In a Judgment of significant importance to commercial litigation funders and professional defendants alike, the Court of Appeal has upheld a decision not to apply the so-called "Arkin cap" to limit a litigation funder's exposure to adverse costs.
The Arkin cap takes its name from the decision in Arkin v Borchard Lines Ltd (Nos 2 and 3) ). In that case, the litigation funder was ordered to pay costs incurred by the successful defendant, but only up to the amount of funding it had provided to the claimant.
Commercial litigation funders have since drawn comfort from this, in the belief that if they commit funding to an unsuccessful claim, and become exposed to the successful defendant's costs, they will not be held liable for more than they have paid out.
The Court of Appeal decision in ChapelGate Credit Opportunity Master Fund Ltd v Money & Others, however, now presents a wake-up call for such funders. The Court of Appeal has held that the Arkin approach does not represent a "binding rule" in all cases. Rather, the court's decision as to what, if any, costs order to make against a commercial funder "is in the end discretionary".
In Davey v Money & Others , the joint administrators of Angel House Developments Limited successfully defended proceedings brought against them by the claimant, Ms Davey, who was unable to discharge the costs orders made against her. The administrators obtained a non-party costs order against ChapelGate, the commercial litigation funders who had financed Ms Davey's claim.
At first instance, in assessing the appropriate level of costs to be ordered against ChapelGate, Snowden J. held that he did not have to adopt the Arkin approach, and limit ChapelGate's exposure to the amount of funding it had provided to Ms Davey. Rather, Snowden J. took the view that, in the case before him, "the balance between the principle that the successful party should have his costs, and enabling commercial funders to continue to provide the finance to facilitate access to justice, should be struck differently than it was in Arkin".
On the facts of the case before him, Snowden J ordered ChapelGate to pay the administrators' costs without any "Arkin cap" being applied.
This decision was upheld by the Court of Appeal.
Court of Appeal decision
The Court of Appeal found that "Snowden J was right to conclude that judges do not necessarily have to adopt the Arkin approach when determining the extent of a commercial funder's liability for costs".
The Court of Appeal also took the view that Snowden J's exercise of discretion, in ordering ChapelGate to pay the administrators' costs without any cap, could not be impugned on the facts of the case. In reaching this decision, the Court of Appeal highlighted a number of factors that it had been appropriate for Snowden J to take into account, as follows:
- ChapelGate's funding had not been limited to a distinct part of Ms Davey's costs (as had been the case in Arkin).Rather, ChapelGate appeared to have funded all payments made in respect of Ms Davey's costs.
- If Ms Davey's proceedings had been successful, ChapelGate stood to receive a profit amounting to a multiple of what it had spent.Indeed, Ms Davey would have had to recover more than five times ChapelGate's expenditure, in order to enjoy a return for herself.
- The litigation which ChapelGate chose to facilitate was inevitably going to cause the respondent parties (including the administrators) to incur defence costs greatly in excess of the funding which ChapelGate provided to Ms Davey.
- The administrators did not have the comfort of any ATE insurance cover to meet their costs, because ChapelGate had not insisted that Ms Davey put such cover in place.
Overall, therefore, the Court of Appeal held that it had been appropriate for Snowden J. to focus not only upon ChapelGate's outlay (that being the Arkin approach), but also upon its prospective gains, and the extent to which the application of an Arkin cap would leave the administrators out of pocket.
Interestingly, in ChapelGate, the Court of Appeal recognised that commercial funders, conditional fee agreements and ATE insurance have all become much more established since the Arkin decision in 2005. The Court should no longer be so concerned that the prospect of an uncapped exposure to adverse costs will cause funders to refrain from supporting claims which have good prospects of success. ATE insurance can also more easily be put in place to mitigate such exposure.
Commercial litigation funders' support of complex and expensive claims against professional defendants is an increasing trend. Such funders must now recognise that, if they facilitate a claim that proves unsuccessful, they will be seen as a potential source of costs recovery if the unsuccessful party cannot discharge its obligations.
This emphasises the importance, from the funder's perspective, of treading carefully. It is essential that the merits of a claim are thoroughly analysed and tested at an early stage, and then kept under equally careful review throughout. The potential level of the defendant's costs must also be given detailed consideration at all times. If an appropriate level of ATE cover is not put in place, leaving the successful defendant out of pocket, the litigation funder may face the prospect of bearing substantial, uncapped costs liabilities.