The High Court removes its cap for litigation funders

The High Court has declined to cap a litigation funder's liability for adverse costs at the amount of funding provided. It confirmed that the so-called Arkin cap is an approach to be considered, not a rule to be followed (Davey v Money [2019] EWHC 997 (Ch)).

Background

The defendants in  Davey v Money were successful in defending various claims brought against them by the claimant, Ms Davey. In order to fund her claims, Ms Davey had entered into a funding agreement with commercial funder ChapelGate Credit Opportunity Master Fund (ChapelGate) on 23 December 2015, originally in the amount of £2.5m in return for the greater of: (i) 2.5 times the committed funding; or (ii) 25% of net recovery.

Chapelgate required Ms Davey to obtain ATE insurance to cover an adverse costs order. Ms Davey did not obtain ATE cover and as a result the total funding commitment was halved to £1.25m. However, the return was still calculated on the basis of the original £2.5m. ChapelGate also protected itself with ATE cover in the sum of £650,000.

In the event, Ms Davey was ordered to pay the defendants' costs, roughly £7.5m, on an indemnity basis.

As a result of Ms Davey's failure to pay, the defendants sought a non-party costs order under s51 of the Senior Courts Act 1981 against ChapelGate. ChapelGate accepted that the order should be made, but argued that its liability should be limited to the extent of the funding it provided, in this case £1.3m, due to the Arkin cap.

What is the Arkin Cap?

The Arkin cap limits a commercial litigation funder's liability for costs to the amount of their investment. It was established in the case of Arkin v Bouchard Lines and was responsible in part for allowing the embryonic litigation funding industry to develop. It has been the subject of criticism, specifically because it could be seen as allowing a funder to reap the rewards of success while benefiting from a cushion in defeat.

The High Court's decision

The Court held that ChapelGate's liability should not be limited to £1.3m by reference to the Arkin cap. Snowden J explored the decision in Arkin, as well as its precipitator the Privy Council decision in Dymocks Franchise Systems (NSW) Pty v Todd, and subsequent decisions and legal commentary, including Sir Rupert Jackson's Final Report of the Review of Civil Litigation Funding in December 2009 which recommended that a funder's liability to adverse costs should be a matter for the discretion of the judiciary in each case.

Snowden J found that he was free to exercise his general discretion as to costs under s51 Supreme Court Act 1981, and could therefore find that ChapelGate should be liable for the full amount of the costs awarded against Ms Davey from the date of the Agreement, irrespective of the Arkin cap. He took into account the following factors:

• ChapelGate had approached its involvement as a commercial investment throughout the litigation;
• The conduct of Ms Davey throughout the litigation had warranted an order for indemnity costs, and ChapelGate had had numerous opportunities to distance itself and chosen not to;
• ChapelGate had been aware that Ms Davey would be unable to meet any potential substantial costs order, which was likely to be far in excess of the sum ChapelGate proposed to invest;
• ChapelGate halved its commitment while retaining the same share of the recovery demonstrating further self-interest in the commercial venture;
• By taking priority in any recovery, ChapelGate was, in the wording of Dymocks, a "real party" with the primary interest in the claim.  Access to justice clearly came second to it receiving of a significant return on its investment; and
• There was no evidence supporting the submission that commercial funders would be discouraged from providing funding in the future.

RPC thoughts

The finding that the Arkin cap is an approach rather than a rule to be applied automatically may leave funders open to liability for the full amount of a successful party's legal costs. From the defendant perspective, that may be welcome news, increasing the prospect of a greater costs recovery, even if the claimant is impecunious.

However, from the claimant and funder perspective, the increased risk of bearing adverse costs is likely to impact the litigation funding market. ATE insurance is frequently part of the funding package; while it may take some time for the full effects to be seen, this decision may result in funders requiring its inclusion more frequently. It may also cause funders to undertake further diligence at the pre-action stage, together with a closer watching brief during the course of the proceedings so that they stay tuned to any twists and turns in the case that may increase their exposure.

On the face of it, this development could suggest that funding will get more expensive as funders need to absorb the cost of higher risk. However, we have witnessed a number of new entrants to the funding market in recent times. So, competitive pressures resulting from an increase in the size of the funder stable, with a larger number chasing a limited pool of cases to fund, may minimise any impact as the funders try to differentiate themselves from one another on a number of factors including review time and, more crucially, price.