The Court of Appeal has confirmed that commercial litigation funders must contribute to a winning defendant's costs on the indemnity basis (rather than the standard basis for costs assessment) and that sums paid by a funder as security for a defendant's costs should be included in calculating the total amount of funding. (Excalibur Ventures LLC v Texas Keystone Inc).

The original Excalibur claim, which was huge ($1.6 billion), speculative, and failed dramatically, with the judge recording "resounding, indeed catastrophic, defeat", had been financed by five funders, all of whom were relatively inexperienced. Given the "egregious" manner in which the litigation was pursued, the Court of Appeal said that it was "unsurprising that the judge directed Excalibur to pay the defendant's costs on the indemnity basis". But the funders in this appeal sought to distance themselves from the way in which the claimant had conducted the claim, arguing that just because the claimant had been ordered to pay indemnity costs they should not have to "follow [its] fortunes", to the extent of paying indemnity, rather than standard, costs. That argument failed.

It was established in a Court of Appeal decision in 2005 (Arkin v Borchard) that funders could be liable for the costs of a winning defendant, but only up to a limit matching the extent of the funder's total financial contribution ("the Arkin cap"). The Arkin cap remains after the Excalibur decision. But, in addition to deciding that within the cap a funder could be liable for an indemnity costs award made against a claimant, the Court of Appeal in Excalibur said that the cap should include both funds contributed directly to a claimant's costs, and those provided as security for a claimant's liability for a defendant's costs. The Court of Appeal saw "no basis upon which a funder who advances money to enable security to be provided by a litigant should be treated any differently from a funder who advances money to enable a litigant to meet the fees of its own lawyers or expert witnesses".

None of the funders in Excalibur was a member of the Association of Litigation Funders (ALF), formed several years ago to represent the interests of funders, and which promotes a Code of Conduct for members. Although the Excalibur funders were not members, the ALF intervened to make representations to the Court of Appeal, particularly in relation to the extent of the role of funders in the day to day running of claims – necessarily limited, they said, to avoid the funder "controlling" the litigation, rendering their involvement unlawful or "champertous".

The Court of Appeal responded to the ALF with remarks, useful for both funders and funded parties, about what responsible funders can be expected to do to monitor proceedings: "rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals" is to be expected, and is responsible, Tomlimson LJ said, and "cannot of itself be champertous". Indeed, he said, "litigation funding is an accepted and judicially sanctioned activity, perceived to be in the public interest".

The Excalibur decision provides useful clarification of a funder's role and the extent of its costs exposure in the course of litigation - welcome both to parties looking to third party funders to assist with payment of their legal costs in appropriate cases, in return for a share in the proceeds of the claim, and to funders themselves.