more details and a link to the webinar, please see here.

 

If you require more information on any of the items reported in this update, please contact Sarah Speller (by email Sarah.Speller@olswang.com or by telephone 020 7067 3481).  For wider litigation queries, please contact Jeremy Mash (by email Jeremy.Mash@olswang.com or by telephone 020 7067 3270).   

The information contained in this update is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action.