What Litigation Funders Need to Know in the Wake of the Costs Judgment in <i>Excalibur Ventures vs. Texas Keystone Inc. and Ors</i>

What Litigation Funders Need to Know in the Wake of the Costs Judgment in Excalibur Ventures vs. Texas Keystone Inc. and Ors

On October 23, 2014, in a decision that has major ramifications for the litigation funding market in the UK and overseas, the English Commercial Court ruled that the third parties that had funded the unsuccessful litigation brought by brass-plate Delaware corporation Excalibur Ventures LLC should be jointly and severally liable to pay the defendants' costs of the action on the indemnity basis.

Jones Day represented one of the defendants, Texas Keystone Inc., in both the underlying US$1.6+ billion litigation initiated by Excalibur in which all claims against the defendants were dismissed and in the ensuing costs litigation against Excalibur's funders.


The court found against each of Excalibur's funders and ordered that they were to be made jointly and severally liable with Excalibur to pay the defendants' costs of the action on a indemnity basis—which typically allows for recovery of around 85 percent of a party's incurred costs rather than the standard 65–70 percent. The funders—Psari Holdings Limited, a Cayman Island fund wholly owned by Mr. Andonis Lemos; Blackrobe AEO Investors I, LLC, part of the now defunct Blackrobe Capital Partners funding group; and various entities in the Platinum group of companies—who had already provided in excess of £31 million (US$50 million) to fund Excalibur's claim, now face further financial exposure, well in excess of that envisaged when they decided to support the litigation.

Key Points Arising from the Judgment and Issues for Funders to Consider When Deciding Whether to Fund Litigation and How to Manage Their Exposure

In light of the judgment, it is clear that third-party funders can be ordered to pay indemnity costs ordered against a claimant as a result of the behavior of the claimant and its lawyers, regardless of a lack of bad conduct on the funders' part. While indemnity costs awards remain relatively rare (where litigation or the conduct of it is "outside of the norm"), funders should ensure that they take steps to actively scrutinize the merits of a claim and those involved in presenting that claim (i.e., witnesses and experts) through independent due diligence. Funders must still be careful not to offend the rules of champerty and maintenance by controlling the conduct of litigation.

It is no defense if funders receive strong (but ultimately erroneous) legal advice on the merits of a claim ahead of making the decision to provide funding. Here, the court considered the case to be "objectively hopeless" and so the funder was not able to hide behind the advice of its (or the funded party's) advisers. Funders must take their own view on the merits of litigation, and if they seek independent advice, they should ensure that those they have instructed have a sufficient understanding of the case and those involved to make a worthwhile assessment. In the Texas Keystone case, the court noted that the legal opinions provided to Excalibur's funders by independently instructed lawyers relied substantially on the advice given by Excalibur's lawyers.

Parent companies of funding parties can be found liable for adverse costs despite funding a claimant indirectly and not directly. The court will look at the economic realities; in the Texas Keystone case, it looked to the entities that, in reality, made the investments in the litigation, by putting their subsidiaries in funds, and stood ultimately to share in the proceeds had the claim prevailed. While funneling funds to special purpose vehicles or subsidiaries that then ultimately lend to the litigant might offer some protection to funders vis-à-vis their contractual relationship with the funded party, funders cannot consider themselves protected from adverse costs by setting up complex group structures aimed at shielding the ultimate parent or funder from liability. The court in Texas Keystone expected the parent funds to "stand in this case together" with their subsidiaries.

In Texas Keystone, the court was prepared to make a costs award against one parent fund, Platinum Partners Credit Opportunities Fund LP, despite it failing to acknowledge service of the defendants' applications or participate in the proceedings at all. This should act as a warning to international funders that fund litigation in the English courts: In addition to the potential reputational damage of trying to back away from your liabilities by opting not to submit to the court that has jurisdiction over the case you were funding, this step may not, in any event, save you, as a parent of a funder, from an adverse costs award.

The Texas Keystone case also makes new law in relation to the Arkin cap, which limits a funder's exposure for the opposing party's costs to the extent of the funder's financial contribution to his own party. The cap should be measured by reference to both amounts contributed to fund a claimant in respect of its costs and the amount contributed solely to enable that claimant to pay security for the defendants' costs. This adds a further level of difficulty for funders in cases where a defendant applies for security for costs. Not only will funders face the difficult decision, as they did in Texas Keystone, of either: (i) choosing to make further funds available to a claimant so that it can pay security and continue its claim, (ii) suffering a dilution of interest as other funders will be required, or (iii) risking that the claim may be abandoned, but they also face being held accountable for adverse costs up to the amount paid in security and thus would be expected to independently reevaluate the merits of the claim at the point at which additional funds are required.

Litigation funders should actively consider hedging options such as insurance for adverse costs as a means of managing the risks of funding litigation. In the case of Texas Keystone, certain funders were insured for adverse costs, while others were uninsured. In the post-Texas Keystone world, managing the additional risk of an indemnity costs award will be important, whether through insurance, indemnity agreements with those with conduct of the litigation, or inter-funder agreements (where there are multiple funders). Having agreements in place with the funded party may offer only limited protection if it has no assets.

Lawyer Contacts

In the light of Jones Day's involvement in the Texas Keystone case, and its extensive experience in this area, the Firm is well placed to assist funders or funder's insurers make provisions to manage the risks of funding litigation. For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our “Contact Us” form, which can be found at

Stephen Pearson
New York / London
+1.212.326.3876 / +44.20.7039.5959

Roy A. Powell

Daniel J. Travers

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