Litigation funding – notable legal developments in 2016

Few facets of the legal industry have experienced as much growth over the last ten years as litigation funding. It is now a well-established, global multimillion-dollar industry and is a judicially accepted part of the New Zealand litigation landscape.

Lara Hofer

The rapid increase in the utilisation of litigation funding has occurred with remarkably few reported teething problems, although it has resulted in a number of legal developments, most of which are welcomed by reputable litigation funders.

With a number of these legal developments occurring in England and Wales, this article focuses on this jurisdiction with last year’s developments explored below.

Essar Oilfields Services Ltd v Norscot Rig Management Pvt Ltd [2016] EWHC 2361 (Comm) (15 September 2016)

In one of the most anticipated litigation funding judgments of 2016, the England and Wales Commercial Court upheld the decision of an arbitrator (former Court of Appeal judge, Sir Philip Otton) to allow a party to recover its third-party litigation funding costs as “other costs” under section 59(1)(c) of the English Arbitration Act 1996 (Act).

The Commercial Court judgment follows a dispute between two companies operating in the oil and gas industry, Essar Oilfields Services Ltd (Essar) and Norscot Rig Management Pvt Ltd (Norscot), which was heard in an International Chamber of Commerce arbitration before Sir Philip.

In a series of awards, Sir Philip held that Essar repudiated an operations management agreement (Agreement) and awarded Norscot damages, various other sums under the Agreement, costs and interest, totalling over US$12 million. These costs included the costs of the Litigation Funding Agreement (LFA) which Norscot had entered into with Woodsford Litigation Funding (Woodsford) to enable Norscot to pursue the claim.

In the fifth partial award, Sir Philip criticised Essar’s conduct and ordered it to pay Norscot’s costs on an indemnity basis. This included the success fee that Norscot paid to Woodsford, upon Norscot being awarded damages, pursuant to the LFA. This is primarily because Sir Philip concluded that Essar had deliberately put Norscot in a position where it could not fund the arbitration on its own and, as a result, that it was reasonable for Norscot to obtain litigation funding on the terms that it did. Sir Philip held that such litigation funding costs were “other costs” for the purposes of section 59(1)(c) of the Act and therefore recoverable from Essar.

Essar disputed the arbitration tribunal’s jurisdiction to make a costs order in relation to third-party litigation funding costs, and appealed the fifth partial award to the Commercial Court. The Commercial Court dismissed the appeal and accepted that the phrase “legal and other costs” was wide enough to include third-party litigation funding costs, and that there had been no “serious irregularity” under section 68 of the Act, as had been alleged by Essar.

Excalibur Ventures LLC v Texas Keystone Inc & Ors [2016] EWCA Civ 1144 (18 November 2016)

In this case, the England and Wales Court of Appeal upheld judgments of the Commercial Court which had ordered that: (a) the litigation funders are liable to pay the indemnity costs awarded against the claimant, Excalibur Ventures LLC (Excalibur); and (b) the “Arkin Cap” (the cap which limits a litigation funder’s adverse costs liability to the amount it has provided to the funded party) should be measured by reference to the amount a litigation funder provided in respect of the funded litigant’s costs plus the amount provided by way of security for costs.

It is important to note here that Excalibur was funded by four groups of litigation funders. However, Tomlinson LJ in the Court of Appeal was correct to point out that “the funding here was not typical of that is routinely undertaken by members of the Association of Litigation Funders”. (Note: the Association of Litigation Funders or “ALF” is an independent body that has been charged by the Ministry of Justice with self-regulation of litigation funding in England and Wales.) None of the litigation funders were members of ALF and the Court drew the important distinction between “professional funders” and “the funders [in this case] [who] were inexperienced and did not adopt what the ALF membership would regard as a professional approach to the task of assessing the merits of the case”.

The claim advanced by Excalibur in late 2010 was a claim for specific performance of an agreement pursuant to which Excalibur claimed its entitlement to an interest in a number of potentially profitable oil fields in Kurdistan, or to damages of US$1.6 billion. Between November 2010 and March 2013, the litigation funders advanced L31.75 million to Excalibur, L17.5 million of which was advanced for the purpose of security for costs.

The claims alleged were described by the presiding trial judge, Clarke LJ, as “bad, artificial or misconceived” and “essentially speculative and opportunistic … based on no sound foundation in fact or law” and Excalibur therefore “met with a resounding, indeed catastrophic, defeat”.

Unsurprisingly, given his findings as to Excalibur’s conduct, Clarke LJ directed Excalibur to pay the defendants’ costs on an indemnity basis. On the assumption that the defendants could expect to recover approximately 85% of their costs on an indemnity basis on a detailed assessment, the L17.5 million of security for costs became inadequate and Clarke LJ ordered Excalibur to provide additional security for costs. That additional security was never paid by Excalibur and leave was then granted to the defendants to join the litigation funders as additional costs defendants.

The Court of Appeal held that there is “no principled basis upon which [a litigation funder] can dissociate himself from the conduct of those whom [the litigation funder] has enabled to conduct the litigation and upon whom [the litigation funder] relies to make a return on [its] investment”. Therefore, litigation funders, absent any extenuating circumstances, “follow the fortunes of those from whom [they] hoped to derive a small fortune” and, in this appeal, that meant being held jointly liable for the indemnity costs ordered against Excalibur.

Further and importantly, payment of security for costs is simply a contribution to the costs which Excalibur had to meet in order to be able to pursue the action. The money the litigation funders provided to Excalibur to enable it to provide security for costs was an investment in the claim just as much as the money provided to pay Excalibur’s own costs, and the Commercial Court and the Court of Appeal agreed that both are used to measure the litigation funders’ “Arkin Cap”.

Wall v The Royal Bank of Scotland Plc [2016] EWHC 2460 (Comm) (7 October 2016)

The England and Wales Commercial Court ordered the claimant, Stuart Barrie Wall (Wall), to disclose the identity of his litigation funder, which was funding the litigation Wall had commenced against the Royal Bank of Scotland Plc (RBS) in relation to its former dealings with a property group owned and controlled by Wall.

RBS had reason to believe that Wall was being funded by a litigation funder and was evidently concerned that Wall would be unable to meet its costs (which RBS had estimated to be over L9 million) if Wall was unsuccessful, under the normal order that the “loser” pays the “winner’s” costs. As a result, RBS wished to make an application for security for costs against the litigation funder under English Civil Procedure Rule (CPR) 25.14, which gives the court discretion to order someone other than the claimant to provide security for costs. However, Wall refused to confirm that he was in receipt of litigation funding.

RBS applied to the Court for an order that Wall: (a) provide the name and address of any third party or third parties who are funding his litigation; and (b) confirm whether any such third party falls within CPR 25.14(2)(b), i.e. whether such litigation funder “has contributed or agreed to contribute to [Wall’s] costs in return for a share of any money or property which [Wall] may recover in the proceedings”. RBS argued that it could not make an application under CPR 25.14 without knowing against whom to make it, and that Wall was therefore obliged to reveal his funder’s identity.

The Court held it has the power to order the claimant to disclose the identity of its litigation funder and whether the litigation funder would share in the proceeds of the litigation. However, this power could not be used as a “fishing expedition” and that such disclosure would only be granted if there is good reason to believe the claimant is in receipt of litigation funding and an application for security for costs would have reasonable prospects of success. The Court concluded RBS met this test and ordered the relevant disclosure.

Comment

There are a number of conclusions that can be drawn from these legal developments in England and Wales. Firstly, seeking litigation funding for domestic or international arbitrations will in many cases be an attractive and sensible option. As established in Essar v Norscot, if the defendant’s conduct is demonstrably unreasonable, the claimant will have a good argument that the defendant should be held liable for the litigation funding costs. This can provide funded parties with leverage to increase the pressure on their opponents by highlighting the cost sanctions they may ultimately face if they do not conduct themselves reasonably. While this decision only applies to English law, this argument may be very persuasive in other jurisdictions and tribunals where they face similar circumstances.

Secondly, there are a number of so-called “litigation funders” in the market. However, litigants and lawyers should exercise caution when selecting a litigation funder to support their case.

When considering the England and Wales Court of Appeal’s findings in Excalibur, parties in New Zealand may be well advised to select a funder that, as a minimum, is a member of the ALF. Funder members of the ALF thoroughly review cases before they invest and appreciate that cases evolve over time. They recognise the legal and commercial importance of maintaining an active oversight of cases throughout, without controlling them. The aim of these litigation funders is to ensure, to the extent possible, that they are only ever funding meritorious claims that are being conducted properly by all concerned. No reputable, experienced litigation funder has any interest in funding speculative claims that do not have a good chance of success. While New Zealand does not yet have any regulations in relation to litigation funding or an independent body like the ALF, the New Zealand courts have started to consider ALF’s code of conduct when assessing litigation funding arrangements.

Finally, in New Zealand (unlike England and Wales) the existence of a litigation funder, its identity and whether or not the funder is subject to the New Zealand jurisdiction should be disclosed to the other party when litigation is commenced. Disclosure of the terms of the funding arrangement may also be required where an application is made to which the terms of the funding arrangement could be relevant.

Therefore, it would be sensible for litigants and lawyers to select a litigation funder that strengthens the funded litigant’s position, for example, a funder that will demonstrate to the other party that the funded litigant is backed by a reputable litigation funder and has the financial resources to take the dispute through to conclusion.

ADLS’ CPD team has an On Demand seminar on litigation funding from both a practical and a legal perspective, including the particular issues that arise from the involvement of litigation funders in representative actions. Visit www.adls.org/cpd for details.

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