High Court declines to apply so-called Arkin cap to restrict funder's liability for adverse costs

The High Court has found that a commercial funder was liable for all of the defendants' costs incurred in successfully defending a funded claim, from the date on which the funding agreement was entered into. The court declined to apply the so-called Arkin cap to limit the funder’s liability for adverse costs to the amount of the funding provided to the claimant: Davey v Money [2019] EWHC 997 (Ch).

The decision is significant in finding that the Arkin cap is not a rule to be applied automatically in every case involving commercial funders. Instead it is an approach which the Court of Appeal in Arkin v Borchard [2005] 1 WLR 3055 intended should be considered for application as a means of achieving a just result in all the circumstances of the particular case.

In other words, on an application for non-party costs against a commercial funder, the court retains a broad discretion to decide the extent to which the funder should be liable for adverse costs. That liability will not necessarily be limited to the amount the funder has provided to fund the claim. The case suggests that relevant factors are likely to include the relative financial interests of the funder and the funded party in any proceeds of the litigation.

The court rejected an argument that its refusal to apply the Arkin cap would discourage the future provision of commercial funding, and therefore adversely affect access to justice. The judge commented that if the decision caused funders to take a close interest in the funded litigation, and a closer watch on the costs being incurred, that would not be contrary to access to justice or any other public policy.

Background

The defendants successfully defended the claimant's claims and counterclaims against them, which included serious allegations of breach of duty and improper conduct tantamount to dishonesty. The claimant was ordered to pay each of the defendants' costs to be assessed on the indemnity basis. The defendants sought costs of around £7.5 million and the claimant was ordered to pay £3.9 million on account. She did not make any payment toward such costs.

The defendants sought a non-party costs order against the claimant's commercial funder, ChapelGate Credit Opportunity Master Fund Limited ("ChapelGate"), under section 51 of the Senior Courts Act 1981, which gives the court a broad discretion to “determine by whom and to what extent” the costs of proceedings are to be paid.

The funding agreement had been entered into on 23 December 2015, by which point the defendants had already incurred roughly £3 million of the total £7.5 million in costs.

ChapelGate's total funding commitment under the original funding agreement was £2.5 million, in return for (simplifying somewhat) the greater of 2.5 times the committed funding or 25% of net winnings. It was a condition of the funding agreement that the claimant would obtain after-the-event (ATE) insurance to cover adverse costs. The claimant failed to obtain such cover and the funding agreement was subsequently amended to waive that condition and reduce ChapelGate's total funding commitment to £1.25 million, but with its return calculated on the basis of the original £2.5 million commitment. ChapelGate then purchased ATE cover in the sum of £650,000 to limit its own exposure to adverse costs.

ChapelGate accepted that a non-party costs order should be made against it on the same indemnity basis as the order made against the claimant, but argued that its liability should be limited as a result of the Arkin cap to the overall amount of funding it had provided to the claimant.

Decision

The High Court (Mr Justice Snowden) held that ChapelGate should be liable for the defendants' costs incurred after the date of the funding agreement (23 December 2015) and that its liability should not be limited by reference to the Arkin cap.

Period of liability

The judge rejected the defendants' submission that, because of the way the "waterfall" under the funding agreement was likely to work out in practice, given the value of the claims, ChapelGate was in effect the sole beneficiary of the claims and should be liable for all of the adverse costs without limitation of time, just as an assignee of a claim who was substituted for the original claimant would be liable for all of the costs if the action failed.

The judge was not convinced by the analogy with an assignee of a claim, noting that there is a clear distinction between a person who becomes the litigating party and therefore is primarily liable under the normal costs rules, and one who simply supports litigation and is pursued for costs under section 51 when the litigating party does not pay.

In any event, the weight of authority suggested that there needed to be some causal connection between the involvement of the non-party and the incurring of costs by the successful defendant before a non-party costs order could be made under section 51. Since the defendants' costs prior to 23 December 2015 had been incurred without the involvement of ChapelGate, the costs order against ChapelGate under section 51 should be confined to costs incurred after that date.

Arkin cap

On the question of whether the Arkin cap should apply, the judge referred to the case of Arkin itself as well as subsequent criticisms of the principle, including in Lord Justice Jackson's Final Report on the Review of Civil Litigation Funding in December 2009 and by Mr Justice Foskett in Bailey v GlaxoSmithKline UK Ltd [2018] 4 WLR 7 (considered here).

The starting point for any analysis of Arkin and its potential application in this case was the decision of the Privy Council in Dymocks Franchise System (NSW) Pty v Todd [2004] 1 WLR 2807, and in particular Lord Brown's statement of principle which was expressly adopted and followed in Arkin. This included that the imposition of a non-party costs order under section 51 is ultimately a matter of discretion to be exercised on the basis of what is just in all the circumstances of any individual case.

Although, in Arkin, the Court of Appeal went on to propose a particular approach to cases involving commercial funders, Snowden J agreed with the defendants in the present case that the Court of Appeal should not be understood as having intended to prescribe a rule to be followed in every subsequent case involving commercial funders - particularly against the background of Lord Brown's statement of principle in Dymocks and in light of the wording used by the Court of Appeal in Arkin (which had said it had an "approach" it was about to "commend", and had observed that "if the course which we have proposed becomes generally accepted…").

That conclusion was reinforced, in Snowden J's view, by the Court of Appeal's acknowledgment in Arkin that it was only concerned with a case in which the funder had contributed a limited part of the litigating party's costs, and that it had not had to explore the ramifications of its proposed solution beyond that situation. Snowden J also considered it to be significant that there is no subsequent authority in which the Arkin cap has been treated as a principle to be applied automatically in any case involving a commercial funder.

Snowden J concluded:

"In short, what has become known as the Arkin cap is, in my judgment, best understood as an approach which the Court of Appeal in Arkin intended should be considered for application in cases involving a commercial funder as a means of achieving a just result in all the circumstances of the particular case. But I do not think that it is a rule to be applied automatically in all cases involving commercial funders, whatever the facts, and however unjust the result of doing so might be."

The court's discretion

Snowden J considered a number of factors that were relevant to the exercise of the court's discretion in the present case.

The case involved conduct which warranted an order for indemnity costs, including a "lack of discrimination in the allegations that were made" and elements of speculation and exaggeration, all of which had significantly increased the costs the defendants had been forced to incur. While ChapelGate had not itself directed the way the case was conducted, it had every opportunity to investigate and form a view as to the nature of the claim and the support for the allegations before choosing to fund it.

It must have been obvious to ChapelGate that the claimant was unlikely to be able to pay any costs ordered against her and that the defendants' costs were likely to be well in excess of the amount ChapelGate proposed to invest. Through the amendment to the funding agreement, ChapelGate had effectively halved its funding commitment while retaining its potential share of recoveries, and had removed the requirement to obtain ATE cover. Although there is no obligation on a funder to ensure that there is ATE cover to protect a defendant, this highlighted the fact that ChapelGate was "closely focussed on its own self-interest" in funding the litigation, and there was no correlation between the amount it chose to invest and the defendants' exposure to costs.

In the judge's view, these points illustrated that it was not easy to see why a funder's choice as to the amount of its funding should dictate its costs liability. The amounts provided by a funder may have no correlation whatever to the costs a defendant has to incur defending the claim. In Arkin, the Court of Appeal obviously thought it unjust if a funder whose involvement was limited to providing funding for expert evidence was made liable for all the costs of the action. However, as Snowden J put it:

"I consider that there is an obvious risk of injustice in the other direction if a number of defendants are forced to incur significant costs in defending themselves, but are limited to recovering only a proportion of those costs because of entirely different funding arrangements over which they have no control between the claimant, his funder and his lawyers."

It was also relevant that ChapelGate had negotiated to receive a substantial commercial profit which would have taken priority over any compensation payable to the claimant. The judge commented that the extent to which a funded party is afforded access to justice by retaining a financial interest in recoveries, and the extent to which the funder seeks to obtain a profit, may well be relevant factors in considering any costs order against a funder. Here the judge accepted that the claimant's access to justice "came a clear second" to ChapelGate's return, and therefore ChapelGate was the party with the primary interest in the claim.

Finally, the judge was not persuaded by the funder's policy argument that a refusal to apply the Arkin cap would discourage commercial funders from providing funding in the future, as it would signal a potentially open-ended exposure to adverse costs. He commented that he had been shown no evidence to support the submissions as to the likely effect of such a decision on the funding industry in 2019.

In that regard, the judge said it was important to note the observations of Tomlinson LJ in Excalibur Ventures LLC v Texas Keystone Inc [2016] EWCA Civ 1144 (considered here) as to the way in which a commercial funder is entitled to protect its interests and minimise the likelihood of being exposed to the risk of significant adverse costs orders. In that case Tomlinson LJ rejected an argument that funders who took a close interest in the conduct of litigation would run the risk of being accused of champerty, remarking that a "rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals" is what is to be expected of a responsible funder and may promote, rather than interfering with, the due administration of justice.

In the present case, Snowden J noted, the funding agreement included a provision under which the claimant was to instruct her solicitors to monitor the defendants' costs and to keep ChapelGate informed of them. He commented:

"If the possibility that a funder may not be able to take advantage of the Arkin cap causes funders to keep a closer watch on the costs being incurred, both by the funded party and the opposing side, and if careful consideration is given to employing the mechanisms in the CPR to limit exposure to adverse costs in an appropriate case, I do not see that as contrary to access to justice or any other public policy."