In a rare court ruling on the liability of litigation funders, the English Court of Appeal issued a landmark ruling Friday that increases the exposure of funders in U.K. cases that don’t succeed.
While the ruling will not affect litigation funding arrangements for U.S. cases, it does reveal details of the underlying funding agreements, which are typically cloaked in secrecy.
The case involved a group of litigation funders, including two from the U.S., who financed a disastrous $1.6 billion case brought by a small energy venture against two U.S. oil companies. As a result of this ruling, the funders will be forced to pay the defendants’ legal costs of more than £20 million ($24.7 million).
The ruling upholds a lower court ruling from 2013 that found that under the U.K.’s “loser pays” rule—in which the losing party in litigation must pay the opposing side’s legal costs—the funders were liable for the defense costs of the two defendants, Gulf Keystone Petroleum Ltd. and Texas Keystone Inc. Friday’s ruling clarifies that the funders are liable for full “indemnity” costs that are calculated as 85 percent of the opposing sides’ legal costs, as opposed to “standard costs,” which are calculated at a lower rate. It also raises the cap that can apply to these indemnity costs.
The underlying suit was brought in 2010 by the Excalibur Ventures, an aspiring oil exploration firm founded by U.S. brothers Rex and Eric Wempen. The brothers claimed that the defendants cheated them out of an exploration deal in Iraq, costing them $1.6 billion in lost profits. (The litigation was detailed by The American Lawyer in a 2013 feature story.) Excalibur was represented in the U.K. by Clifford Chance international arbitration partner Alex Panayides, who was working on a partial contingency fee.
After a trial in London, a judge ruled for the defendants in 2013, criticizing the litigation as meritless. The appellate court said the case was pursued in an “egregious” manner, with the plaintiffs making false and misleading statements, noting that Clifford Chance’s Panayides pursued the case with “misplaced zeal.” Clifford Chance declined to comment.
The oil companies are seeking to recoup their costs from the litigation funders because Excalibur has no assets. Excalibur’s funders include the now disbanded BlackRobe Capital Partners, which was founded by John “Sean” Coffey (who in 2013 joined Kramer Levin Naftalis & Frankel), retired Simpson Thacher & Bartlett partner Michael Chepiga and Timothy Scrantom (now of Charleston, South Carolina-based Scrantom Dulles International, which advises litigation funders). The other funders are New York-based hedge fund Platinum Capital Partners Inc. and a U.K. entity called Psari Holdings Ltd., which was controlled by Greek shipping magnates Adonis and Filippos Lemos.
Richard Waller of London’s 7KBW Barristers and Richard Eschwege of London’s Brick Court Chambers argued the appeal for Texas Keystone and Gulf Keystone. Texas Keystone has also been represented by Jones Day partners Stephen Pearson and Roy Powell. London’s Memery Crystal is also representing Gulf Keystone.
“The Court of Appeal’s ruling should serve as a warning to third-party funders of the potential perils of financing expensive international litigation without carrying out a rigorous analysis of the claim, the party to be funded and the witnesses who will support the claim,” said Jones Day’s Pearson.
One of the lawyers for Psari, Chris Coffin of London’s Withers, pointed out that his clients didn’t play an active role in the underlying case.
“Our clients had no first-hand knowledge of or involvement in the conduct of the underlying litigation, as they were content to leave that to Clifford Chance and counsel instructed by Clifford Chance,” Coffin said. He noted that the court accepted that the funders “did nothing discreditable in the sense of being morally reprehensible or even improper.”
Coffin said that as far as he knows, the funders don’t plan to petition the appellate court for permission to appeal. Lawyers for Platinum did not return a request for comment.
The funders put up a total of £31.75 million to bankroll the case and provide security for opposing counsel’s costs. Psari and affiliates of Platinum, which saw two Cayman Islands-based funds it controls plunge into bankruptcy last month, put up the most money. Platinum paid £14 million; Psari paid £13.75 million; and BlackRobe contributed £4 million.
Under its funding agreement, Psari stood to pocket 21.6 percent of the recovery. In theory, Psari could have gotten as much as £320 million, a return of around 1,450 percent, according to the court. BlackRobe and the other funders stood to recover up to seven times their funding, plus interest.
The ruling also reveals that Clifford Chance was working for a contingency fee in which it could have recovered 140 percent of its usual fees, plus a discretionary success fee. This was the first time that the Magic Circle firm had entered into a contingency arrangement, the court said.
Psari was represented on the appeal by John Wardell of London’s Wilberforce Chambers. The Platinum entities were represented by Ian Croxford of Wilberforce. BlackRobe, which closed up shop in 2013, did not make an appearance in the appeal. Because the defendants have joint and several liability, it’s possible that the plaintiffs will pursue their recovery against the deeper pockets of Psari.
The litigation funding industry filed amicus briefs arguing that funders should not be on the hook for the full costs, claiming that it would hamper access to justice for plaintiffs with limited resources. The British appeals court rejected that argument.
“I do not myself think that commercial funders are greatly motivated by the need to promote access to justice, and nor do I suggest that they should be,” wrote Lord Justice Stephen Tomlinson for a three-judge panel. “They are, as it seems to me, making an investment and are motivated by largely commercial considerations.”
After Excalibur lost at trial in 2013, Psari threatened Clifford Chance with a malpractice suit. That matter settled in December 2015 for an undisclosed sum.