Changing landscape for litigation funders - Arkin Cap lifted by Court of Appeal

12 June 2020

The Court of Appeal upheld a decision that the so-called ‘Arkin Cap’ is not a binding rule but ultimately at the Court’s discretion, in the recent case of ChapelGate Credit Opportunity Master Fund Ltd v Money & Ors.

The Arkin Cap

The Arkin Cap refers to the 2005 Court of Appeal decision in Arkin v Borchard Lines Ltd.  A litigation funder funded the claimant’s costs of expert evidence and a substantial disclosure exercise. The claimant was unsuccessful and was ordered to pay the defendant’s costs. The defendants pursued a Non-Party Costs Order against the funder, however the Court of Appeal limited its liability to the amount they had invested to fund the claim. The Arkin Cap has been applied in subsequent cases but has been the subject of significant criticism.

These criticisms were echoed by Lord Justice Jackson in his Review of Civil Litigation Costs, where he highlighted the injustice that ‘a litigation funder, which stands to recover a share of damages in the event of success, should be able to escape part of the liability for costs in the event of the defeat’. The Arkin Cap was considered to be unjust to both the opposing party who may be left with unrecovered costs, but also to the client who may be exposed to costs liabilities which they could not meet. It was recommended in Jackson’s Final Report that the extent of the funder’s liability be a matter for the discretion of the judge in the individual case.

Despite the criticism and concerns raised, courts continued to apply the Arkin Cap in cases such as Excalibur and Burden Holdings (UK) Limited (in Liquidation) v Fielding.

The recent decision in ChapelGate indicates a shift in judicial attitude.

The Court of Appeal decision

In summary, the litigation funder (ChapelGate) funded an unsuccessful claim against two administrators of a company. The administrators sought, and obtained, a Non-Party Costs Order against ChapelGate due to the losing claimant being unable to discharge the costs order against her. The High Court ordered ChapelGate to pay £4.33 million of the defendant’s costs, despite its funding of the claim being limited to £1.25 million. The order was made on the basis that the Arkin Cap was just one approach that might be adopted in similar cases, rather than a prescribed rule to be applied automatically in all cases involving commercial funders. This approach was upheld by the Court of Appeal.

In reaching their decision, the Court of Appeal focused on the following key points:

  • This was not a case, as Arkin was, of a funder funding only a distinct part of a claimant’s costs. ChapelGate appeared to have funded the entire claim;
  • The funder’s prospective gains - ChapelGate stood to receive in return a profit amounting to multiple what it had spent, and far more than the claimant would have derived from it;
  • The extent to which the Arkin cap would have left the defendants out of pocket – it was inevitable that the respondents would incur costs greatly in excess of the funding which ChapelGate provided and, as the claimant had not obtained ATE insurance, the respondent’s exposure was heightened.

The Court of Appeal concluded the following:

  • The Arkin cap is not redundant and there will continue to be cases where judges consider it appropriate to apply the Arkin cap, particularly where the facts are closely comparable to those in Arkin;
  • The Arkin cap is not binding. Judges retain discretion and the essential question will be whether it is just in all the circumstances to limit the funder’s liability to the amount of funding.

 

The future landscape for Litigation Funded cases

Commercial litigation funding continues to be an increasingly popular method of funding in high value claims which are complex and expensive in nature. However, where these claims are unsuccessful, if claimants are unable to meet the costs liability, funders are at risk of Non Party Costs Orders and potentially being exposed to the full amount of adverse costs. Following the ChapelGate Court of Appeal decision, litigation funders can no longer rely on the expectation that their exposure for costs will be capped. Instead, it will be entirely within the discretion of the Court.

The landscape for litigation funders has changed since the Court of Appeal’s decision in Arkin and litigation funders are now in a position to be able to protect its position by ensuring that either it or the claimant has ATE cover. Now more than ever it is essential that an adequate level of ATE cover is in place to ensure that adverse cost orders can be met and adequately covers the defendant’s total costs.

 

Further information

This blog was written by Charlotte Boswell, Associate Costs Lawyer in our Costs team.

You may be interested in our Litigation Funding Options page and/or our Litigation Funding FAQs.

If you would like further information on the issues raised in this blog, please contact  a member of the Dispute Resolution team or Richard Foss, Head of the department.

 

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