The Arkin cap and liability for costs

Posted on 16th March 2020

The courts have complete discretion regarding costs to achieve justice

The case of Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655, [2005] 1 WLR 3055 (“Arkin”) and the notion that the courts were bound to cap the costs payable by a third-party litigation funder to successful opponents to the amount of funding provided by them (the Arkin cap) has largely been applied without much ado by the courts; until now.

The courts in the case of ChapelGate Credit Opportunity Master Fund Limited v James Money & Ors (“ChapelGate”) have repositioned Arkin and affirmed that the content and extent of third-party costs orders, including those against litigation funders, should be entirely at the discretion of the court and a “means of achieving a just result in all the circumstances of the particular case” (emphasis added).

In his February 2020 judgment – unanimously agreed by the other two Lord Justices – Newey LJ (sat in the Court of Appeal; [2020] EWCA Civ 246) stated that, although the Arkin cap was both widely applied by the courts and therefore relied upon by litigation funders, it did and does not – contrary to the belief of the investment manager of the litigation funder in ChapelGate – represent a binding rule.

Why did the Arkin cap persist for almost 15 years and what has changed?

Newey LJ highlighted the policy objectives that the Arkin cap served for enabling litigation funders to “provide the finance to facilitate access to justice” for impecunious claimants whilst “third party funding of litigation was still “nascent””.

Now, however, the Arkin cap should be seen as a fading beacon that has served its purpose, given that the market in which litigation funders, litigants, lawyers and litigation insurers operate has now ‘grown up’. ChapelGate, therefore, announces the courts’ view that litigation funders:

  • have strolled off the proverbial Ark that the Arkin cap represented for them;
  • should no longer be considered a ‘protected species’; and
  • some of their number – such as the litigation funder in the present case – should be considered an ‘invasive species’, driven by commercial considerations putting at risk the native concern and purvey of the courts, ‘justice’.

The Court’s exercise of its discretion with regards to litigation funders

Newey LJ dug back into the authorities and pulled out (from the Court of Appeal in the Excalibur Ventures case, [2016] EWCA Civ 1144, [2017] 1 WLR 2221) Tomlinson LJ’s:

  • “expressed scepticism about whether the imposition of a requirement to pay costs on an indemnity basis would have an adverse impact on access to justice”; and
  • remarks – without criticism, but as a mere statement of the reality of things – that litigation funders are:
    • 1. making an investment; and
    • 2. are motivated by largely commercial considerations.

The courts in ChapelGate commended the consideration of the following factors for deciding “the balance between the principle that the successful party should have its costs, and enabling commercial funders to continue to provide the finance to facilitate access to justice” when ordering third-party costs against litigation funders:

  1. The approach of the funder to its involvement in the case;
  2. The conduct of the litigation, whether it was significantly out of the norm to warrant indemnity costs and the opportunity the funder had to form its own view as to the nature of the claim and support for the allegations;
  3. How apparent it would have been to the funder that:
    • 3.1 the claimant(s) could not pay any substantial costs awarded against them; and
    • 3.2.the costs of the defendant(s) were likely to be substantial.
  4. The extent to which the funder was focused, whether to the potential cost of the defendant or otherwise, on its own self-interest “in funding the litigation as a commercial venture”;
  5. The terms of the funding agreement, in particular whether the funder had “negotiated to receive a substantial commercial profit which would have taken priority over any compensation payable to [the claimant]”;
  6. The extent to which the disapplication of the Arkin cap (or, possibly, any decisions in respect of costs the court may be contemplating) discourages commercial litigation funders from providing funding in the future.

ChapelGate and its implications for litigation funders and claimants

In reference to the litigation funder (and the claimant) in the instant case, Newey LJ found that the courts were “right to see ChapelGate as “the party with the primary (i.e. first) interest in the Claim” and to consider that Ms Davey’s access to justice “came a clear second to ChapelGate receiving a significant return on its commercial investment””.

The Courts placed primary reliance on the funding agreement between Ms Davey and ChapelGate (the litigation funder), in particular the terms that allowed Ms Davey to proceed without after-the-event insurance (‘ATE’) and for ChapelGate to recoup “a profit amounting to a multiple of what it had spent”. As to the latter point, Newey LJ found that “Ms Davey had to recover from the respondents more than five times ChapelGate’s expenditure to have any prospect of keeping anything for herself”.

The courts were silent on whether the funding agreement between ChapelGate and Ms Davey amounted to ‘maintenance’ (the improper support of litigation) or ‘champerty’ (an aggravated form of ‘maintenance’) and, therefore, was an unenforceable contract (pursuant to s.14(2) of the Criminal Law Act 1967).

So where does that leave litigation funders and claimants without ATE?

Unscrupulous or inept litigation funders who do not conduct proper due diligence and / or do not build sustainable business models that encompass full liability for adverse costs may well find themselves quickly in trouble and, in the worst case scenario, no more.

Presently, the Association of Litigation Funders is charged with administering self-regulation of the industry in line with the voluntary Code of Conduct for Litigation Funders. As such, successful parties in litigation may quickly find themselves significantly out of pocket.

Where that litigation funder dissolves or otherwise cannot make good on its liability under a third-party costs order, a claimant without ATE – whether affluent or not and who involves a litigation funder in order to afford or otherwise share the risk of the litigation – may also find him or herself significantly out of pocket, as the court seeks to achieve justice in the case.

Presumably, this will raise deeper questions for all concerned, including ATE insurers, regarding the conduct of a case, the involvement of the third-party funder and the true cause of the successful defendant’s costs or ‘losses’.

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