Court ruling calls into question funder assertions about meritless claims
17th January 2014
The recent High Court ruling on claims brought by Excalibur Ventures LLC for more than $1.75bn calls into question a key assertion made by the third party litigation funding industry – that litigation funding won’t increase the number of meritless claims.
Excalibur had brought claims over disputed rights to oil blocks in Iraqi Kurdistan. The resulting 57-day trial between Excalibur and Gulf Keystone (among others) was one of the longest cases of 2012-2013 to pass through English courts. Excalibur instructed the global law firm, Clifford Chance, and managed to secure $50m in litigation funding to get the case to court. They filed 14 claims in total under English and New York law – including breach of contract, conspiracy to defraud and fraudulent concealment.
The result?
The claims were apparently thrown out for completely lacking merit and key witnesses were slammed in the 323-page judgment handed down.
Speaking during the case, High Court judge Mr Justice Christopher Clarke is reported to have criticised Clifford Chance for producing “voluminous and interminable” correspondence which was “in some circumstances highly aggressive and in others unacceptable”. Clarke J is reported to have said: “Excalibur put forward a range of bad, artificial or misconceived claims which required a great deal of expense, labour and time to refute”.
Crucially, Clarke J is reported to have concluded that the size of the claims brought by the claimants was wildly distorted and that “all these spurious claims were pursued relentlessly to the bitter end.”
The case highlights a vital issue in the debate about litigation funding. Funders often claim that they do not sponsor meritless litigation because it is not in their interest to do so. But legal merit clearly is not the only calculation. When the potential return is high, the availability of third party litigation funding increases the risk of distorted claims being filed with financial backing from investors who view litigation purely in terms of risk and reward. Over time, an appetite for high risk, high reward cases can only increase litigation dockets, an outcome that has significant economic repercussions.
In claims that do have merit, Claimants face the prospect of giving up a substantial share of any sums they might receive as compensation. The share of compensation paid to litigation funders in future is likely to constitute a considerable levy on successful court actions: less access to justice and more profiting from justice.
And third party litigation funding is not going away. A recent Solicitor’s Journal article points out that awareness of the market for third party litigation funding continues to increase amongst lawyers and their clients, particularly amongst corporate clients. Indeed, the Journal predicts continued growth in the number of completed funding deals and the amount of capital available. One funder quoted last year in the The Financial Times estimated that the global third party litigation funding industry is now worth £1bn and that there is at least another £1bn readily accessible from hedge funds and high net worth individuals who are interested in dipping their toes into the sector.
With an increasing number of funders looking to back substantial claims, and some of those apparently willing to support claims that are “bad, artificial or misconceived”, the legal system looks open to manipulation from investors looking for a hefty payday. For centuries the UK has been respected as a bastion of justice with a well-functioning legal system that other countries dream of replicating. The rise of third party litigation funding threatens the integrity of civil litigation in the UK and the current self-regulation, in the form of the Code of Conduct for Litigation Funders, has shown it can only go so far. Of the three funders behind the Excalibur case – a Cayman Islands company and two US companies incorporated in Delaware – none were members of the Association of Litigation Funders, the only group to which the Code of Conduct applies, and one of them is reported to have collapsed. The more spurious the cases that occur over the coming months, the clearer the need for statutory regulation will be.
Lisa A. Rickard
President, US Chamber Institute for Legal Reform