In a decision which could have a significant impact on the litigation funding and ATE insurance markets, the court in Davey v Money & Ors1 held that litigation funders could be liable for the full amount of an adverse costs order against their funded client.

The costs judgment in Davey v Money arose from a claim brought by Ms Davey against the administrators appointed to her company (the first and second defendants) and the company which appointed the administrators (the third defendant). In order to pursue the claim, Ms Davey required very substantial funding, which she obtained from ChapelGate.

When Mr Justice Snowden found against Ms Davey in the Chancery Court, he ordered that she pay the defendants’ costs, which they claimed were approximately £7.5m. She was unable to do so and the defendants applied for a non-party costs order against ChapelGate pursuant to section 51 of the Senior Courts Act 1981.

ChapelGate admitted that it was liable for the adverse costs order against Ms Davey but argued that its liability should be capped at the level of the funding provided to Ms Davey. In doing so, it relied on what was known as the Arkin cap, a principle arising from the decision of the Court of Appeal in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055. The defendants argued that the Arkin cap was not, in fact, a rule to be applied to all cases where an unsuccessful party was funded, but a decision based on the specific facts of the Arkin case.

The Arkin cap has been the subject of criticism since the decision was made, including from Sir Rupert Jackson, whose views were cited in the judgment. Sir Rupert’s views, expressed in 2009, were that “the criticisms of Arkin are sound. There is no evidence that full liability for adverse costs would stifle third party funding or inhibit access to justice. No evidence to this effect is mentioned in the judgment. Experience in Australia is to the opposite effect… It is perfectly possible for litigation funders to have business models which encompass full liability for adverse costs. This will remain the case, even if ATE insurance premiums (in those cases where ATE insurance is taken out) cease to be recoverable under costs orders…”. He went on to recommend that the rule ought to be changed but no such change was adopted by the courts or enacted in legislation.

In considering whether or not to apply the Arkin cap to the application against ChapelGate, the judge was not in a position to overrule the decision in Arkin, which had been given by a higher court. Instead, he relied on the significant differences in the funding arrangements between Arkin and the instant case. In so doing, he held that ChapelGate was liable for the entirety of the costs order against Ms Davey.

It remains to be seen whether the decision will be appealed on the grounds that the judge ought to have been bound by the decision in Arkin. However at this stage, it appears that the Arkin cap should no longer be regarded as a general rule, but an approach that was suitable on the facts of the Arkin case. The apparent increase in the exposure of funders and their ATE insurers to adverse costs orders could give rise to an increase in the costs of funding and/or ATE premiums, although the market is much more mature now than when the Arkin decision was made.

For further information on the impact of the decision in Davey v Money, please see our earlier article here, written by Nicola Gare, a member of the HFW Funding Committee, for details of which please see our Funding and Financing page.