The 4 Worst Cases for Litigation Finance (& What We Can Learn From Them)

Courts around the world have recognized the need for Litigation Finance, and have consequently welcomed the industry with arms wide open. But alas, not every third party-funded case has proven beneficial for the industry. From disclosed funding agreements to setting aside the Arkin Cap, we take a look at Litigation Finance’s darkest hours, as we attempt to glean what funders and law firms can do differently in order to avoid similar pitfalls in future cases.

1. Gbarabe v. Chevron — The now infamous Chevron case remains a prime example of what not to do if you want your litigation funding agreement to remain undisclosed. It’s been reported time and again – including by LFJ – that courts around the world view litigation funding agreements as protected by the Work Product Doctrine. But in order for a funding agreement to be protected… well… you might want to actually mention Work Product when the Defense makes a motion to disclose!
   The Chevron case was brought by the law firm Perry and Fraser. Funding was secured from Therium Capital. The underlying claim alleged that Chevron mismanaged its oil rig prior to a 2012 explosion which led to the damaged health and livelihoods of tens of thousands of Nigerians.In its defense, Chevron sought to classify Perry and Fraser unfit to try such a large class action. As expected, Chevron targeted the source of the law firm’s funding, requesting full disclosure of the funding agreements. Perry and Fraser (arguably proving Chevron’s point) neglected to cite Work Product, which led to Judge Illston unsealing the Therium documents, which have since leaked online.

   In the end, Illston found the lead plaintiff to be unfit to represent the class, and criticized Perry and Fraser’s handling of the case. Therium is estimated to have lost $1.7M on the case (a drop in the bucket for the global funder who recently raised $304M from a single investor). Yet the Chevron case remains a cautionary tale: If you want your funding agreements protected by Work Product… BE SURE TO MENTION WORK PRODUCT!!

2. Excalibur Ventures v Texas Keystone and others — The case which confirmed that third party funders are indeed responsible for security for costs, even despite the absence of a contractual relationship which stipulates such responsibility between funder and claimant.In the underlying claim, Excalibur sought damages of $1.6B, alleging the defendant companies, Texas and Gulf, agreed to grant Excalibur a 30% share in the lucrative Shaikan oil field in Kurdistan. The underlying litigation was financed by four groups of funders, who had advanced a total of £31.75 million. Of this amount, £14.25 million was required to meet Excalibur’s legal and expert fees, and £17.5 million was paid into court pursuant to an order requiring Excalibur to provide security for the defendants’ costs. It should be noted that the funding undertaken in this case was not typical of commercial funding in the UK and none of the funders were members of the Association of Litigation Funders. Only one of the funders had any experience of funding litigation and this was its first venture into litigation in the UK.The Court ultimately found that Excalibur’s claims ‘failed on every point,’ and that the claim was “an elaborate and artificial construct.” In lieu of this classification, the Court ordered a £22.3 million security for costs. The aforementioned £17.5 million had already been set aside for security for costs, which left a £4.8 million shortfall.

   The Court found that the funders were indeed on the hook for that shortfall – up to a specified level known as the “Arkin Cap,” which essentially holds that a funder’s liability for the other side’s costs should be limited to the amount of funding it has provided in the action itself.

   In addition to the Arkin Cap, the case highlights 2 very important facts: 1) Although, according to the Court, the funders “did nothing discreditable in the sense of being morally reprehensible or even improper,” the fact remains that their legal partners did act in an improper manner according to the Court, and the funders are essentially responsible for that behavior. Additionally, 2) funding for security for costs is treated no different than funding for actual legal fees. To that end, the £17.5 million was included in the Arkin cap, and served to increase the amount that the funders could be held liable for.

3. Hellas Telecommunications (Luxembourg) [2017] EWHC 3465 (Ch) — A recent UK High Court decision which found that both funders’ identity and the specifics of their funding agreements can and should be disclosed in order to facilitate an application for security for costs in a liquidation case.
   The underlying case involves a liquidator who was funded by at least one third party. The High Court found that CPR 25.14 (2)(b) provides the necessary standing for the court to make an order for security for costs against a person who has “contributed or agreed to contribute to the claimant’s costs in return for a share of any money or property which may be recovered in the proceedings.”On that basis, the Court found that it does indeed have the power to compel disclosure of third party funders. However, to protect their confidentiality (as there was a possibility that some of the funders were creditors of the company in liquidation), the Court limited the disclosure to specific individuals (a ‘confidentiality club’), and required those individuals to use the information solely for the purposes of determining whether to make an application for security for costs.

   The decision adds to the emerging jurisprudence on third-party funding by confirming the power of UK courts to require disclosure of third-party funding arrangements in order to allow a party to pursue an application under CPR 25.14.
   

4. Sandra Bailey and Others v GlaxoSmithKline — Remember that Arkin Cap we mentioned in #2 above? Well, the Court in the Bailey case found that there are situations where its application is “inappropriate.” In other words, funders thought they were protected by the Arkin Cap (maximum amount they could be charged for security for costs), but not so fast…In the underlying case, Managed Legal Solution Limited provided funding of up to £1.2M. However the Court ordered that Managed Legal provide £1.75M in security for costs – well above the Arkin Cap. In his ruling, Foskett J found that The Cap was not to be applied in an “unquestioned” way, since this would fetter the Court’s discretion on costs.Additionally, the limited financial resources of both the claimants and the funder played into Foskett J’s decision. In particular, the funder was “balance sheet insolvent,” and reliant on a single shareholder for its liquidity. The funder also had zero capital and would need to borrow to provide any security ordered. It was also noted that the funder was not a member of the Association of Litigation Funders (a prominent grouping of UK commercial litigation funders which adhere to strict ethical terms).

   On those bases, Foskett J found that the Court has wide latitude to circumvent the Arkin Cap. So non-established funders should be forewarned – that Arkin Cap is a suggestion, not a stipulation; security for costs may indeed prove more expensive than originally thought.