Excalibur Ventures LLC v Texas Keystone Inc & Ors (Rev 2)

On 17 December 2010 Excalibur Ventures LLC (“Excalibur”), a Delaware corporation, began this action against Texas Keystone Inc. (“Texas”), Gulf Keystone Petroleum Limited and other Gulf Keystone companies (“the Gulf Defendants”), together “the Defendants”. In it Excalibur claimed to be entitled to an interest in a number of oil fields in Kurdistan, which are potentially extremely profitable, and of which the Shaikan field is the most important. The claim was for specific performance of the Collaboration Agreement pursuant to which Excalibur claimed its entitlement to an interest in the fields or to damages which, as finally put, were said to be of the order of US $ 1.6 billion. On some unknown date Excalibur entered into some form of conditional fee agreement with Clifford Chance LLP (“Clifford Chance”), their solicitors.

On 10 September 2013 I read out in court the concluding paragraph of my judgment. On 13 December 2013 I handed down the full judgment. Its effect was that the claim failed on every point. On the same day I ordered that the claim be dismissed and that Excalibur should pay the Defendants their costs to be assessed on the indemnity basis. The reasons why I did so are set out in the judgment which I gave on that day (“the costs judgment”).

I ordered Excalibur to make a payment on account of the Defendants’ costs in the sum of £ 10,700,000 in respect of the Gulf Defendants, and £ 6,800,000 in respect of Texas. The sum of £ 17,500,000 which had been paid into Court as security was to be paid out to the Defendants forthwith in satisfaction of the payments on account which I had ordered.

I also ordered Excalibur to provide additional security for the Defendants’ costs in the total sum of £ 5,612,010, failing which I gave the Defendants leave to join some of the funders of the action to the proceedings. That security was never provided. Leave was given to join the remainder of the funders subsequently.

Excalibur is but a nameplate for Rex and Eric Wempen. It could not have brought this action unless it had been financed by a number of different persons who at different times and in different amounts produced the monies necessary to start and, later, to continue the action. That included providing or contributing to the funds which were required to be paid into court by way of security for costs. In return the funders were to share, to differing extents, in the fruits of the action if it succeeded.

The funders divide into four groups. The initial funder was Mr Andonis Lemos (“Mr Lemos”). He is the sole shareholder of Psari Holdings Limited, a Cayman Island company, which is the vehicle through which he agreed to provide funds to Excalibur, initially in November 2010. The company was not set up for that purpose but in order to invest in, inter alia, litigation funds, managed by an experienced team.

In March 2012 further groups of funders and their parents appeared on the scene. The second group was Hamilton Capital LLC (“Hamilton”), a Delaware corporation formed on 9 January 2009, which is a 99% subsidiary of Platinum Partners Credit Opportunities Master Fund LLP (“PPCO”), a Delaware limited partnership, formed on 25 June 2008. (Excalibur was Hamilton’s eighth funding engagement). The remaining 1% is shared equally between Mr Jack Simony (“Mr Simony”, who is a portfolio manager for Hamilton and other associated legal entities and PPVA (see [9] below) and Mr Harvey Werblowsky (“Mr Werblowsky”). He was the Chief Legal Officer for PPCO and PPVA (see [9] below) and a Portfolio Manager for Hamilton and JH (see [10] below). PPCO is a master fund, whose partners include feeder funds which themselves are funded by individual investors.

The third group was Blackrobe AEO I Investors LLC (“Blackrobe”), a Delaware company, which is a fund administered by Blackrobe Capital Partners LLC (“Blackrobe Capital”). Blackrobe has acknowledged service but neither it nor Blackrobe Capital has taken any part in the proceedings.

In October 2012 a fourth group appeared, consisting of Huron Capital PLC (“Huron”), formed on 17 August 2011 as a 100% subsidiary of Platinum Partners Value Arbitrage Fund LP (“PPVA”), a Cayman Islands limited partnership, formed on 17 December 2002. PPVA’s business is to invest and trade in US and non-US securities on what is described as a “multi strategy basis”. It, too, is a master fund like PPCO.

Last of all came JH Funding LLC (“JH”), a Delaware company, incorporated on 7 March 2013. It is a 99% subsidiary of PPCO with 0.5% being owned by Mr Simony and Mr Werblowsky respectively. Mr Simony acted as Portfolio Manager for it.

PPCO and PPVA and their subsidiaries operate out of the same office in New York. PPCO has not acknowledged service although the other Platinum entities (i.e. those in [7], [9] and [10] above) have. The Defendants suspect that the reason why they have not done so is to enable them to attempt to resist enforcement of any order on technical grounds. The Defendants seek a determination against PPCO on the merits and not a judgment in default.

The funding was provided in different tranches and for different purposes. I set out below the sequence.

By the 1^st Psari Funding Agreement of 24 November 2010 Psari agreed with Excalibur to advance, and did advance, US $ 10,000,000 in respect of costs. It also agreed to advance a further $ 5 million for security for costs should that be ordered. In return Psari was, in the event of success, to obtain a 10% working interest in such interest as Excalibur received in the Shaikan field (with the option of monetisation after a certain period) or 10% of any damages in respect of Shaikan. (Later funders were not to get an interest in Excalibur’s interest).

The 10% figure was to be increased by a further 2.5% if the $ 5 million was drawn down, and pro rata to any lesser sum. In the event the $ 5 million facility was not utilised. If the proceedings were resolved by settlement Psari was to receive either the 10% figure, or, if it was greater, $ 20 million if the settlement was within 12 months, $ 25 million if it was within more than 12 but less than 24, and $ 30 million if it was more than 24 months after the date of the Agreement. The Agreement contained a definition of “Material Adverse Change” which included the value of the claim falling below $ 350 million. In the event of such a change Psari could call back such of the Advance as remained unspent and uncommitted. Under the Agreement Excalibur undertook to use Clifford Chance until such time as its obligations to Psari were discharged in full.

In December 2011 Texas and the Gulf Defendants applied for security for their costs. The hearing of the application was scheduled for 14 March 2012.

A letter agreement dated 9 March 2012 between Psari and Excalibur contained a Security for Costs Facility and an Expenses Facility. Under the Security for Costs Facility Psari agreed to provide Excalibur with up to £ 7 million for security for costs in respect of the claim as ordered by the court or agreed between the parties, conditional upon Excalibur obtaining a further £ 2 million from alternative sources for security, which was to be used first, come what may. The facility was to be a bridging facility; and Excalibur undertook to use its best endeavours to repay any sums drawn down as soon as possible.

Excalibur agreed to increase Psari’s recovery under the 1^st Psari Agreement by 1% for each further $ 1 million supplied under the Security for Costs Facility and not repaid by 1 October 2012. It may be that an amount of £ 2.5 million i.e. circa $ 4 million was drawn down under this facility on 27 April 2012: see [24] below. If so it was repaid on 6 July 2012. Excalibur also agreed to pay Psari a commitment fee varying in an amount according to when the draw down was repaid. If it was not repaid by 13 June 2012 the fee was to be 150% of the amount drawn down. Whether that fee of about $ 6 million was paid is unknown. The Security for Costs Facility discharged Psari’s obligation to supply the Security Advance under the 1^st Psari Funding Agreement.

Under the Expenses Facility Psari agreed to provide up to £ 3 million in respect of the expenses of prosecuting the claim to judgment. In return Excalibur agreed to increase Psari’s recovery under the 1^st Psari Funding Agreement by 1% for each further $ 1 million supplied under the Expenses Facility. If the £ 3 million should prove insufficient then, in the absence of further funding, Clifford Chance, which was a party to the agreement, agreed that it would apply a 100% discount to its fees and Psari and Clifford Chance would meet further disbursements on a 50/50 basis.

On 13 March 2012 Clifford Chance entered into a Representation Agreement with Excalibur, which has not been disclosed. It appears that Clifford Chance agreed to provide their services at a 40% discount. In the event of success in the action Clifford Chance would receive an uplift equivalent to 40% of their undiscounted fees, a further 100% of that 40%, and a success fee to be determined by Excalibur in its sole discretion.

On 14 March 2012 Popplewell J ordered Excalibur to provide security to the Defendants in the sum of £ 9.5 million. Mr Lemos was told of the application and that if further funding was refused the claim could not continue.

On 28 March 2012 Excalibur drew down £ 3 million (approximately equal to $ 4.8 million) under the Psari Expenses Facility the effect of which was to increase its percentage recovery in the event of success to 14.8%.

On 30 March 2012 Excalibur and Hamilton entered into the 1^st Hamilton Funding Agreement under which Hamilton agreed to provide Excalibur with £ 6.5 million to be used for, and only for, providing security for costs. In return Hamilton was to receive 1.25% of Excalibur’s Net Recoveries as defined in an Inter-Creditor Agreement of the same date for each £ 1 million disbursed or 400% of the Hamilton Funding, whichever was the greater, capped at 7 times the funding. I call this “the Hamilton formula”. Interest on the funding was to be at 25% per annum with the minimum interest being £ 855,263 (only payable out of Recoveries as defined in the Agreement).

PPCO provided Hamilton with the £ 6.5 million by way of a subscription for capital, and the dollar equivalent of that sum ($ 10,419,500) was transferred by PPCO to Clifford Chance on 2 April 2012. An Operating Agreement between Hamilton and PPCO of 30 April 2012 provides that distributions of cash or other assets of Hamilton are to be made at the time(s) determined by PPCO as Managing Member.

Also on 30 March 2012 Excalibur and Blackrobe entered into the 1^st Blackrobe Funding Agreement under which Blackrobe provided Excalibur with £ 500,000 for security for costs on terms broadly similar to those in the 1^st Hamilton Funding Agreement although the minimum interest must have been less. The agreement has only been disclosed in redacted form.

On 27 April 2012 either Psari or a new company of Mr Lemos, which I shall call Psari NewCo, advanced £ 2.5 million to Excalibur. If it was Psari, it was pursuant to the Psari Security for Costs Facility (see [16] above). If it was Psari Newco (a company whose existence is unclear: see [26] below) it was done pursuant to a new agreement of, or intended to be of, 30 March 2012, as recited in Recital (E) of the Inter-Creditor Agreement of that date (see [26] below). It is said by Withers, Mr Lemos’ solicitors, that there is no single document recording the agreement between Excalibur and Psari Newco. The exact payer is unclear because the payment and receipt details in the Psari Expenses Ledger disclosed do not distinguish between Psari and Psari NewCo, its nominee, and, in practice, Mr Lemos, whose companies they were, probably did not do so either.

On 30 March 2012 Excalibur, Hamilton, Blackrobe, Psari, Psari NewCo and Clifford Chance entered into an Inter Creditor Agreement which regulated the order and priorities of distributions to the Funders viz Hamilton, Blackrobe, Psari, and Psari NewCo. Psari NewCo is referred to in the agreement as “a limited liability company or other entity being a nominee of Psari and on whose behalf for all present purposes Psari has executed this Agreement”.

On the same date Excalibur and the Wempens entered into Pledge and Security Agreements with Hamilton, Blackrobe and Psari granting them security over Excalibur’s assets and the Wempens’ membership interest in Excalibur in respect of Excalibur’s obligations under the 30 March 2012 Facility Agreements with Hamilton and Blackrobe and under the 24 November 2010 Agreement with Psari.

On 25 June 2012 there was a Novation Agreement between Excalibur, the Funders, Clifford Chance, and the Wempens whereby in effect Blackrobe assumed the rights and obligations of Psari/Psari NewCo in respect of the £ 2.5 million paid by the latter to Excalibur, which Blackrobe repaid to Psari/Psari NewCo.

On the same date Excalibur entered into a 2^nd Blackrobe Funding Agreement in relation to the provision by Blackrobe of £ 2.5 million for security for costs. On 6 July 2012 Psari/Psari NewCo was repaid.

The effect of all this was that between March and July 2012 Blackrobe provided Excalibur with £ 3 million for security for costs, of which £ 2.5 million had originally been paid by Psari/Psari New Co.

On 5 October 2012 Excalibur and Hamilton entered into the 2^nd Hamilton Funding Agreement under which Hamilton agreed to provide Excalibur with up to a further £ 3 million in funding to meet litigation expenses. Mr Simony was told that without this funding the claim would not be continued and Hamilton would lose the money already provided. The interest rate payable (25%, minimum £ 375,000) was the same as in the 1^st Hamilton Funding Agreement, so also was the return i.e. the Hamilton formula.

On the same day Excalibur and Blackrobe entered into the 3^rd Blackrobe Funding Agreement whereby Blackrobe agreed to provide up to £ 1 million in funding. In fulfilment of the Agreement Blackrobe paid Clifford Chance £ 900,000 on 15 October 2012 and £ 100,000 on 16 October 2012. No copy of this Agreement has been disclosed.

Also on 5 October 2012 Excalibur, Hamilton, Blackrobe, Psari and Clifford Chance entered into a second Inter Creditor Agreement to reflect the further funding made by Hamilton and Blackrobe. The Pledge and Security Agreements were also amended.

On 10 October 2012 a Participation Agreement was signed whereby Huron agreed to assume Hamilton’s rights and obligations to Excalibur under the 2^nd Hamilton Funding Agreement. Huron provided £3 million to Excalibur, which sum PPVA had provided to Huron by way of capital contribution. The £ 3 million was paid by Huron on 17 October and 21 November 2012 by payment to Clifford Chance of the dollar equivalent of £ 2 million ($ 3,214,200) and £ 1 million ($ 1,592,700), those sums having been received from PPVA.

The Huron Operating Agreement of 17 August 2011 provided that cash of the company not required for the operation or the reasonable working capital requirements of the company was to be distributed from time to time to its Members, i.e. PPVA, in such manner as was determined by the Operating Managers selected by PPVA.

On 15 October 2012 the trial started.

By December 2012 the action was quite far advanced although there was a long way further to go. Excalibur needed funds to pay counsel. Mr Lemos was again told that, if he refused further funding Excalibur would not be able to continue with the claim and judgment would be entered for the Defendants. The same message was given to him when further funding was sought later. On 25 and 29 January 2013 Psari and Hamilton each provided Excalibur with further funding, being the dollar equivalent of £ 500,000. Hamilton was provided with the funds to do so by PPCO by a capital contribution of the dollar equivalent ($ 880,400) paid direct to Clifford Chance.

By the beginning of 2013 the trial had lasted beyond the time which had been contemplated when Popplewell J first ordered Excalibur to produce security. On 15 February 2013 I ordered Excalibur to provide further security of £ 8 million. This placed Excalibur and its funders in a dilemma. If the security was not provided the action would be stayed and the past investment lost. If it was to continue, almost the same sum as had been originally ordered would have to be put up again. Application was made to the funders to come up with the security.

A series of agreements and fund transfers were made at the beginning of March 2013. On 7 March 2013 Psari transferred a further £ 4 million to Clifford Chance to finance the security that Excalibur was to provide. On 8 March 2013 Psari and Excalibur entered into the 4^th Psari Funding Agreement in respect of that £ 4 million. Under that letter Agreement Psari was to obtain an increase of 1% of Recoveries for each $ 1 million supplied or pro rata.

By a Facility Agreement of 8 March 2013 (a date after the hearing but before judgment) between Excalibur and JH, JH agreed to provide Excalibur with £ 4 million for security (only). JH was to be remunerated in the case of success in accordance with the Hamilton formula. Interest was to run at 25% per annum with a minimum of £ 400,000. Mr Simony signed on behalf of JH. PPCO provided it with £ 1 million by way of capital contribution, by transferring the dollar equivalent of £ 1 million ($ 1,525,000) to Clifford Chance on 8 March 2013.

The JH Operating Agreement with PPCO of 7 March 2013 provided for JH’s cash or other assets to be distributed to Members in accordance with their membership interests at the time(s) determined by the Managing Member i.e. PPCO.

Also on or around 8 March 2013 there was an undocumented agreement between JH and Huron whereby Huron agreed to finance £ 3 million of JH’s obligation to Excalibur. On 8 March PPVA provided the dollar equivalent of that sum ($ 4,516,214) to Huron which transferred it to Clifford Chance.

On 8 March 2013 Excalibur, Hamilton, Blackrobe, Psari, JH and Clifford Chance entered into a 3^rd Inter Creditor Agreement, which superseded and replaced the previous two. Section 5 provided that the Funders were “entitled to require” Excalibur to accept or make any offer of settlement as the Funders deemed appropriate.

The effect of the above is that the following amounts were provided by the respective funders for the following purposes:

The respective dates and purposes of the funding for each funder were as follows:

As is apparent from the above all the security ordered by the Court was provided by the funders (see the entries in bold, of which those italicised are for the first round and the others for the second). In the case of Huron the first £ 3 million for costs was originally Hamilton’s responsibility under the 2^nd Hamilton Funding Agreement of
5 October 2012 but that was assumed by Huron under the 10 October 2012 Participation Agreement. The second £ 3 million for security was originally JH’s responsibility under the Facility Agreement with JH of March 2013 but was assumed by Huron under the Agreement between JH and Huron of March 2013.

If you ignore the Huron Participation Agreement, on the footing that those who agreed with Excalibur to bear the costs were Hamilton and JH and not Huron the figures for Hamilton and JH become as follows:

The economic reality is that PPCO provided £ 8 million of funding to Excalibur of which £ 7.5 million was for security for costs and PPVA provided £ 6 million of funding of which £ 3 million was for security for costs.

The interest that Psari stood to gain appears to have been 21.6 % calculated as follows:

So Mr Lemos stood to gain a very large sum if Excalibur won. (He was, of course, also taking the risk of failure and, if he had obtained a working interest, would have had to devote time, resources and finance in the longer term). Excalibur in opening valued its interest in the Shaikan field, after defraying its share of past costs, at
$ 1.481 billion. If so Mr Lemos stood to gain about £ 308 to £ 320 million – a return of around 1,450% ($ 320m/ $22m) on his investment.

The Funders other than Blackrobe stood to recover up to 7 times their funding. For Hamilton that meant £ 70 million (7 x £ 10m). For JH that meant £ 28 million (7 x
£ 4 million). These figures would have to be shared by Hamilton with Huron under the 5 October 2012 Participation Agreement and by JH with Huron under the March 2013 Agreement. In addition they would receive interest at 25% per annum.

Blackrobe has not disclosed unredacted versions of its funding agreements. The unredacted content of the redacted versions is essentially the same as in the Hamilton Funding Agreements. It seems to me overwhelmingly likely that they were on the same terms as to return and interest as applied to Hamilton (but with a different minimum figure for interest).

Texas and the Gulf Defendants seek orders that the Costs Defendants – who are Psari, Mr Lemos, Blackrobe, Blackrobe Capital, PPVA, Hamilton, JH, Huron and PPCO - should be held to be jointly and severally liable to them for the costs of and occasioned by the action to be assessed on the indemnity scale.

Psari and Mr Lemos, who are represented by Mr John Wardell, QC, accept that they should be liable for the Defendants’ costs but not that they should be assessed on the indemnity scale. Hamilton, JH, PPVA and Huron, who are represented by Mr Ian Croxford QC, dispute any liability at all. PPCO has not acknowledged service, but I take it to be of the same mind as Hamilton, its subsidiary. I call these parties “the Platinum funders”.

Blackrobe and Blackrobe Capital have taken no part in the proceedings. They have not objected to the jurisdiction of the Court.

The dispute between the parties gives rise to the following issues:

Excalibur was ordered to provide and did provide security for the Defendants’ costs in the total sum of £ 17.5 million. That security was furnished from funds derived from the three sets of funders (Lemos/ Psari, the Platinum funders and Blackrobe). When determining what sum to order by way of security the Court did not assume that Excalibur would have to pay costs assessed on an indemnity scale. In practice the Defendants had no prospect of obtaining security for costs assessed on that basis. Most of the Defendants’ costs are met by the security ordered but there is a shortfall currently estimated by the Defendants to be about £ 4.8 million, which, mostly and perhaps entirely, represents the difference between standard and indemnity costs. The fact that the security has turned out to be inadequate is not, however, a ground for declining to make a non-party costs order; if anything the reverse is true: Petromec v Petroleo Braisleiro Petrobas [2006] EWCA Civ 1038 at [14] per Longmore LJ; and Dolphin Quays Developments v Mills [2008] 1 WLR 1829 at [62] per Lawrence Collins LJ.

I awarded indemnity costs against Excalibur for a variety of reasons which I set out at length in my judgment of 13 December 2013 (“the costs judgment”) and which I held took the case “well outside the norm”. I am content to adopt Mr Richard Waller QC’s summary of my findings which were that:

“This case was ‘well outside the norm’ (emphasis added) for a ‘considerable number of reasons’. In summary, the Court found that:

i)

the claim was essentially ‘speculative and opportunistic’;

ii)

the claim involved litigation ‘gargantuan in scope’, but based on ‘no sound foundation in fact or law’ which met with a “resounding, indeed catastrophic, defeat’;

iii)

the claims were ‘replete with defects, illogicalities and inherent improbabilities;’

iv)

the claims were ‘spurious’ and ‘pursued relentlessly’ to the ‘bitter end;’

v)

the Defendants were presented with a case that ‘changed as the difficulties in its exposition became apparent;’

vi)

the claim was ‘grossly exaggerated’ in quantum;

vii)

the claim involved ‘unsuccessful allegations of untruthfulness or dishonesty’ against a chief executive of a publicly listed company, which was unsurprisingly picked up by the press;

viii)

the claim was ‘a major source of disruption to Gulf’s business’ and to a lesser extent Texas;

ix)

the claim imposed an enormous drain on the resources of the Court;

x)

Mr Wempen told lies and misleading statements from the outset;

xi)

the prevention case was ‘a dishonest case’;

xii)

Mr Park’s conduct and failings as an expert were ‘outside the norm’;

xiii)

Clifford Chance’s correspondence was ‘voluminous and interminable,’ ‘heavy-handed’ and in some instances ‘aggressive’ and ‘unacceptable in content’ including making ill-founded allegations of criminal conduct;

xiv)

In respect of disclosure, there were ‘extravagant demands’, and ‘important documents were wrongly made the subject of claims for privilege.’”

To some extent that underestimates my criticisms of the litigation which included the fact that the demands for disclosure in relation to the hopeless alter ego allegation were wholly disproportionate and that Eric Wempen's evidence was also in part untruthful.

The purpose of an order for indemnity costs is not to impose a penalty on the unsuccessful litigant (or his funders). It is to afford the successful party a more generous criterion for assessing which of his actual costs should be paid by his opponent because of the way in which the latter, or those in his camp, have acted. I set out some of the principles relating to the grant of indemnity costs in the costs judgment.

Section 51 of the Senior Courts Act 1981 provides as follows:

“ 51 Costs in civil division of Court of Appeal, High Court and county courts.

(1)

Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in—

(a)

…..;

(b)

the High Court …

shall be in the discretion of the court.

(2)

….

(3)

The court shall have full power to determine by whom and to what extent the costs are to be paid.”

CPR 44.2 provides that:

“(4)

In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, including –

So far as the discretion under section 51 (3) is concerned, the test is whether in all the circumstances it is just to exercise the power: Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232, 240.

The Court’s discretion under section 51 (3) extends to the form of order to be made, the proportion of any costs to be paid, and the quantum of any award: Nelson v Greening [2007] EWCA Civ 1358. Thus if a third party order is made it does not have to be on the basis of joint and several liability with the litigant. The discretion is very wide such that there can be no comprehensive checklist of necessary (or sufficient) factors: Systemcare (UK) Ltd v Services Design Technology Ltd [2011] EWCA Civ 546 at [26] and [64].

The principles upon which the Court exercises its discretion were summarised by Lord Brown of Eaton-Under-Heywood in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 at [25] in the following way:

In the light of those principles I have no doubt but that Psari and Mr Lemos (hereafter “Psari/Lemos”) were right to accept (as, to his credit, Mr Lemos did on 6 March 2014) that they should be liable to the Defendants for their costs. The claim could not have been brought without their assistance; they stood to benefit from its success to the tune of a healthy multiple of their investment. That the pursuit of speculative litigation is in the same category and to be viewed in the same way as impropriety for these purposes was affirmed by Rix LJ in Goodwood Recoveries Ltd v Breen [2006] 2 All ER 533 at [59]. Similar considerations apply to the other funders.

In the same case Rix LJ, with whom May LJ agreed, accepted that where a non-party director could be described as “the real party”, seeking his own benefit, controlling and/or funding the litigation, then:

“even where he has acted in good faith or without any impropriety, justice may well demand that he is liable in costs on a fact sensitive and objective assessment of the circumstances”.

This was a departure from an earlier requirement of want of good faith or impropriety: Metalloy Supplies Ltd v M/A. (UK) Ltd [1997] 1 WLR 1613, 1620; an approach applied in Landare Investments Ltd v Welsh Development Agency [2004] EWHC 946 (QB). In Systemcare Lewison LJ drew attention to the “and/or” formulation. Both elements did not need to be present. In Sims v Hawkins [2007] EWCA Civ 1175 Rix LJ had referred to the principal question “whether the non-party (who renders himself liable to the regime, whether by funding or controlling the litigation or even in some other way)” was the “real party” to the litigation. The disjunctive is, also, apparent in the passage from Dymocks cited at para 65 (ii) above.

Psari/Lemos were sought (in what was referred to at trial as “the pitch” document), and put forward to the Court, as strategic partners for the future in the exploitation of the Shaikan field. In his 14^th witness statement of 26 November 2012 Mr Alexandros Panayides (“Mr Panayides”), the partner at Clifford Chance acting for Excalibur, explained how Excalibur would be able to perform its financial obligations if specific performance was awarded, on the basis of, inter alia, the involvement of Psari, and the very substantial balance sheet strength of the Lemos family. Psari’s interest was said to be a working interest so that it would be responsible for historic and future costs in relation to that interest. It was said to be the “anchor investor” in respect of Excalibur’s future financing endeavours associated with any working interest it might obtain; and that it might make available funding beyond its existing obligation. Mr Wardell said that this was said without instructions. Even if it was, it is apparent that by agreeing to take a share in any interest that Excalibur might obtain Psari/Lemos, which both funded and stood to take great benefit from the litigation, were acting as a real party to it in the sense described above.

Mr Panayides also gave details of the financial and personnel strengths of Blackrobe, Blackrobe Capital, Hamilton and Platinum, erroneously stating that Hamilton and PPVA were linked. The Funding Agreements were said to have been “negotiated and crafted with care” precisely because the primary remedy sought was specific performance. Blackrobe and the Platinum funders were said to be sophisticated investors with access to very substantial capital and expertise whose support for Excalibur would be more than simply financial. The interests of the funders and Excalibur were said to be “perfectly aligned” because each would have a direct interest in supporting the efforts of Excalibur to raise funds.

The position of a professional funder i.e. a funder who has a commercial interest in the outcome of the litigation, as opposed to a “pure funder” (Footnote: ⁴), was considered by the Court of Appeal in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055. The Court recognised that there were two competing principles. The first was that costs should follow the event so that a funder who wholly or partly causes the defendant to incur costs should be liable for those costs. The second was the policy of ensuring access to justice. Exposure of funders to the risk of having to pay costs of the opposing party assessed on an indemnity basis might increase the risk and hence the price of funding litigation.

The solution derived by the Court was to hold that a professional funder who financed part of a claimant’s costs of litigation (£ 1.3 million in respect of the cost of expert evidence), should be potentially liable for the costs of the opposing party to the extent of the funding provided. The Court said that it could see no reason in principle why the solution suggested should not also apply where the funder had contracted the greater part, or even all, of the expenses of the action. But it reached no decision on the point.

It seems to me that it is appropriate to apply the Arkin cap in the present case. The position might be different if a funder had behaved dishonestly or improperly or if, as the Court put it in Arkin, “the funding agreement falls foul of the policy considerations which render an agreement champertous” e.g. if the funder has taken complete control over the litigation. In such a case it may be that there should be no cap at all.

On the facts of the present case the Arkin cap is not relevant in respect of Psari /Lemos since the likely shortfall (£ 4.8 million) is less than their contribution to costs of £ 9.75 million. The same is so in the case of the Platinum funders, taken as a whole, where their contribution to costs of one form or another is £ 14 million (or
£ 8 million if you exclude the costs ultimately borne by Huron). But the position is different if you take Hamilton and JH separately, or if you distinguish between contributions towards security for the Defendants’ costs and towards Excalibur’s costs. In the case of Blackrobe (contribution £ 4 million) the effect of the cap is relatively small.

These considerations do not impact on the question whether the costs to which the Costs Defendants should be required to contribute should be costs assessed on the indemnity scale.

Mr Wardell submits that there is no proper basis for making Mr Lemos or Psari liable for indemnity costs when he bears no personal responsibility for any of the multiple factors which caused me to order Excalibur to pay costs on that scale. I turn, therefore, to consider in the paragraphs that follow the history of the Lemos/Psari involvement and that of the other funders as set out in Mr Lemos’ statement. I have no reason to doubt that what he there says is substantially accurate. I should, however, record that I have had no evidence from Mr Panayides, nor do I have all the communications between Mr Lemos and Clifford Chance.

The Lemos family have for over 165 years been engaged in the shipping trade and enjoy a high reputation. They have recently diversified their business interests into several different fields. Those interests, which are very extensive, are managed on a day to day basis by Mr Andonis Lemos and his brother Filippos. Mr Lemos has an MJur degree from the University of Oxford. He was called to the Bar and did pupillage but has never practised. His knowledge of Excalibur’s claim and the proceedings was, he says, very limited and mostly obtained since judgment was handed down. He was told by Mr Panayides that funders were required to keep their distance from the underlying litigation at all times so as not to offend against the law of maintenance. Accordingly he did not before the trial generally receive updates about what was happening in the litigation nor did he interfere with its conduct.

Mr Panayides’ father had been chairman of one of the Lemos family’s ship management companies. His brother George Panayides (“George”) is a long standing and trusted employee of a Lemos family company. In late 2010 George told Mr Lemos that his brother Alex, who was held in high regard by the Lemos family, was acting for Excalibur and was extremely positive about their claim; and that it was a “once in a lifetime” investment opportunity.

On 2 November 2010 George sent Mr Lemos a summary of the claim, including the pitch document, several press releases about Gulf’s discovery of oil, the potential value of the blocks, the progress of drilling, and other evaluations. 8 files of exhibits came a few days later. They have not been disclosed. On 9 November Mr Panayides provided written answers to a number of questions Mr Lemos had raised. He was very positive. He indicated that the main axis of the litigation strategy would be to undermine Mr Kozel – a strategy that badly backfired.

On 12 November 2010 Mr Panayides sent Mr Lemos a 17 page opinion from Clifford Chance. This expressed the view that Excalibur had a strong likelihood of success. It advised that the 2006 Collaboration Agreement was binding on Gulf by assignment (not, as later asserted, that Gulf was originally a party); that Gulf was in breach of it by not providing Excalibur with a 30% share; and that Excalibur was not in breach. Various tortious and other non-contractual claims, including fraud and constructive fraud were said to be either very strong or strong, although the fraud relied on in the action was a different fraud and the fraud referred to in the advice was not even pleaded. All of this turned out to be deeply flawed, particularly in relation to the assignment case.

On the same day, when they met, Mr Panayides persuaded Mr Lemos and his brother that Mr Kozel had behaved extremely badly, and had robbed the Wempens of their rightful share in the oil field. Mr Lemos thought that, if he provided funds, he would be helping the rightful party to get justice. Mr Panayides said that Clifford Chance were so confident that they were on a partial Conditional Fee Agreement, something they had virtually never done; that it was the best claim he had ever seen; and that he had never lost a case in his entire legal career. It was very unlikely that the case would go all the way to trial but if it did it would take place within the year.

Mr Panayides said that Psari would only be required to provide the $ 10 million which became the subject of the 1^st Psari Funding Agreement (and the $ 5 million if needed); that Psari would not have to pay more; and that Mr Lemos would not face any personal liability. This advice was, in the light of Dymocks and Arkin, so extraordinary that it is possible that Mr Lemos misunderstood what he was being told (Footnote: ⁵). It is, however, his evidence that he understood, and Mr Panayides confirmed to him, that once Psari had made its investment it would have no liability to anybody (although that advice later changed).

Mr Lemos asked if it would be possible to get a QC's opinion. Mr Panayides said that that would not be possible before the date by which the funding was needed. Mr Lemos’ statement does not explain why there was any deadline, let alone one which should prevent him from obtaining the second opinion which he had sought. Mr Panayides' confident message was repeated at dinner that evening when, in Mr Lemos’ words, his “assertions” were “repeated because of our awe-inspired questions”. Mr Panayides assured Mr Lemos that the Wempens were good men and said that he would never bring them a case that would put the Lemos family at risk of suffering loss. Mr Lemos never met Rex Wempen until the closing days of the trial and did not meet Eric Wempen at all.

Mr Panayides repeated his confident message at a subsequent meeting with Andonis and Filippos Lemos and their father at which he said that he had never brought a case to them to fund because no case had met the very high standard required before. He put the chances at 90%. On 17 November Mr Lemos told Mr Panayides that subject to some outstanding issues, of which four were critical, they were committed to funding the proceedings.

The first of the four deal breakers was a query as to the valuation of Gulf and whether it was $ 2.03 billion which would give Excalibur $ 610 million, which did not tally with a previous figure he had been given of $ 900 million, as a potential pay out for Excalibur (of which at that stage Mr Lemos would get 10%). Mr Lemos was plainly in it for the money. The answer he was given that evening was that the claim value was not dependent on the valuation of Gulf but of the Shaikan block, and that would rise when drilling results from an additional 5 wells were made known.

In an email timed at 21:12 on 17 November Mr Panayides answered the four questions and said that he was at Mr Lemos’ disposal on the following morning. In relation to the first he observed that Excalibur’s claim was directed to acquiring an equity interest in the Gulf entity that was the beneficiary of the PSC. This was not what the Collaboration Agreement provided for.

The other 13 questions reflected Mr Lemos’ legal background and were percipient about potential problems. In his witness statement Mr Lemos said that Mr Panayides confirmed his view as stated in his original opinion. But his 21:12 email did not do so and his original opinion had not dealt with them. Either Mr Panayides did not deal with these questions or, if all that he did was to confirm his previous opinion, he did not really engage with them.

After the 1^st Psari Funding Agreement had been entered into neither Mr Lemos nor Psari had any further significant involvement or input into the claim. Mr Lemos appears never to have received any real reassessment of the merits of the case at any stage. When he or his brother spoke to Mr Panayides the message was that things were going very well, and the prospects improving from a very positive starting point. Beyond receiving some updates and asking for come clarification the Lemos family did not engage in the substance of the claim.

When security for costs was sought in January 2012 and more funding was needed for legal expenses Mr Lemos was very reluctant either to provide more money or to give up. He says that “uncertainties and doubts ...had started to infiltrate our minds” but does not elaborate on what they were. He was told that, if he refused further funding, the claim could not continue. Mr Lemos told Mr Panayides that he would not be willing to provide further investment unless other professional funders could be found who were also willing to invest. Mr Panayides came up with various potential funders including Blackrobe and Platinum. Mr Lemos agreed to provide further funds following a request from Mr Panayides that they were needed within the week. When asked if he had any concerns about the Lemos' exposure Mr Panayides repeatedly said that he would tell them to walk away if he was not sure of success or had any other major concern and confirmed that he had none. No attempt was made to get a second opinion either before or after 14 March 2012, when security was ordered.

The Lemos family had no involvement in preparation for trial or the pre-trial proceedings or correspondence and had no idea that important documents had wrongly been made the subject of privilege. Nor were they engaged in selecting or instructing experts. During the trial Mr Panayides or his assistant would send transcripts and a summary report highlighting the key issues and how generally they thought that the trial was progressing. Mr Panayides’ reports were generally very positive. At no point in the trial did Mr Panayides change his views on the prospects of success.

On 25 January 2013 Mr Panayides reported that the Defendants had made an application for further security. In late February Mr Panayides started to look around for further funders. In early March he called Mr Lemos to tell him that Psari needed to provide further funding because he had not been able to secure funds from elsewhere. Mr Lemos, who felt backed into a corner, told Mr Panayides that he took at least some comfort from the fact that the new funding would be the extent and end of any liability. It was only at this point that Mr Panayides suggested that there was “a remote possibility” that the Defendants could bring a claim against Psari and possibly him personally. They agreed to park that issue and very reluctantly Mr Lemos agreed that Psari would provide the additional £ 4 million funding. When Mr Panayides was asked what he would do in their shoes he unequivocally said that he would continue to invest.

Mr Lemos says (i) that he and his family were told throughout the proceedings that the claim had a very strong prospect of success; (ii) that he believes that they were misled and deceived by the Wempens just as much as the Defendants were; (iii) that the legal opinion that he was given was flawed from the start and everything flowed from there. At no point were they told to seek legal advice; and they did not think of doing so because they felt that to all intents and purposes Clifford Chance were their legal advisers. They were not personally responsible for the matters which caused me to order indemnity costs.

I do not regard Mr Lemos as having behaved in a morally reprehensible manner or with any impropriety. He was approached by a partner, well known to his family and in a firm of top rank solicitors, who gave him extremely confident advice which was repeated as the case progressed, despite the fissures which were developing in it. He does not appear to have become consciously aware of the legal sink hole which underlay Excalibur’s case and which opened up during its course.

The funders received updates about the case during the trial. What exactly they said is unknown but I am sure that Clifford Chance remained confident to the end. Mr Simony or Mr Werblowsky attended to observe on about 10 days in all. How badly things were going was not apparent to Mr Simony until the closing arguments when, as he puts it, “… as I sat listening to [the] argument I formed the view that the Claimant’s case was not going well and the Judge was not likely to be finding for the Claimant”.

Unless I am compelled by authority to take a different view I would not regard the circumstances summarised above as precluding an order that Psari/Lemos should pay the costs on an indemnity scale or as a sufficient reason for not doing so.

This was speculative and (as Mr Lemos should have appreciated) opportunistic litigation, which Excalibur had refrained from starting until it was clear that the Shaikan field was likely to be highly profitable. The pitch document which Mr Lemos was given in November 2010 explained that the Shaikan block was awarded in November 2007 and that Excalibur “had chose[n] to wait out the drilling process on the advice of counsel” (in fact Eric Wempen). Gloster J (as she then was) referred in her judgment of 28 June 2011 at [30] to the delay in commencing proceedings. That delay gave rise to an obvious laches defence to any claim for specific performance, and was likely to underline the appropriateness of assessing damages at the date of breach. She also referred at [4] to the lack of evidence as to Excalibur’s financial or technical capabilities; to the fact that Excalibur’s grounds for saying that any Gulf Defendant was party to the Collaboration Agreement were not at that stage “legally or evidentially convincing” at [68(i)]; and to the concession of counsel at the previous without notice hearing that Excalibur may well not have a good contractual claim against all the Defendants, ibid.

It is Mr Lemos’ misfortune (a) that the advice he was so confidently given was the polar opposite of what I have decided; (b) that the Wempens in whom he put his trust (but never saw at any material time) were not the persons he thought them to be; (c) that he was put off obtaining an opinion from Leading Counsel, before funding, in a case which was legally as well as factually porous, and never obtained one afterwards; (d) that he was largely unaware as to what Excalibur and its lawyers were doing at his expense; and (e) that he appears to have proceeded, until a late stage, on the erroneous understanding that financing this litigation would involve no further exposure on his part.

None of this, however, was the Defendants’ doing and all of it was, in my judgment, at Mr Lemos’ risk. The claim failed not only on the facts but also on the law. Such “due diligence” as there was consisted of rushing into a decision in November 2010 (with important questions either left unanswered or not sufficiently answered), and leaving everything to Clifford Chance without any opinion from counsel, or any reappraisal of the “merits” after disclosure, evidence or the provision of fresh funds in March 2012, and without even meeting Mr Wempen or discovering how impecunious he was. In those circumstances it would be unjust that he should be absolved from contributing to the Defendants’ costs assessed on the same scale as I have thought appropriate to award against the company which he backed because he was not subjectively aware of, or alive to, the features that led to the costs judgment. The pursuit of objectively hopeless claims which required much time, labour and expense to refute is itself a ground for indemnity costs both against the litigant and his funder.

In February/March 2012 Mr Panayides had approached Blackrobe to fund Excalibur in respect of security for costs. Blackrobe, whose principals - Tim Scranton and Sean Coffey - are an experienced litigation funder and an experienced New York litigation lawyer respectively, was prepared to finance part of what was needed and brought the opportunity to invest to Mr Simony of PPVA/Hamilton. Mr Simony and Mr Werblowsky met Mr Panayides in London. He was, according to Mr Simony, “very upbeat and optimistic” about Excalibur’s prospects of success, which he rated as very high (“the best case he had ever seen in his career”) with prospects in excess of 70%. He was told of Clifford Chance’s CFA with a 40% discount on its fees. Reliance was placed on the supposedly “smoking gun” evidence of fraudulent conduct on the part of the Defendants by backdating emails and a meeting note referring to a meeting that had allegedly never taken place. This probably relates to the backdated letter of 24 November 2007 with which I dealt in [1302] – [1309] of my main judgment and [45] of the costs judgment, and the dispute as to whether Mr Kozel had ever attended a meeting with Dr Ashti Hawrami at the Lanesborough Hotel in late July or early August 2007: see main judgment [578] ff. Further meetings took place in New York with Mr Panayides and there was a short meeting (less than an hour) between Mr Simony and Rex Wempen.

On 28 February 2012 Mr Simony engaged Orrick, Herrington & Sutcliffe LLP (“Orrick”) to consider the merits of the case. On 12 March 2012 they provided advice to Hamilton (limited to English law) to the effect that, if Excalibur’s expert evidence and factual witness evidence was accepted, Excalibur was more likely than not to succeed. They made some observations on difficulties that the Defendants might face. The advice was heavily caveated. No papers had been received from Clifford Chance until the evening of 29 February. Their engagement letter was dated 7 March. The documents received consisted largely of the pleadings, security for costs applications and accompanying witness statements, instructions to Mr Bellacosa, an expert witness as to New York law, and a memorandum by Clifford Chance to Blackrobe Capital on the merits (which has not been disclosed). There had been a short meeting with Mr Panayides when he had produced correspondence files 10 - 19 and a small bundle of “key documents” which may have included the document that Mr Kozel had backdated: see [98] above.

Their letter of advice made plain not only their reliance on Clifford Chance and Mr Panayides and the fact that Clifford Chance had discounted their fees but, also, their inability simply to adopt the latter’s overall assessment of the claim. They had seen no witness statements and almost no documents. Nor had they reviewed Mr Bellacosa’s draft statement, nor a draft report from Mr Park. They made no reference to the judgment of Gloster J, which they had not seen.

After £ 9.5 million had been ordered by way of security Hamilton agreed to fund
£ 6.5 million, Blackrobe £ 500,000 and Psari £ 2.5 million, the latter sum being intended to be temporary until such time as Blackrobe could raise the money to buy Psari out of that position. It was only then that Mr Simony became aware that Psari was the funder of the litigation. He did not become aware that Mr Lemos was its owner until that was revealed (on my direction) during the course of Mr Wempen’s cross examination.

In May 2012 Blackrobe provided Mr Simony with a copy of their own internal analysis of the claim, which I have not seen, and a legal opinion from Allen & Overy to the effect that Excalibur had a “high likelihood” of recovery. That opinion is itself curious in that, in relation to the critical issue whether Gulf was a party to the Collaboration Agreement, they concluded that there was a medium likelihood that Gulf would prevail on at least one of the three theories – agency, assignment and piecing the corporate veil; but then referred to Excalibur having a low to moderate likelihood of success on the first two and a low one on the third. They did, however express a high likelihood of success on either the tort or fiduciary claims if the Collaboration Agreement was not enforceable against Gulf.

In September 2012 Mr Panayides and Mr Simon Picken QC met Mr Simony and Mr Werblowsky in New York. They explained that further funds were needed for litigation particularly because the expert evidence was proving more complicated and costly than anticipated. Hamilton was asked to put up further funds to finance the case. The general impression given was “still upbeat and optimistic about the prospects of success”. If anything the level of confidence had increased. Hamilton (reluctantly) and Blackrobe agreed to provide up to a further £ 3 million and
£ 1 million respectively: see [31] and [32] above.

In December 2012 Mr Simony travelled to London and spent a day at the trial. Mr Panayides asked for further funds to meet Excalibur’s ongoing legal costs which were needed urgently in order to pay counsel. He explained that, absent such funds, Excalibur could not continue and the case would end with judgment for the Defendants. Mr Panayides remained upbeat about the prospects of success and there was no indication that his level of confidence had reduced. (This is surprising in the light of the cross examination of the Wempens). As a result Excalibur entered into the Facility Agreement with JH (see [40]) which complemented the 4^th Psari Funding Agreement (see [39]). These enabled Excalibur to comply with the order for security for costs of 15 February 2013.

According to Mr Simony’s first statement none of PPVA, Hamilton or JH or, I infer, PPCO exercised any control or influence over the way in which the litigation was conducted, or had sufficient information about the claim to be able to assess the merits and identify the failings in the claim eventually identified by me. They did however have Orrick’s advice on the merits. Nor did they play any part in the strategy, conduct of the claim, correspondence or any of the other matters criticised by me. They left Excalibur to plot its own course advised by Clifford Chance.

None of those circumstances cause me to regard an order that the other funders should, like Psari/Lemos, contribute to costs on an indemnity scale as unjust. On the contrary, it seems to me that, having taken the commercial decision to leave everything in the hands of Excalibur and Clifford Chance (and in the case of Psari having required Excalibur to engage them) they must bear the burden of the costs that they have caused the Defendants thereby to incur, including any attributable to any actions of Clifford Chance, assessed on the same scale as applicable to those to whom they entrusted their fortunes.

There is no good reason to distinguish between the funders. The considerations relevant to the position of Psari/Lemos are largely applicable to the others. As with Mr Lemos, the other funders hoped to derive large sums from the claim, which could not have been continued without them. Between them they transformed Excalibur from a shell into a company fully resourced to carry on the litigation to the bitter end and on a massive and disproportionate scale.

In the case of the Platinum funders the position in relation to due diligence was different but scarcely better since what Orrick did was a very limited review and was largely parasitic on the work of Clifford Chance. As Mr Simony put it “neither I nor Mr Werblowsky, nor the companies represented, had sufficient information about the claim to be able to assess the merits and identify the failings in the claim eventually identified by the judge”. Adopting a claim whilst unable to assess the merits sufficiently risks exposure to indemnity costs when the case turns out to be as bad as this one. Mr Simony was also aware of the proposal to use the “smoking gun” and the strategy to go for Mr Kozel, which miscarried.

In the case of Blackrobe and Blackrobe Capital I have no evidence from the individuals concerned. But it seems to me that they are in no different position to that of the Platinum funders, with whom they marched broadly in step.

In short, in a case of this kind justice requires that, when the case fails so comprehensively, not merely on the facts but because it was wholly bad in law, the funder should, subject to the Arkin cap, bear the costs ordered to be paid by the person whom or which he has unsuccessfully supported, assessed on the scale which the court thinks it just for that person to pay in the light of all the circumstances, including but not limited to that person’s behaviour and that of those whom that person engaged. In short, he should, absent special circumstances, follow the fortunes of those from whom he himself hoped to derive a small fortune. To do otherwise would, in my judgment, be unfair to the Defendants and their personnel, who were on the receiving end of claims and actions of the character that I described in the costs judgment.

In this respect I note that in R v SSHD ex parte Osman [1993] COD 204, where an order for indemnity costs had been made against Mr Osman, the Divisional Court (Kenney LJ and Waterhouse J), thought that it was prima facie right that the third parties who had supported the litigation should be ordered to meet the costs orders made against the applicant and ordered the applicant and his solicitors to disclose their identities. The observation was made at an interlocutory hearing and without any order having been made on that basis. A similar approach was taken in Murphy v Rayner [2014] 1 WLR 672 where the Legal Services Commission was ordered to pay the costs of a successful defendant which had been awarded to him on the indemnity scale. However, the LSC took no point about the scale. See also R (Gunn) v SSHD [2004] 1 WLR 1634 [50]; and Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232 [34].

To make an order for indemnity costs would not be to penalise but to recompense. The sum presently in issue – about £ 4.8 million – is not disproportionate to the total monies contributed by Psari (and other funders), or to the individual contributions of most of them, and certainly not disproportionate to the anticipated return.

As I have indicated, Psari/Lemos submit, as do the other funders represented, that no order should be made against a funder to bear costs on an indemnity basis unless grounds for doing so are made out against them independently of any grounds that may exist for making such an order against those they have funded.

In Relfo Limited v Varsani [2012] EWHC 3848 financial assistance was given to the defendant by two gentlemen one of whom was the defendant’s father. Between them they controlled the dishonest defence of the action, from which they stood to benefit and they gave dishonest evidence in it. Sales J, as he then was, made an order for indemnity costs against them. That was, therefore, a case where the funders had to pay indemnity costs where they had been in control of the action and personally dishonest.

In Gatnom v Sanders [2011] EWHC 3716 (Ch) a company was ordered to pay the costs of the proceedings against it on an indemnity basis. A director of the company was ordered to pay the costs of the claimant on the same basis. He was the company’s ultimate beneficial owner, the guiding force behind its dishonest defence, and had given untruthful evidence.

I do not regard either of these cases as authority for the proposition that the question whether funders should pay indemnity costs must be determined by whether it was culpable or unreasonable conduct of themselves personally which took the case outside the norm. As Mummery LJ said in Secretary of State for Trade and Industry v Aurum Marketing [2000] EWCA Civ 224 at [4] what may be sufficient to justify the exercise of the discretion in one case should not be treated as a necessary factor for its exercise in another.

To introduce the principle contended for would unacceptably limit the width of a discretion which is intended to be a wide one - that the court should make the order that it thinks just. Moreover its application would give rise to justifiable objections.

The grounds upon which I ordered indemnity costs against Excalibur fall into different categories. Some such as Mr Wempen’s lies, Mr Park’s conduct and Clifford Chance’s correspondence and approach to disclosure are based on personal faults or failings. However, a client may find himself, as Excalibur did, liable to pay indemnity costs on account of the behaviour, some of which may be dishonest, of those whom he has chosen to engage (e.g. lawyers or experts, who may themselves have been chosen by the lawyers.) or enlist (e.g. witnesses), even though he is not personally responsible for it. That being so, there is, to my mind, no good reason for disregarding the acts or omissions of such persons when considering whether to make an order against a funder, even if the funder did not know of those faults or failings. This is particularly so in the case of Psari/Lemos given that, rightly or wrongly, Psari/Lemos regarded Clifford Chance, as “for all intents and purposes our legal advisors”.

Another category related to the characteristics of the claim and its promotion (see (1) – (7) and (11) in [58] above). I do not regard it as just to disregard those matters save to the extent that it is established that the funders appreciated how bad the claim was, and how unreasonably it was being pursued, or the extent to which they personally authorised the form of that pursuit. Such an inquiry would, in any event, be difficult in circumstances where the true position is in large measure known only to the funder and his agents and where many of the relevant communications may be privileged (either in favour of the funder or the person funded). It would, also, not be fair to the Defendants to reach any conclusion based on advice said to have been given without knowing the totality of that advice.

A further category relates to the effect of the proceedings on the Defendants especially Gulf. If the proposition argued for requires that to be ignored it is unjust.

Even if, which I do not accept, it is, for present purposes, necessary to ignore the conduct of the claim, nevertheless its character (looked at objectively), size and effect would, by themselves, justify indemnity costs being ordered against the funders. That the question needs to be considered objectively is apparent from Fulton Motors Ltd v Toyota (GB) Ltd [2000] CP Rep 24 (indemnity costs of an appeal ordered against directors with a personal stake in the litigation financing an appeal which could not “on any realistic assessment” be said to have a good prospect of success).

In this respect a claim can be regarded as speculative even if the claimant has received strong advice as to its merits: BE Studios v Smith & Williamson Ltd [2005] EWHC 2730 (Ch) at [19] per Evans-Lombe J. See also Dymocks Franchise Systems (NSW) Ltd v Todd [2004] 1 WLR 2807 [33] where the Privy Council regarded the existence of encouraging advice from leading counsel as no ground for not making an order under section 51. Nor do I regard the fact that the funders had legal advice that the claim was good as meaning that no order should be made for indemnity costs.

I am, of course, conscious that I am considering what order to make in respect of costs with the benefit of hindsight. That is because my judgment is an objective assessment of the merits of the claim, which is what is required. In any event the defects in the case were apparent or detectable at an earlier stage. For instance, in her judgment of 28 June 2011 Gloster J said that she had seen “no evidence that Excalibur had ever participated in any project or that it possessed the technical know-how, capacity or capital required to invest or participate in an oil exploration and production venture” and observed that, on the evidence before her, there was a strongly arguable case that the Gulf Defendants were not party either to the Collaboration Agreement or the arbitration agreement contained within it, as indeed they were not. The problems with the case which were apparent to me at the end of the openings became increasingly manifest in the light of the cross examination of both Wempens and Mr Park.

The claim was put at $ 1.65 billion when, on my assessment, calculating damages at the date of breach, it was worth at best $ 3.3 million. The claim for specific performance and for that level of damages, calculated at the date of trial was designed to procure a settlement. The evidence of Mr Lemos was that the funders all agreed to produce funding on the clear assumption that the claim would settle before it went to trial. That that is the usual modus operandi of professional funders is clear from the evidence of Mr Simony. The likely effect of a claim of this size is to create great uncertainty for the Defendants’ business, as must have been obvious, and to drive them to the negotiating table, as the funders always intended. Mr Lemos was advised in terms by Mr Panayides that Excalibur intended to wait for Gulf and Texas to make the first move “because the case continued to be so strong.” That that was the aim no doubt played its part in the unreasonable manner in which the case was pursued and is another circumstance which, when taken with the other matters referred to in my costs judgment, makes it just that the funders should pay costs and on the same scale as Excalibur.

The supposed principle looks at the question from only one point of view – that of the funder. It ignores the effect and character of the action which he has funded on the defendants; whereas the derivative nature of his involvement should, as it seems to me, ordinarily lead to his being required to contribute to the costs on the basis upon which they have been assessed against those whom he chose to fund. Whilst the funders had the choice of which claims to back and whom to instruct, the Defendants could not choose by whom to be sued or in what manner. If, then, the funder’s witnesses turn out to be liars or the litigation is conducted unreasonably, so that the court awards costs on an indemnity scale, it is just and equitable that the funder should pay on that scale.

One of the reasons for indemnity costs was the fact that baseless allegations of dishonesty were made against Mr Kozel. The funders appear to have been aware that one of the aims of the litigation strategy, including allegations of dishonesty, was to undermine Mr Kozel and so put pressure on him to settle.

Whilst the funders can have had no personal knowledge of whether the allegations were well founded or not, one of the risks of making an unsuccessful allegation of dishonesty is that (even if the allegation is not improperly made) it may well attract indemnity costs, as some imperfect recompense to the Defendants for what they have had to endure. In the present case the allegation of dishonesty in relation to the letter of 24 November 2007 was a relatively minor consideration in my determination to award indemnity costs. More significant was the fact that the case was opened on the basis that the court would be invited to find that it could not safely conclude that the Kozel brothers spoke the truth. Similar considerations apply in respect of the disruption of the Defendants’ business: Amoco (UK) Exploration Company v British American Offshore Ltd 22 November 2001 per Langley J [7]. See also the costs judgment at [42] – [47]. That risk should apply both to Excalibur and its funders.

I recognize that there are, in this context, potentially competing public policies. If professional funders are exposed to the risk not only of standard but also of indemnity costs they may decline to fund, or only be prepared to do so at a higher cost or, perhaps more likely, against some form of indemnity or an increased reward for success, even in relatively standard cases. In either case access to justice may be curtailed. Alternatively they may seek to intervene in the proceedings in a manner which runs the risk that their agreement to support the litigation is champertous or close to it. An exceptional case, such as the present, should not, Mr Croxford QC submits, introduce a principle which may affect cases which are within the norm.

I do not regard these considerations as compelling. Indemnity costs are awarded in circumstances (including but not limited to the conduct of a party and not necessarily involving dishonest, morally culpable or improper behaviour) which are outside the norm. This case was well outside it. The sums at stake were as huge as the deficiencies in it were egregious. I do not think it appropriate to reach some different conclusion because of any potential impact of my decision on possible future funders in quite different cases. I entertain some doubt that my decision will send an unacceptable chill through the litigation funding industry, whose aim is not to finance hopeless cases but those with strong merits. If it serves to cause funders and their advisors to take rigorous steps short of champerty, i.e. behaviour likely to interfere with the due administration of justice, - particularly in the form of rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals - to reduce the occurrence of the sort of circumstances that caused me to order indemnity costs in this case, that is an advantage and in the public interest.

I also do not accept that I should embark upon some exercise of working out which of the reasons that caused me to order indemnity costs should be classified as constituting conduct for which the funders are responsible and ascertaining the extent to which that conduct caused costs to be incurred. This would be an impossible task. It is, in any event, the conduct of the funders in promoting this litigation with all its ills that makes it just to award indemnity costs against them as well.

Lastly, Mr Croxford said that it was relevant to consider whether or not the Defendants had a suitable summary remedy against Clifford Chance and the Wempens which they have chosen not to deploy and which I should take into account in deciding what is just. As to that, the Wempens have insufficient money; and to secure an order for wasted costs against Clifford Chance would require the Defendants to surmount a very high hurdle. I do not regard the possibility of a wasted costs order against either the Wempens or Clifford Chance as a reason not to make the order which I propose.

I therefore propose to make an order that the funders should be liable for Excalibur’s costs assessed on the indemnity scale.

A question arises, which I was told had never previously been addressed, as to whether the cap should be measured by reference (a) only to the amount contributed to Excalibur in respect of Excalibur’s costs (as contended for by the Platinum funders but not Psari/Lemos) or (b) that amount plus the amount contributed solely to enable Excalibur to give security for the Defendants’ costs. In support of the former it is submitted that the provision of security for costs is a potential, and, in the events which have happened, an actual, contribution to the costs of the successful Defendants for whose benefit it enures. By contrast a funder of legal expenses does not, section 51 apart, stand to pay anything to the defendant if the claimant loses. In those circumstances a cap on further contribution should not be measured by reference to contributions towards security for costs.

In my view the answer is the latter. The function of the cap is to limit the costs which the funder has to pay by reference to the money that he has put up to finance the action. He should be required to pay the successful defendant no more than he was prepared to put up in relation to the action himself. The cap bears no necessary relationship to the costs which the Defendants have incurred so as to fall to be reduced to the extent that they are covered. The fact that there is security for those costs will, of course, reduce the amount that falls to be paid subject to the cap.

The provision of money to Excalibur in order that it may provide security for costs is not the equivalent of a payment of costs ordered at the end of the case. It was a form of funding of the claim in exchange for a return attributable to the monies provided for that purpose – in effect an investment. If the action was to continue it was, of course, beneficial for the Defendants to have security rather than not. But continuance of the action was the last thing they desired. The provision of money for security was the only means by which that could happen and it resulted in the Defendants continuing to incur the costs and suffer the detriment which the action cast upon them.

It is noticeable, in this connection, that both Hamilton and JH were under the relevant Funding Agreements to be remunerated in accordance with the Hamilton formula applied to their contributions even though they were for Excalibur to provide security for costs or pay its own legal expenses. Further, in the relevant Agreements Hamilton and JH agreed to be liable for any costs assessed against Excalibur in connection with the litigation to the extent of the Disbursements i.e. the funding of security for costs actually made: see clause 4.1.19 of the 1^st Hamilton Funding Agreement and the Facility Agreement of 8 March 2013 taken with the definition of “Disbursements” therein. In effect they were agreeing, as between themselves, to accept liability for costs assessed against themselves to the extent of the Arkin cap applied to amounts provided for security for costs.

If the position were otherwise a funder whose sole contribution was to provide money for security for costs, without which the action would not have continued, would be in the happy position of facing no possible exposure under section 51; whereas those who funded the costs would bear that burden (alone). This would be the position even though, had the claim succeeded, the security for costs provider would have a right to share in the proceeds increased by a percentage reflecting what he had contributed in respect of security. In effect such a provider would have, so far as exposure to an order under section 51 was concerned, a “free ride”, on the back of those financing the costs. This could not be just and cannot be right.

It follows that I also do not accept the proposition advanced by Mr Croxford that a funder who funds both costs and security for costs should come under no liability to the defendants at all if the amount provided for the latter is equal to or greater than that provided for the former.

The next question is whether, when different funders have contributed amounts at different times, they should be liable to the successful defendants only in respect of costs that the Defendants have incurred after they made their contribution. If four funders each make one, and only one, contribution of £ 100,000 on 1 January in one of four consecutive years and judgment is given at the end of year 4 is the contributor in year 4 responsible for any of the costs in years 1-3?

In my judgment the answer is “No”. In the example given the contributor in year 4 has not done anything which led to the defendants incurring costs in those years.

As to causation, in Hamilton v Al Fayed [2003] QB 1175 at [54] Simon Brown LJ said:

“…proof of causation is a necessary pre-condition of the making of a section 51 order against a non-party – as to which there is ample authority and, as I understand it, no dispute”

In Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232 Morritt LJ took the view that the costs claimed must “to some extent” have been caused by the non-party, rejecting a submission (as I would in this case) that a third party could only be liable for indemnity costs which were directly attributable to conduct of his which was improper or sufficiently exceptional to justify the making of an order, such as pursuing a case known to be unsustainable.

In Byrne v Sefton Health Authority [2001] EWCA Civ 1904 Chadwick LJ said that, if an order was to be made under section 51 (3), the conduct of the person against whom the order was made must be “an effective cause” of the costs incurred. In that case solicitors for the claimant failed to issue proceedings and ceased to act before the expiry of the limitation period. A later action was dismissed on limitation grounds. The Court of Appeal set aside an order for costs made in the action in favour of the Health Authority against the original solicitors. Not surprisingly the Court did not accept that their incompetence was causative of the costs of the action “in any real sense”.

In Dymocks Franchise System (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 Lord Brown of Eaton-under-Heywood, giving the opinion of the Privy Council said that

“their Lordships are content to assume for the purposes of this application that a non- party could not ordinarily be made liable for costs if those costs would in any event have been incurred even without such non-party’s involvement in the proceedings”

In Goodwood the Court expressed (obiter) a preference for what Morritt LJ had said over what Chadwick LJ had said, partly because in Dymocks the Privy Council had adopted an analysis which was consistent with Morritt LJ’s view “by asking whether the third party had caused the costs in issue and then leaving the rest for the exercise of a principled discretion in the ultimate interests of justice”.

In Arkin Lord Phillips said that “causation is also often a vital factor”.

In Total Spare and Supplies Ltd v Antares SRL [2006] EWHC 1537 (Ch) David Richards J thought it just to make an order for costs in favour of a claimant against a non-party, being a company to whom the defendant had transferred its business a fortnight before the trial began with a view to making it more difficult for the claimant to recover any damages or costs.

For my part I would adopt the approach approved in Goodwood. It does not seem to me, however, that it is necessary in the present case to distinguish between “effective” and “but for” causation. Each tranche of funding was something but for which the action would not have continued and an effective cause of that continuance, which caused the Defendants to continue to incur costs. It is not necessary to show that the funder was personally responsible for the circumstances that led to indemnity costs in the sense of knowing that the claim was bad, authorising disproportionate expenditure and the like.

It does not seem to me, however, that there is any good ground in the present case for departing from the usual approach of requiring causation to some extent. Mr Waller QC submitted that, given the interrelationship between the various entities within the Platinum Group and the fact that the later tranches of funding were designed to preserve Hamilton/PPCO’s initial investment it was not appropriate to distinguish between the different Platinum funders in terms of the start date for their investment. The court should proceed on the basis that the Platinum funders became involved in March 2012. Tempted though I am to adopt this broad brush approach, I decline to do so. It seems to me that a distinction should be made between Hamilton/PPCO and Huron/PPVA, not least because the interests of PPCO and PPVA are not necessarily identical. Further, since I intend the order that I make to cover JH, it seems to me wrong for them to be responsible for any of the costs of the substantive hearing, when they supplied security only after it had concluded.

He also submits that there is no good reason why the Platinum funders should not be liable for any costs incurred before March 2012. When they started to provide funding they stood to benefit from and adopted all the work that had gone before, which work had exposed the Defendants to the costs which were its consequence, and without which they could not have generated any return. They knew (as Mr Simony's evidence indicates) that Excalibur had little or no assets and was dependent on third parties if it was to continue. Hamilton and JH were well aware that they could face an adverse costs order because their Agreements with Excalibur made provision for it. The Platinum funders should accordingly take the consequences for funding Excalibur’s litigation as a whole including for any costs incurred before March 2012. The same applies in the case of Blackrobe.

While I see the force of these considerations I do not think it appropriate to make an order the effect of which is that the Platinum funders or Blackrobe will be liable for costs which they have played no part in causing the defendants to incur. The fact that they are, in a sense, inheritors of the work of others is not sufficient reason.

The next question is whether I should take account of Huron’s position so as to treat them for present purpose as funders. I am sure that I should. In considering what order it is just to make it is appropriate to look at who was the person ultimately obliged to provide the money and who would ultimately share in the proceeds if the action was successful.

PPCO is the parent of Hamilton and JH and PPVA is the parent of Huron. In each case it was the parent which produced the money that the 100% or 99% subsidiary was obliged to provide. This is not an unusual corporate arrangement. Mr Croxford submits that there can be no question of PPVA being required to make any payment since it was not a funder at all. It had no obligation to provide anything for Excalibur. The fact that it enabled its subsidiary to fulfil its obligations to Excalibur is neither here nor here. To treat PPVA as the funder would be to pierce the corporate veil in circumstances where there is no justification for doing so.

I disagree. As Lewison LJ said in Axel Threlfall v ECD Insight [2013] EWCA Civ 144 at [13]:

“…..the separate personality of a corporation, even a single-member corporation, is deeply embedded in our law. But its purpose is to deal with legal rights and obligations. By contrast, the exercise of discretion to make a non-party costs order leaves rights and obligations where they are. The very fact that the making of such an order is discretionary demonstrates that the question is not one of rights and obligations of a non-party, for no obligations exist unless and until the court exercises its discretion. Moreover the fact that the discretion, if exercised, is exercised against a non-party underlines the proposition that the non-party has no substantive liability in respect of the cause of action in question. Of course, it is not enough merely to say that Mr Whitney was a director of ECD, but in deciding whether or not to make such an order, the court is not fettered by the legal realities. It is entitled to look to the economic realities. It is in this sense that many of the cases pose the question whether the non-party is “the real party” in the case.”

Here the economic reality is that the investments in the litigation were made by PPVA and PPCO and it is they which would have been the ultimate beneficiaries of success. The funding vehicles - Hamilton, JH and Huron – do not appear to have had any independent interest separate from that of their owners. Hamilton does not even have its own bank account and, according to Mr Werblowsky’s evidence, relies on PPCO “to manage its treasury function”. Mr Werblowsky’s evidence is that any recoveries that Hamilton made would be likely to be paid into the same master account from which the advances were made i.e. PPCO’s account and Hamilton would then have directed PPCO to pay from that account any amounts due to Huron, which did have such an account. JH does not have its own bank account either and any recoveries by JH would be dealt with in the same manner.

Hamilton and JH have, therefore, no source of funds other than their parent. Neither Hamilton, JH nor Huron produce management accounts. I infer that they will in all probability not have any assets to satisfy any order made against them. In their letter of 30 April 2014 Memery Crystal invited Orrick to confirm that those three companies were in a position to meet any costs liability but they have not done so. I, also, infer that the position is similar in respect of Blackrobe and Blackrobe Capital.

In those circumstances there seems to me no good reason why, in deciding what is just, I should disregard the role of the parents. A similar approach was taken by Moore-Bick J (as he then was) and the Court of Appeal in Petromec Inc v Petroleo Braisleiro Petrobas [2006] EWCA Civ 1038; David Richards J in I-Remit Inc v Far East Express Remittance Ltd [2008] EWHC 939 (Ch) at [14]; and Newey J in Gatnom Capital at [13]. Parent and subsidiary should in this case stand together.

It is material to note that the Platinum funders had the benefit of two policies in respect of their provision of funds in March and October 2012. On 31 May 2012 “Platinum Partners”, which are the entities in the Platinum Group of investment management companies, and Blackrobe entered into an ATE insurance policy for
£ 9.5 million, the amount provided by Hamilton [£ 6.5 million] and Blackrobe
[£ 3 million] for security against any costs of the Defendants that they might be ordered to pay. Mr Simony understood that the insurers had taken advice from Freshfields on the merits of the claim, but I have not seen that advice.

On 8 November 2012 PPVA, Hamilton, Huron and Blackrobe entered into a specific situation insurance policy for £ 4 million, which provided cover in respect of legal expenses paid under the 2^nd Hamilton and 3^rd Blackrobe Funding Agreements of
5 October 2012.

According to Orrick both these policies have been accepted and paid by the insurer.

Accordingly the order that I propose to make is as follows:

The effect of this order is that it will be necessary, on assessment, to distinguish between costs incurred (a) up to 29 March 2012, (b) from 30 March 2012 up to
4 October 2012, (c) from 5 October 2012 up to 7 March 2013 and (d) from 8 March 2013 onwards. Whilst the exercise of assessing the costs may well be a heavy one I do not anticipate that the need to make these time divisions will be particularly onerous. That exercise will produce a total costs figure and an individual figure for each funder (or funding set), which, in the case of Psari/Mr Lemos will be the same as the total, and, in the case of the others, will be less.

Whilst the Costs Defendants will be liable to the Defendants in accordance with the terms of the order it will not, of course be open to any of the Defendants to recover more than their costs as assessed less the amounts already received from the security already provided.

Since there may be complications that I have not foreseen in executing the order it should provide that the parties are to have liberty to apply.

As I have indicated the parties were agreed that consideration of any question of apportionment as between the Costs Defendants should be left over until after this ruling. Prima facie it seems to me that the Costs Defendants should share their respective liabilities to the Defendants above in proportion to the respective amounts found due from them in accordance with the order set out in [161] above. I have, however, heard no submissions on the subject and the view I have expressed is entirely tentative and open to change. It may also be necessary to consider the problem that may arise if recovery from one or other funder (either by a Defendant or a Costs Defendant) become impossible. I would also wish to consider whether any provision should or could be made which might obviate the need for a full scale assessment in the event that agreement is reached between the Defendants and one or more parties as to the figure at which costs should be assessed.

I am grateful to all counsel for the quality of their helpful submissions which have helped me to steer a way through a partially uncharted sea.