UK: Arkin Uncapped - Court Of Appeal Upholds Uncapped Costs Order Against Funder

In Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors, the Court of Appeal has upheld a decision in which a claimant's litigation funder was ordered to pay a successful defendants' costs on the indemnity basis, without a cap. In so doing, it held that the so-called "Arkin cap" on a funder's costs liability is not a binding rule, and judges can exercise their discretion in applying it.

Background

Non-party costs orders

Under s.51 Senior Courts Act 1981, the court has a general discretion to decide what costs are payable in court proceedings, and by whom. Although usually costs will be borne by the unsuccessful party, this discretion can be exercised to make a different order, including an order that a non-party to the proceedings should pay costs. The established principles on the exercise of this discretion are as follows:

• Costs orders against non-parties are exceptional, meaning "outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense".
• Generally a non-party costs order won't be made against a "pure" funder, i.e. someone with no personal interest in the litigation, who does not stand to gain from it or control its course.
• If however a non-party substantially controls the proceedings, or is to benefit from them, justice ordinarily requires it to pay its opponent's costs if it loses.
• The key question is whether in all the circumstances it is just to make a non-party costs order.

Costs orders against funders

In recent years, as litigation funding has become more prevalent, the courts have made non-party costs orders against commercial litigation funders. In Excalibur Ventures LLC v Texas Keystone Inc for example, the Court of Appeal found that commercial funders should "follow the fortunes" of those they fund. As it found the funded claim had been "based on no sound foundation in fact or law", it ordered the claimant to pay costs on the indemnity basis, and subsequently made the claimant's funders jointly and severally liable on the same basis.

The "Arkin cap"

A commercial funder's exposure to adverse costs orders has however often been limited by what has become known as the "Arkin cap", after the case of Arkin v Borchard Lines Ltd & Ors. In that case, a company which had provided funding for an unsuccessful claimant's expert evidence was ordered to pay the successful party's costs, but capped at the amount of funding it had provided.

The rationale in Arkin was that if a funder who was considering contemplating funding a discrete part of a claimant's case was potentially liable for the entirety of the defendant's costs, that would have a chilling effect on the availability of funding and therefore access to justice.

The Arkin cap was also applied in the Excalibur case, so that although the funder was liable for costs on the indemnity basis, its liability was capped at the level of funding it had provided to the claimant.

The Chapelgate case

In this case, Chapelgate funded a claim against the administrators of a company for breach of fiduciary duty and failing to exercise independent judgement in the administration. Chapelgate originally committed to provide £2.5million of funding, on condition that the claimant obtained a satisfactory opinion from counsel, conditional fee agreements with its legal team, and after the event (ATE) insurance to cover the risk of adverse costs awards. For whatever reason, the Claimant did not however obtain the ATE insurance, and so Chapelgate reduced its funding to £1.25million, while maintaining the same profit share. As a result it stood to get a maximum return of the greater of 500% of the amount it provided or 25% of the net winnings. Chapelgate also had priority on the proceeds of the litigation, so that its funding and profit share would be paid first, followed by the legal advisers' fees, with the residue to the claimant.

In the substantive proceedings in the High Court, the judge dismissed the claimant's claims against the administrators. He found that the claimant had made "serious allegations which were wholly unfounded", and that this took the case well out of the norm. He therefore ordered the claimant to pay the defendants' costs of the proceedings on the indemnity basis.

The defendants subsequently asked for costs orders to be made against the funders. Following the decision in Excalibur (referred to above), the funders did not resist a costs order being made against them on the indemnity basis. They did however seek to argue that, as in Excalibur, the Arkin cap should be applied so that their liability was capped at the amount of funding they had provided (c.£1.25million).

In the High Court, the judge considered that Chapelgate funded the litigation as a commercial venture, and that there was no correlation between the amount it chose to invest and the costs to which the defendants were exposed. He declined to apply the Arkin cap, saying it is "not 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". Chapelgate appealed.

Court of Appeal decision

The Court of Appeal noted that the Arkin cap has been criticised in Sir Rupert Jackson's Review of Civil Litigation Costs: Final Report, but had nonetheless been applied in the Excalibur case and again last year in Burnden Holdings (UK) Ltd v Fielding.

The Court of Appeal concluded:

• The essential question was whether it was just in all the circumstances to cap the costs liability.
• It was possible to envisage situations where rigid application of the Arkin cap would not be just.
• Judges should be able to have regard not just to how much the funder had funded, but also to what it stood to gain from the litigation.
• The Arkin cap is not redundant, but it is not a binding rule - judges should retain discretion to decide whether it is just to apply the cap.

Applying those principles to the present case, the Court of Appeal found the trial judge's exercise of this discretion could not be impugned:

• Unlike in Arkin, Chapelgate had funded the entire litigation.
• It stood to gain a multiple of what it had provided.
• The litigation it funded involved very serious allegations and it was inevitable that the defendants would incur costs in excess of the amount it had funded.
• The defendants' costs were not protected by ATE cover.
• Application of the Arkin cap would therefore leave the successful defendants substantially out of pocket.

What impact will removing the Arkin cap have?

Chapelgate argued in this case that removing the Arkin cap could have a negative impact on access to justice, as funders will be hesitant to provide funding if their potential adverse costs liability is uncapped.

However, the Court noted that Arkin was decided when third party litigation funding was still nascent. It is now a much more established market, and the impact of this decision is likely to be more nuanced than the simple retraction of litigation funding. It will however mean that funders will need to be increasingly circumspect about the cases they fund, and keep those cases under review (without going as far as to control the litigation) to ensure they do not (continue to) fund spurious claims. As the trial judge indicated, "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... I do not see that as contrary to access to justice or any other public policy."

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