English court: no absolute rule on litigation funders' court costs liability

The appeal court backed High Court judge Mr Justice Snowden's finding that the so-called 'Arkin cap' on funder liability was just one potential approach to costs and 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". In doing so, it denied an appeal brought by ChapelGate, which had provided funding on commercial terms in insolvency proceedings.

Commercial litigation expert Michael Fenn of Pinsent Masons, the law firm behind Out-Law, said the decision was a significant one, as it confirmed the discretion the courts have when ordering a non-party to the litigation to pay costs.

"This is a significant decision for the litigation funding market, and will no doubt cause funders to reflect on their policies, practices and terms," he said. "For example, funding terms where the funder's potential share of recoveries is significantly out of proportion to the amount of its investment may leave funders more exposed to the type of order made in this case."

"Funders are also more likely to require clients to have after-the-event (ATE) insurance against adverse costs, to enhance their due diligence on the legal merits of cases, and to keep a careful eye on the costs being incurred. However, it is unlikely that the better established funders will be deterred by this decision from providing funding to clients with good claims," he said.

The 'Arkin cap' was named for a 2005 Court of Appeal decision, in which a company that had provided funding for an unsuccessful claim on a commercial basis only had to cover the winning side's costs to the extent of that funding. In that case the funder, MPC, had provided funding to cover the costs to the unsuccessful party of employing expert witnesses, preparing evidence and document organisation and review.

The judges in the Arkin case were clear that their approach to costs would not be appropriate in every case. Instead, it was "designed to cater for the commercial funder who is financing part of the costs of the litigation in a manner which facilitates access to justice and which is not otherwise objectionable". The judges noted in their judgment that they had not been required to "explore the ramifications of an extension of the solution we propose beyond the facts of the present case".

While the 'Arkin cap' has been applied in later cases, judges have been careful to note that it is not a universal rule. The cap was also criticised by Sir Rupert Jackson, architect of the civil litigation costs reforms, as "wrong in principle", to the extent that it interferes with the discretion of the judge to award costs against a funder which "stands to recover a share of damages in the event of success".

In this case, Mr Justice Snowden had awarded costs against ChapelGate, which had funded proceedings on commercial terms. ChapelGate had approached the litigation as a commercial investment, and would have received a significant return had the litigation been successful. The funded party, Ms Davey, had pursued her case in a way which was "significantly out of the norm and so warranted an order for indemnity costs", and it was right that a commercial funder should share in the consequences of that.

The judge also found it relevant that ChapelGate had chosen to reduce its stake in the litigation after Davey declined to take out ATE insurance. This showed that it "was closely focussed on its own self-interest in funding the litigation as a commercial venture, and that there was no correlation between the amount that it chose to invest in the litigation and the costs to which the defendants were exposed", according to Mr Justice Snowden.

The Court of Appeal ruled that he had been correct to decide the case in this way.

"I do not consider that the Arkin approach represents a binding rule," said Lord Justice Newey, giving the judgment of the court.

"Judges, as it seems to me, retain a discretion and, depending on the facts, may consider it appropriate to take into account matters other than the extent of the funder's funding and not to limit the funder's liability to the amount of that funding," he said.

In this case, ChapelGate "stood to receive in return [for its funding] a profit amounting to a multiple of what it had spent" had Davey been successful. The judge was also entitled to have regard to the extent that applying the 'Arkin cap' would leave her opponents out of pocket, given the waiver of the requirement that Davey take out ATE insurance, Lord Justice Newey said.