The Court of Appeal has confirmed that the 'Arkin Cap' does not automatically apply in cases involving commercial litigation funders.

This means that commercial funders can no longer assume that their total liability for an opponent's costs in an unsuccessful action will be capped at the level of funding they have provided. 

The Arkin Cap

The "Arkin Cap" derives from the judgment the case of Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655 [2005] 1 WLR 3055. In Arkin, a company that had provided funding on a commercial basis for an unsuccessful claim was ordered to pay the winners' costs only to the extent of that funding. The decision was widely interpreted to mean that a funder's liability would be capped at their financial contribution to the case. 

Since the Arkin decision, the Arkin Cap has faced considerable criticism. 

It recently came under attack in the case of Sandra Bailey & others v GlaxoSmithKline UK Limited [2017] EWHC 3195 (QB). In that case, the Defendant's estimated costs to trial significantly exceeded the sum committed by the Claimants' third party funder to funding the litigation. Foskett J held that the Arkin Cap was simply one factor (along with others, including the presence of ATE insurance) to be taken into consideration in the exercise of the Court's discretion to order security for costs under CPR 25.14. On the facts of the case, the Court ordered that the third party funder should provide security for costs in excess of the amount of its funding. 

The ChapelGate litigation 

In the underlying case (Davey v Money [2018] EWHC 766 (Ch)), the professional funder ChapelGate provided funding for the Claimant's unsuccessful claim. The Claimant was ordered to pay the Defendant's costs on an indemnity basis. The Claimant failed to pay them, so the Defendants sought a non-party costs order against ChapelGate. 

ChapelGate contended that its liability under the non-party costs order ought to be limited under the Arkin Cap to the amount of its funding of the underlying litigation (which was £1.25 million). 

First Instance

At first instance (Davey v Money [2019] EWHC 997 (Ch)), Snowden J considered that he was not bound to apply the Arkin Cap "on the different facts of this case". In his view, in Arkin the Court of Appeal had intended that the Arkin Cap might be one approach that could be applied in similar cases; they had not intended to "prescribe a principle of general application" in all cases involving commercial funders. The Court retained a general discretion in relation to costs orders, which should be exercised justly. 

On these facts, Snowden J concluded that there would be an "obvious risk of injustice" if the Defendants had incurred significant costs incurred defending themselves, but could not recover a proportion of those costs owing to private funding arrangement between the Claimant and ChapelGate. He therefore made an order that ChapelGate should pay the Defendants costs on an indemnity basis, without any cap. The Defendants had incurred relevant costs of £4.33 million, a sum significantly exceeding the amount of funding provided in the underlying case.

Court of Appeal 

ChapelGate appealed to the Court of Appeal (Chapelgate Credit Opportunity Master Fund Ltd v Money and others [2020] EWCA Civ 246).

The Court of Appeal unanimously upheld the first instance decision. It agreed with Snowden J that in Arkin the Court of Appeal "was not attempting to lay down a binding rule" applying automatically in cases involving commercial funders, and that the Court retained a discretion in relation to costs orders (including the ability to make orders outside the scope of the Arkin Cap). 

The Court of Appeal did not suggest that the Arkin Cap is redundant: in his leading judgment, Newey LJ commented that "There will, I am sure, continue to be cases in which judges decide that it is right to following the course espoused in Arkin". Newey LJ theorised that "The Arkin "solution" is particularly likely to be relevant on facts closely comparable to those in Arkin, where the funder had "merely covered the costs incurred by the claimant in instructing expert witnesses"". 

However, the Court of Appeal held that Snowden J's decision was reasonable on all the facts of this case, and declined to interfere with it.

In reaching this decision, the Court of Appeal took into account that:

• While in Arkin, the funding provided was limited to a particular element of the case, in ChapelGate the funder provided funding in respect of the whole case. Given that ChapelGate agreed to provide funding relatively late in the litigation, it would have been aware of the merits of the case, and that the nature of the case meant that the Defendants were likely to incur significant costs.
• If the Claimant in the underlying action had been successful, ChapelGate would have reaped a large financial reward (up to greater than 250% of their investment or 25% of the "Net Winnings", depending on the outcome of the case) in priority to the Claimant, meaning that ChapelGate had the primary interest in the claim. 
• ChapelGate was aware that the Claimant had not obtained ATE insurance. ChapelGate's usual practice was to require that a claimant obtained ATE insurance to meet the Defendants' legal costs in the event of an adverse costs order, increasing the Defendant's costs exposure; in this case it waived that requirement. 

Comment 

The decision in ChapelGate means that the application of the Arkin Cap has been significantly narrowed. 

It is potentially good news for defendants of funded claims, who may (if the claim does not succeed, and they cannot recover their costs from the claimant) be able to pursue the funder for uncapped costs. 

The decision is potentially bad news for commercial funders, who can no longer assume that their liability for unsuccessful cases will be capped at the level of funding offered. However, in our experience, sophisticated commercial funders already carry out detailed and ongoing due diligence in relation to the entities and the cases they are provide funding for, and ensure that their clients have adequate ATE insurance protections in place. In practice these funders are unlikely to be too heavily impacted by the ChapelGate decision.

The Court of Appeal seem to have been particularly swayed by the large profit ChapelGate would have made if the underlying claim had been successful: "In the case of a funder who had funded the lion's share of a claimant's costs in return for the lion's share of the potential fruits of litigation against multiple parties, it would not be surprising if the judge ordered the funder to bear at least the lion's share of the winners' costs, regardless of whether the funder's outlay on the claimant's costs had been a lesser figure". This suggests that, going forward, funders who may profit from a high proportion of any damages awarded face an increased risk of uncapped adverse costs orders.

However, as the first instance and Court of Appeal decisions in this case make clear, the question as to costs orders remains firmly in the hands of the Court.