Harbour View Q4 2014

HARBOUR VIEW N e w s a n d O p i n i o n s f r o m T h e H a r b o u r Te a m

Q4 Issue focus‌ Competition Damages Claims

In this edition of HARBOURVIEW we focus on Competition Damages Claims, of which we are funding several.

We also provide our usual insight into funding-related issues.

CONTENTS actions for competition p3 Collective damages claims

p5 Pass the parcel up – Visa reduces p7 Time’s exposure by £500m Having a strong case is no excuse p8 for refusing to mediate tribunal orders serial claimant p9 toICSID post security for costs – litigation funders p13 Excalibur liable for indemnity costs English High Court confirms p15 policy that arbitration awards should be complied with

p18 p19

HARBOURNEWS… in brief Festive message

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Collective actions for competition damages claims Limiting access to funding in competition cases would fly in the face of Lord Justice Jackson’s recommendations and severely restrict funding options for consumers and small businesses affected by anti-competitive practices.

There is a well-worn saying that the courts are open to all, just as the grill room at the Ritz Hotel is open to all.

The reality is that claimants must often rely on private funding arrangements to finance their cases.

Parliament needs to be careful, with the passage of the Consumer Rights Bill 2013-14, not to unfairly restrict the funding options available.

The proposal for a collective-action regime for competition damages cases is contained in Schedule 8 of the bill, entitled Private Actions in Competition Law (with the relevant provisions being inserted in the Competition Act 1998 and the Enterprise Act 2002). This regime will adopt an opt-in or opt-out approach for the formation of the class, depending on the judicial choice under the new proposed Section 47B (7) (c) of the Competition Act 1998.

Regardless of whether opt-in or opt-out is adopted, the success of either system will depend on the funding available to bring these claims. There are real concerns that the available funding options could be so limited that good claims may well struggle to be brought.

‘…funding is the life blood of the justice system.’

In his Review of Civil Litigation Costs: Final Report, Lord Justice Jackson expressly acknowledged that there is a place for damages-based agreements (DBAs) as a way of funding collective actions. Not only was it the clear intention of the author of the costs reforms that DBAs should be available, but there were no carve-outs or exceptions in either the Legal Aid, Sentencing and Punishment of Offenders Act 2012, or in the Damages-Based Agreements Regulations 2013.

Despite these clear intentions, it is proposed in the new bill to prohibit the use of DBAs for opt-out competition damages collective actions. This is the result of perceived concerns about such a funding arrangement. But the government did state that the use of conditional fee agreements and after-the-event insurance should continue to be available. One has to wonder why such a distinction was made.

Lord Justice Jackson

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Given the prohibition on DBAs in the bill, it was clear that litigation funding would therefore become an important way of funding these claims. However, an amendment to the bill was tabled on 9 July 2014 by Lord Hodgson to prevent the use of litigation funding for opt-out competition damages collective actions, as well as prohibiting the use of DBAs.

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Once again, this ignores that Lord Justice Jackson approved of litigation funding in his final report.

This approval extended specifically to collective actions where he stated in paragraph 4.3 of chapter 33 in the report that if claimants: ‘are advised that the proposed funding agreement is appropriate and if the funders subscribe to the voluntary Code… this would be a proper means of funding many collective actions’.

Since the publication of the final report, the Civil Justice Council has been instrumental in approving a code of conduct for funders that was ‘fit for purpose’ and dealt with the areas identified by Lord Justice Jackson. The Association of Litigation Funders was established in November 2011 to regulate its funder members and their observance of this code of conduct. The association’s funder members are now funding competition claims in England and Wales as well as in other jurisdictions.

Interestingly, in Lord Justice Jackson’s report it was noted that the Confederation of British Industry wanted costs-shifting to be maintained for collective actions and stated ‘access to justice should not in our view be paid for by defendants’ (paragraph 2.6 in chapter 33). Both of these aims have been met.

Costs-shifting has been retained for collective actions and neither DBAs nor third-party funding are paid for by defendants, but by the claimants.

The fact that funders are funding collective actions in other jurisdictions should indicate that care should be taken not to restrict the range of funding options available to claimants in England and Wales. To do so would mean that our jurisdiction would be out of step with other common law jurisdictions.

As Lord Neuberger noted in Harbour’s inaugural annual lecture in May 2013, “…funding is the life-blood of the justice system”.

If DBAs and litigation funding are prohibited, the burning question is: will conditional fee agreements and after-the-event insurance be able to fill the funding gap created? The evidence over the years would point to it not being able to do so, despite the fact that success fees and ATE insurance premiums were recoverable from a losing opponent.

Following a debate in the House of Lords in early November, Lord Hodgson’s amendment was withdrawn. As Baroness Hayter, for the government, pointed out: the existing opt-in regime is not delivering effective redress and “the heart would have been taken out of the bill” by prohibiting litigation funding for opt-out collective actions.

Comment The continued availability of litigation funding for these claims is a victory for common sense when it is clear that DBAs will not be available to individuals or small businesses affected by anti-competitive practices.

Vigilance is still needed as the bill progresses through Parliament. Indeed, Lord Justice Jackson spoke, when addressing the Law Society’s “Commercial litigation: the post-Jackson world” conference on 20 October, of the importance of those in authority “stand(ing) up to powerful vested interests within the ‘big business’ camp” who he viewed as undermining the funding reforms that he recommended in his final report.

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Pass the parcel It has often been conceded in English competition damages claims, relating to illegal cartels, that the ‘passing-on’ defence may be available.

Yet with surprisingly little case law to guide disputing parties, how the defence applies and how pass-on should be quantified remains the subject of much debate. We look closer.

The passing-on defence is routinely invoked in cartelrelated competition damages claims in Europe.

Litigating parties (and where applicable, their funders) spend considerable sums on economists and lawyers, arguing about the level of overcharge imposed by a cartel, and the extent to which a claimant may have passed-on that overcharge to its customers. One might therefore expect the case law in this area to be well-developed, but in fact the opposite is true with such claims rarely reaching trial, or settling before judgment is handed down.

The expert view Advocates for a high pass-on rate paint a picture of a perfect or near-perfect market, where the retail price of a product increases in synchronisation with its wholesale price. An example of this might be found in the 2013 OFT study into petrol retailing, which found pass-on rates to motorists at close to 100%.

But not every market is the same. There is little doubt that some retailers absorb the majority of wholesale price increases, and pass little or nothing on to the customer.

In practice, our experience is that retailers will pass on a portion of an overcharge, but only where the overcharge is significant and visible. Minor or less-visible increases tend to be ignored.

Consider the example of a gym that buys several vending machines. The owners of the gym are, unbeknownst to them, the victims of a cartel.

They have paid an overcharge of 15% for the vending machines because a cartel of manufacturers fixed an artificially high price for a vital component in those machines. Subsequently, the gym owners decide to increase membership fees. In doing so, the increased income dwarfs the overcharge they have suffered.

Did the gym pass on the overcharge to its members, or did it absorb it? When setting the new membership fees, the gym owners paid little attention to the cost of the vending machines but they did look at the overall expenditure of the business, which includes the costs of the machines. Would the membership fee increase have been different had the vending machines been cheaper?

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There are no clear legal or economic answers.

In large-scale competition damages claims, each party will appoint an economist to grapple with such issues.

Some law firms with specialist competition damages teams now have their own in-house economists.

The economist attempts to estimate, based on evidence, any actual pass-on. He needs access to data on actual prices and costs at the relevant stages of the supply chain, and applies various techniques in settling upon an estimate. But reliable results are far from guaranteed due to difficulties with data. And there is little guidance from the courts as to which techniques they consider to be more reliable than others.

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The legal view When do steps taken by a retailer who has suffered damage at the hands of a cartel reduce the compensation that he can recover? Although it has not been given judicial consideration within the context of competition damages, this question was considered at length in a recent shipping case, Fulton Shipping Inc v Globalia Business Travel S.A.U [2014] EWHC 1547 (Comm).

‘Is there a difference between causing the price increase and providing the occasion or context for an increase?’

In Fulton, the Commercial Court considered the fact that the owners of a ship benefitted from the ship’s immediate sale after the repudiation of a time charterparty. The owners were taking prudent and reasonable steps to minimise the losses caused to them by the repudiation, and the court held that these steps/this benefit was not in law to be taken into account when assessing the damages awarded for the repudiation.

This was because the benefit was not legally caused by the breach.

Applying Fulton in the context of cartel cases, the question is whether the increase in the retail price was caused by the cartel, not merely whether the cartel provided an occasion or moment in time during which the retailer happened to increase its prices. But are the principles applied in Fulton applicable to competition damages claims? And if so, is there a difference between causing the price increase and providing the occasion or context for an increase? The latter question requires a detailed analysis of how the price increase affected the retailer’s pricing. Retailers will wish to make the argument that any increase in their prices was a mere ‘collateral benefit’.

Comment For the time being, we proceed along an uncertain path. That uncertainty cuts both ways when considering settlement prospects. However, it should not be forgotten that cartel cases involve clear instances of wrongdoing by the defendant, as typically pre-established by a competition authority, so the notion of the cartelists then seeking to escape liability for their overcharging seems unpalatable.

In the near future one of these cases will proceed to judgment. And when it does, we hope there will be better guidance for all concerned.

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Time’s up – Visa reduces exposure by £500m For the first time, the English Courts have considered the effect of Section 32 of the Limitation Act in the context of a competition damages claim.

The key question was, how much knowledge does a potential claimant need to have about their potential claim, before time begins to run on that claim.

The case of Arcadia Group Brands & others v Visa & others [2014] EWHC 3561 involves conjoined actions brought by major UK retailers against Visa in respect of its setting of interchange rates, which form the largest part of the service charges levied on retailers in relation to Visa payment card transactions. The case is one of several that Visa and MasterCard are currently defending.

Visa and MasterCard’s interchange rates have been probed by European Union regulators since 2002, on the basis of allegations that such rates are anti-competitive.

The retailers in this case, led by Arcadia, were seeking additional damages under an extension of the relevant claim period going back to 1977.

Visa successfully applied to strike out this additional claim for the period between 1977 and 2007 (i.e. for the period in excess of 6 years), on the basis that the retailers were out of time to sue for that period.

The retailers relied upon Section 32 of the Limitation Act to argue that Visa had concealed relevant facts and that they could therefore not have sued before 2007. They argued that the limitation period had not started to run given that not all the relevant facts were known at the time of the hearing.

The Court had to balance the public interest in preventing prejudice to claimants “who lack sufficient information to advance a claim” and the general policy of “ensuring certainty and finality in litigation”.

The Court found in favour of finality and limited the claim period to 6 years.

While certain facts remain unknown in the case – for example the exact mechanisms and rates for the setting of the charges – the Court determined that the retailers had enough information at the relevant time to plead claims that were capable of surviving a strike out application. Or put another way, “the Claimants are focussing on matters about which they might want reassurances before bringing a claim, but which do not constitute matters which are essential to pleading it”. As examples of generally available information, the Court cited several European Commission documents including press releases, as well as the European Commission’s 2007 MasterCard decision. And the Court emphasised that this was not a secret cartel operating without the knowledge of its victims.

The Court refused to accept that a competition damages claim of this nature fell within an exceptional category calling for a different approach to the application of the limitation statute.

Comment Limitation is always a high hurdle, and the Court appears to have found it difficult in this case to get past the concern that it would open up 37 years’ worth of claims by extending the claim period past 6 years.

There is surprisingly little case law dealing with a complex matrix of facts gradually emerging over time as here.

Indeed, most of the authorities appear to be so far removed as to be of limited assistance, particularly in a competition context, where what is an anti-competitive restriction is not just a question of what the restriction is, but of economic analysis in the context of the market.

Some points to note: • This decision arguably places the onus on potential claimants to be proactive when the scent of a potential infringement of competition rules enters the public domain. However, the future approach by the courts may be more generous to claimants in cartel cases, where the infringement is secret.

• While an important decision for Visa, the retail claimants are still apparently left with a very substantial claim (approximately £500m) that is not time barred.

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Having a strong case is no excuse for refusing to mediate In Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd (No2) [2014] EWHC 3148 (TCC) the Court held that a reasonable belief you have a strong case does not preclude a finding that a refusal to engage in mediation was unreasonable. Notwithstanding this, given that BAE had made a Part 36 offer before trial which had not been improved on, the court did not depart from the usual costs rules.

Despite deciding not to disturb the usual rule on costs following a Part 36 offer not being beaten at trial, Justice Ramsey, who is tasked with implementing the Jackson reforms, sent a clear message that those who refuse to mediate do so at their peril.

Considering Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 and Daniels v Commissioner of Police for the Metropolis [2005] EWCA Civ 1312, Justice Ramsey recognised that in cases where a party has a watertight case, or faces an unfounded claim,

refusal to mediate should not necessarily be seen as an unreasonable course of action. Nonetheless, he felt this ignored the fact that mediation can have positive effects even for cases which have no merit.

The successful defendant had argued that several factors made this a case that was unsuitable for mediation, including that the dispute was fundamentally about a question of construction, about which there was no middle ground. However, Justice Ramsey felt that a skilled mediator would have assisted the parties in finding a solution, and ultimately would have avoided the need for a trial.

The decision is the latest in a recent line of authority that demonstrates that making arguments against mediation will be difficult. In PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288, the Court of Appeal held that as a general rule, failure to respond to requests for ADR was unreasonable and the defendants were therefore not entitled to Part 36 costs as a result. In Phillip Garritt-Critchley & Others v Andrew Ronnan and Solarpower PV Limited [2014] EWHC 1774 (Ch), the Court awarded costs on an indemnity basis against a defendant who unreasonably refused to mediate.

Comment Harbour supports all forms of alternative dispute resolution, in particular mediation. Although its effectiveness may vary, we are in agreement with Justice Ramsey that if approached correctly mediation can be a very powerful tool in obviating the need to go to trial.

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ICSID tribunal orders serial claimant to post security for costs A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) has ordered a claimant to post security for costs. The respondent had requested such an order as part of a Request for Provisional Measures in the case of RSM Production Corporation v Saint Lucia (ICSID case No. ARB/12/10).

The tribunal in this case (the “Tribunal”) ordered the claimant to post US$750,000 security within 30 days of its decision, which it gave on 13 August 2014.

The decision is available here.

The decision was not unanimous. Professor Siegfried H Elsing, the President of the Tribunal, provided his decision followed by the assenting reasons of Australian arbitrator, Gavan Griffiths QC, who came to the same conclusions as Professor Elsing but differed occasionally in his reasoning. Judge Edward Nottingham, the third member of the Tribunal, provides his dissenting opinion at the end of the decision, the notable point of disagreement being that Judge Nottingham did not consider that the Tribunal had power to make an order for security for costs.

The Tribunal made the latter order, but suspended the decision on security for costs until a later date.

Decision The decision of the Tribunal on security for costs falls into two categories: whether or not the Tribunal has power to make an order for security for costs; and, once the majority had decided that the Tribunal did have that power, whether or not to order security for costs in this instance, on these facts.

Background The dispute relates to an agreement between the parties under which the respondent granted the claimant an exclusive oil exploration license in an area off the coast of St Lucia. Boundary disputes developed with neighbouring islands which it is claimed prevented the claimant from initiating exploration under the agreement. The claimant is seeking a declaration from the Tribunal that the agreement is still in force or that the respondent terminated the agreement in breach and is therefore liable for damages. The respondent seeks an award dismissing the claims and declaring that the agreement has expired.

“…the notable point of disagreement being that Judge Nottingham did not consider that the Tribunal had power to make an order for security for costs.”

Arbitral proceedings were commenced on 29 March 2012 and the Tribunal was constituted on 6 August 2013. In September 2013, the respondent filed a Request for Provisional Measures which included both a request for an order for security for costs and a request for an order that required the claimant to pay all further advances to the Tribunal and to refund the respondent the portion it had already been paid.

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Majority finds power to order security for costs in general powers on provisional measures When considering its power to make an order for security, the Tribunal looks at the general powers in ICSID Convention Article 47 and ICSID Arbitration Rule 39 relating to provisional measures.

Article 47 reads: Except as the parties otherwise agree, the Tribunal may, if it considers that the circumstances so require, recommend any provisional measures which should be taken to preserve the respective rights of either party.

Rule 39 reads: (1) At any time after the institution of the proceedings, a party may request that provisional measures for the preservation of its rights be recommended by the Tribunal. The request shall specify the rights to be preserved, the measures the recommendation of which is requested, and the circumstances that require such measures.

After considering the ICSID case law, the majority found that: • Despite the above Article and Rule using the word ‘recommend’ rather than ‘order’, the majority decided that, because it was well settled amongst ICSID tribunals that decisions on provisional measures are binding, the term ‘recommend’ is to be understood as meaning ‘order’.

• Despite the fact that security for costs is not expressly mentioned in the above provisions, the Tribunal was not excluded from issuing such a measure. The majority noted that the broad wording of the provisions left it entirely to the Tribunal’s discretion and, further, when the provisions were drafted in 1965, issues such as third party funding and the shifting of financial risk away from the parties was not and could not have been contemplated. Therefore the omission of a specific reference to security for costs, they felt, should not mean they were precluded from dealing with such matters.

• The requirements for ordering provisional measures were satisfied. The requirements are: (1) That a right in need of protection exists; (2) That exceptional circumstances are present (including urgency and the need to prevent irreparable harm); and (3) The Tribunal in recommending provisional measures must not pre-judge the dispute on the merits.

The right that the respondent asked the Tribunal to protect by ordering security for costs was its right to reimbursement in the event that it prevailed on the merits and was awarded its costs by the Tribunal.

The majority held that this was a procedural right, rather than relating to the subject matter of the dispute and that, contrary to some case law, a procedural right could be protected by provisional measures. It held that the specific right need not exist at the time in order for it to be able to be preserved by the Tribunal.

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The majority considered that the facts of the specific case did constitute exceptional circumstances.

The Tribunal referred back to its own earlier decision in which it required the claimant to pay all advances, which decision should only be made as an exception to the rule, and based its decision on the same factors.

“The majority noted that the broad wording of the

• It was not required, in this instance, to decide whether or not the Tribunal had prima facie jurisdiction before ordering any provisional measures as neither party contested the Tribunal’s jurisdiction in this case.

provisions left it entirely to

Tribunal’s decision to order Security for Costs

were drafted in 1965, issues

The majority found that, in this case, it is right for security for costs to be ordered as a preliminary measure. It based its decision on the following: • There was a material and serious risk that a costs award would not be complied with given the claimant’s history. In previous arbitrations under ICSID this claimant had failed to honour its obligations under costs awards or requests for payment of advances. Since there had been no material change in the circumstances of the claimant since those proceedings, the majority held that there was a serious risk that the claimant would continue to fail to pay.

• That the claimant was reportedly funded by a litigation funder supported the Tribunal’s concern that the claimant would not comply with a costs award as, in the absence of security or guarantees, it was doubtful whether the litigation funder would assume responsibility for honouring such an award.

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the Tribunal’s discretion and, further, when the provisions such as third party funding and the shifting of financial risk away from the parties was not and could not have been contemplated.”

• Given the claimant’s history of not paying costs awards or requests for advances, the majority held that it was inappropriate to wait for the final award before dealing with costs.

• The amount of US$750,000 had been requested by the respondent and the Tribunal saw no reason not to award this amount.

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Dissenting opinion

Litigation funders

Judge Edward Nottingham found that the language of Article 47 and Rule 39 does not properly support the ruling of the majority to order the claimant to post security for costs. The two reasons for his decision are:

As above, the majority referred to the presence of a litigation funder as supporting the likelihood that the claimant would not comply with a costs award, since it was considered unlikely that the unidentified litigation funder would pay the costs unless ordered to do so. In fact, the presence of a funder was the central ground for Gavan Griffiths QC in making his decision to grant the order.

• An order for security for costs was not properly encompassed in the class of provisional measures which may be taken to preserve the rights of the respondent; and • The entry of an order was not in accordance with the provisions, which explicitly stated that the Tribunal may recommend provisional measures.

His dissenting opinion considers the language of Article 47 and Rule 39 in detail and concludes that, amongst other things, the respondent’s right to its costs should the claim fail and should it be awarded such costs, was not a right that existed or could be preserved, because of its contingent nature. Judge Nottingham asserts that, had the drafters of the ICSID convention intended to include in Article 47, or elsewhere, the authority of a Tribunal to order security for costs, it would have included explicit language to do so, particularly given the impact of such orders on investor-claimants’ access to ICSID. Judge Nottingham states that the way in which the power to order and the power to recommend are used in ICSID’s governing documentation shows that there is a clear distinction between the two. Although not relevant to the current proceedings, the ICSID Additional Facility Rules explicitly recognise the distinction. Therefore, in the view of Judge Nottingham, the omission of the term ‘order’ in Article 47 and Rule 39 is intentional.

The claimant had argued that the respondent was also funded by a third party, meaning that it was not the respondent’s money that was funding their defence so, in the event that a costs award was made but not complied with, the respondent would not be immediately out of pocket. However, the majority rejected this, labelling it merely an unsubstantiated suspicion.

Judge Nottingham in his dissenting opinion disagreed with the majority’s reasoning, stating that there was no evidence in front of them concerning the identity of the funder, its financial means nor the arrangement between the funder and the claimant.

Using the mere suggestion of the presence of a litigation funder in the absence of any further information as a reason to award security for costs was, according to Judge Nottingham, mischievous.

In the absence of any guidance from the Administrative Council on the issue of security for costs and funding (which he suggested the administrative council should address), the Tribunal should not have been “using general language of unlimited elasticity to accomplish the result which the Tribunal regards as appropriate.”

Comment This is the first instance of an ICSID tribunal making an order for security for costs. For claimants, there is some relief to be taken from the fact that RSM had a history of failing to honour costs awards or other payments ordered and it is undoubtedly this that steered the majority of the Tribunal in making its decision. It is still only in exceptional circumstances that such an order could be made. However, the Tribunal is the first to have interpreted the powers given in Article 47 and Rule 39 as giving it jurisdiction to order security for costs.

The financial situation of the claimant and its right to bring proceedings is of particular importance in investment disputes as the majority of cases relate to circumstances in which an investor claimant is claiming for losses as a result of the actions of the respondent.

If the respondent were then able to rely on the claimant’s lack of funds to obtain security for costs orders that the claimants would be unable to meet, there is an obvious risk of denying access to tribunals. Some may argue that this is the reason why security for costs is not explicitly set out in the ICSID convention, while it is in the documents of other arbitration institutions, such as the LCIA.

Some may also argue that funding is fast becoming an essential piece of the ICSID regime where, as acknowledged in this decision, the investor-claimants are more often than not impecunious as a result of the situation that gives rise to the claims brought under ICSID. Funding from a third party of good-standing, a member of the Association of Litigation Funders or the equivalent in other jurisdictions, should provide reassurance to a tribunal that the claim would not be spurious, and that provisions for adverse costs (be that obtaining evidence that the claimant could cover that costs, or ATE insurance, or the funder taking on any potential adverse costs risk) would have been made.

As above, Judge Nottingham agreed that the role of litigation funders raised many questions in investment treaty arbitration, but preferred these questions to be resolved by the ICSID Administrative Council as rule-makers, rather than by tribunals through creative textual interpretation.

It is likely that these issues will continue to be faced by tribunals, perhaps warranting consideration by the Administrative Council in future.

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Excalibur – litigation funders liable for indemnity costs On 23 October 2014, Christopher Clarke LJ handed down judgment concerning the costs liability of professional litigation funders in Excalibur Ventures v Texas Keystone & Ors, a US$1.6 billion dispute concerning oil rights in Iraqi Kurdistan, which was tried in the Commercial Court over 5 months.

The claimant, Excalibur, alleged that it was entitled to a 30% share in the rights of four oil fields in Kurdistan.

Lord Justice Clarke dismissed the claim and awarded the defendants their costs on an indemnity basis, saying that the claim had met a “resounding, indeed catastrophic defeat” and had been “an elaborate and artificial construct… replete with defects, illogicalities and inherent improbabilities”. Lord Justice Clarke was highly critical of the way that the case had been conducted by Excalibur.

If the claim had succeeded, some of the funders expected returns of up to £320 million.

Excalibur was a shell company with no assets. A number of different litigation funders (the “Funders”) funded Excalibur so that it could pursue its claim, although significantly, none of those funders was a member of the Association of Litigation Funders of England and Wales (“ALF”). The funders in this case provided £31.75 million of funding to Excalibur.

Accordingly, the defendants applied to join the funders to the proceedings for the purposes of a non-party costs order. The funders resisted this, with some arguing that they were not liable to pay a costs order at all, and others arguing that they were liable to pay a costs order only on the standard but not the indemnity basis.

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Excalibur (through the funders) had previously put up security for the defendants’ costs in the sum of £17.5 million, but because the defendants were awarded their costs of the action on an indemnity basis, a shortfall was likely to arise between the security provided and the defendants’ final recoverable costs after assessment on the indemnity basis.

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The defendants’ applications gave rise to a number of issues that the Court has not previously considered in respect of litigation funding, including: • whether litigation funders should themselves be liable for costs on an indemnity basis; • how the provision of security for costs by the funders in this case might affect the analysis; and • how the Court should distinguish between the different funding contributions of each funder.

Lord Justice Clarke ordered that the funders were liable to pay the defendants’ costs of the action on an indemnity basis. He held that while the funders were not themselves personally responsible for the matters which caused him to order indemnity costs against Excalibur, that was not itself sufficient reason for precluding an order for indemnity costs against the funders in the circumstances of the case.

Although the funders had received and relied on very positive legal advice on the merits of Excalibur’s claim, in Lord Justice Clarke’s view “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.”

Likewise, although the funders were not themselves aware of Excalibur’s unreasonable conduct during the course of the litigation, once they had taken the commercial decision to leave the case in the hands of Excalibur and its solicitors, the funders had to bear the burden of the costs that they caused the defendants thereby to incur, to be assessed on the same scale as applicable to those to whom the funders had entrusted their fortunes. Absent special circumstances, a litigation funder should “follow the fortunes of those from whom he himself hoped to derive a small fortune.”

Lord Justice Clarke recognised that there were public policy considerations if litigation funders were exposed to the risk of costs assessed not only on a standard, but also on an indemnity basis. He did not, however, consider that his decision would send an “unacceptable chill through the litigation funding industry”.

To the contrary, if the decision “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.”

Comment Despite some excitement in the legal press, the decision in Excalibur did not herald a change in Harbour’s business. Nor do we believe it did so for other funder members of ALF. This is because for professional litigation funders like Harbour, the case changes little.

The argument was made on behalf of the funders that to make a costs order on an indemnity basis would have a chilling effect on the industry.

For inexperienced funders, this might well be true.

They had advice from a reputable firm that the case they were funding had good prospects of success, and to their misfortune they accepted that advice without insisting on further enquiries being carried out and information sought.

For funders such as Harbour, Excalibur is precisely the kind of case which our due diligence process is designed to weed out. As Lord Justice Clarke rightly identified, the aim of the funding industry is not to finance hopeless cases, but those with strong merits, and that is a task Harbour takes very seriously.

Harbour’s investment team is comprised of experienced litigation lawyers, and our investment committee is staffed by senior QCs and a former High Court Judge. The funders in Excalibur appear to have made a decision to fund a case that they knew very little about, relying on assurances made by the solicitor.

Leaving aside whether or not the case would have been funded, the position is not significantly changed from that in previous case law.

Since Arkin v Bouchard Lines [2005] EWCA Civ 655, funders have been liable only up to the amount equivalent to the sum which they have invested in the litigation – the so-called ‘Arkin Cap’. Since that judgment was handed down, the possibility of having to pay adverse costs up to the amount of the investment is something that good funders have factored into their calculations.

Whilst Excalibur creates the possibility that adverse costs will creep up towards the upper end of the cap, his judgment does nothing to disturb the upper limit.

Harbour looks to insure adverse costs through its syndicate of ATE insurers, who offer a bespoke policy built on Harbour’s track record of conducting thorough due diligence on claims it funds.

Helpfully for funders that take on previously funded cases, Lord Justice Clarke also held that funders can only be held liable for costs incurred from the time that they agreed to fund a case, rather than being jointly and severally liable for all of the costs, as was argued for by the defendants.

Detractors of litigation funding may cite this case as support for the concerns that they hold. In reality, this was simply the case of an inexperienced funder losing a substantial case. The impact on the rest of the funding industry has been minimal.

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English High Court confirms policy that arbitration awards should be complied with The case of Cruz City v Unitech & Ors [2014] EWHC 3131 (Comm) shows the English High Court confirming the policy that judgments of the English courts and English arbitration awards should be complied with and, if the circumstances require, enforced.

The Claimant had applied to the Court for the appointment of receivers by way of equitable execution over certain assets of the first and second defendants.

The Court made the appointment, taking into account previous law made by the Court of Appeal and Privy Council and the demands of justice when a claimant is faced with a defendant who has made all efforts to resist payment in a number of different jurisdictions.

relation to the first award and the award in that claim was set aside. This made no practical difference, however, as the defendants remained liable to pay under the award in the second arbitration. The sum awarded was just under US$300 million.

Background The claim related to a joint venture through which Cruz City, a Mauritian company, was to invest in a project to clear and then develop slums in Mumbai with Arsanovia, a wholly owned subsidiary of Unitech (one of India’s largest real estate investment and development companies). The second defendant, Burley, is also a wholly owned subsidiary of Unitech.

The Arbitrations and Previous Efforts to Enforce All relevant agreements provided for LCIA arbitration in London. In early 2011, Cruz City commenced two arbitration proceedings. The first arbitration was against Arsanovia and Burley under their shareholder agreement and the second against Unitech under a separate agreement. Arsanovia commenced proceedings against Cruz City seeking to enforce a buy-out.

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Jan S. / Shutterstock.com

The three arbitrations were heard together. The result of the arbitrations was that Arsanovia’s claim in the third arbitration was rejected and Cruz City was successful in the first and second arbitration.

The first and second awards were challenged by the defendants and the challenge was successful in

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As of October 2014 neither defendant had paid any part of the sum awarded. The Claimant applied for the appointment of a receiver over Unitech’s shareholdings in four companies based in India, the Isle of Man and Cyprus. The Claimant’s attempts at enforcement prior to its application for appointment of a receiver had included: commencing proceedings for enforcement of the awards in India; obtaining a final charging order in the Isle of Man; beginning enforcement proceedings in Cyprus; and obtaining an interim worldwide freezing order in Mauritius.

“The Court held that there was no rule which prevented it from making the order sought in relation to foreign assets.”

The defendants had failed to comply with a worldwide disclosure order made by Field J in May 2013 in which the defendants were required to disclose all their assets worldwide exceeding US$1 million. This order was not complied with until the day before a return hearing for a further disclosure request made by the Claimant, on 30 April 2014.

The defendant’s behaviour had given rise to critical comments in judgments from a number of different courts, in particular that of the Deemster in the Isle of Man to the effect that Unitech appeared to be playing tactical games and coming close to abusing the due legal process.

Decision Having first considered its own jurisdiction to grant the order, the Court then applied the principles set out in the cases of Masri v Consolidated Contractors International (UK) Ltd (No 2) [2008] EWCA Civ 303 and Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank & Trust Co (Cayman) Ltd [2011] UKPC 17, amongst others. The Court held that there was no rule which prevented it from making the order sought in relation to foreign assets.

The requirement of a sufficient connection with the English jurisdiction was satisfied by the fact that the defendants had submitted to being bound by an English arbitration award.

Matyas Rehak / Shutterstock.com

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The court based its decision on the following factors: • Unitech held its assets through multiple chains of companies in a variety of jurisdictions. This meant that it was difficult for Cruz City to identify and realise the value in the shareholdings held by Unitech. There was nothing unlawful or improper in the way Unitech held its assets, but it would make the enforcement process complex and allow Unitech the opportunity to act in breach of a freezing order, undetected.

• The impracticability of recovery of the award debt by other processes of execution in the countries where Unitech held assets. For example, although the Cruz City has commenced enforcement proceedings in India, they were advised that such enforcement can take 2 – 3 years and an appeal could take in excess of a further 4 – 5 years. With the defendants clearly ready to take all steps to avoid honouring their obligations, enforcement in India did not provide a quick solution.

• The granting of the order was likely to be an effective remedy. Authority stated that the Court should not appoint receivers if it was likely to be a fruitless remedy, but it was held that in this case there was a real prospect that the order would side-step the obstacles Unitech was determined to place in the way of other means of enforcement.

• Despite the fact that the defendants had showed themselves willing to disobey the Court in relation to the disclosure order, there were indications that the appointment of receivers may stop their open defiance of the Court and force them into acting more reasonably.

“It remains the case that some parties persistently resist and avoid honouring awards made against them.”

• The appointment of receivers would provide valuable support for the pre-existing freezing order.

It would be less easy, if not impossible, for the defendants to move assets around in breach of the freezing order without it being known that they were doing so. When granting the freezing order, Flaux J had found that there was a serious risk of dissipation of assets so the appointment of receivers would provide additional protection against this.

• Considering the actions of the defendants as a whole and despite the defendant’s arguments that the receivers could be appointed by the courts in Cyprus and the Isle of Man, the appointment of receivers by the English court was needed given the defendants’ resolve to place every possible obstruction in the way of the appointment of receivers by the courts in Cyprus, the Isle of Man and all other relevant jurisdictions.

Comment Although the regime in place under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides a framework within which arbitration awards can be enforced, it remains the case that some parties persistently resist and avoid honouring awards made against them. The methods used by these parties can range from bringing about lengthy delays in enforcement proceedings, to moving assets around in breach of freezing orders and to open non-compliance with court orders.

This decision is a helpful reminder of one of the options available when enforcing an award. The tool-chest available to successful parties to enforce awards is plentiful, but some methods are more useful in certain circumstances and care should be taken in deciding which methods to deploy. In this case, the English Court has confirmed that, in such cases where there is sufficient connection to England to justify the exercise of the Court’s power, the Court can appoint receivers against specific assets. This will be a welcome decision for successful parties, while also providing a suitable warning to those who resist complying with awards or subsequent court orders.

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HARBOURNEWS… in brief Harbour sponsored the Bar Choral Society November concert held at Temple Church, followed by a drinks reception for special guests. It was a magnificent evening and we are delighted to have captured the evening in the photographic montage here: www.flickr.com/photos/95618265@N07/sets/72157649032369637/

In other news: Susan Dunn – attended the annual conference of the International Bar Association in Tokyo.

In addition, following Harbour’s successful funding of a Swiss claimant, Susan was interviewed by SRF (a Swiss media company) for a piece they recently aired on litigation funding.

Rocco Pirozzolo and Stephen O’Dowd – were invited to give a presentation on litigation funding to select clients of Crowe Clark Whitehill. Rocco also has the following articles published: “Pressure points” in the Litigation Funding magazine in December; “Damages-based agreements: Failure to launch” in the Law Society’s Civil Justice newsletter in September; and “Collective action funding concerns” on 10 October in the Law Society Gazette.

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and finally‌ We wish our readers a very Merry Christmas, and a prosperous New Year!

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