Litigation funding is increasingly used as a means of bringing claims against financial institutions, particularly with large group claims.

However, claims are often defeated in Court, and in those cases many banks – still facing capital and shareholder/investor pressures – can find that the costs of a successful defence are irrecoverable. Some might (in non-thematic issues) be pushed to settle early for that reason.

Historically, funders have benefitted from the "Arkin Cap", which has protected them from large costs awards. But recent case law suggests that this may be changing and with it, some of the strategic and settlement dynamics could change too.

The recent case of Bailey –v- GlaxoSmithKline highlights why Defendants facing third-party funded claims need to look in detail at the funder behind any claim against them.

History of the Arkin Cap

The Arkin Cap has its origins in Arkin v Bochard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055, where the Court of Appeal decided that it was “unjust that a funder who purchases a stake in an action for a commercial motive should be protected from all liability for...costs” where a funded claim fails. However, this prospective liability was capped at “the extent of the funding provided”. Without the cap, it was reasoned, the business model of funders, and availability of funding might be imperilled. The Cap was judged necessary because, without it, a funder would be "deterred by the fear of disproportionate costs consequences" (Court of Appeal in Arkin judgment Para 38) and could restrict access to justice.

Increasingly, though, litigation funding is used not only by those who would otherwise have no ability to pursue a legal claim, but by those who do have the funds, but who want to take legal funding off their own balance sheet. In simple terms, it is not just about access to justice, but accounting.

The existence of the Arkin Cap was criticised in the Jackson review of Civil Litigation Funding (2009), and in the recent case of Excalibur Ventures LLC v Texas Keystone Inc. and others [2016] EWCA Civ 114, there was judicial repetition of concerns that the existence of the Arkin Cap was "over-generous to commercial funders".

Sandra Bailey and Others v GlaxoSmithKline

In this case, Managed Legal Solution Limited provided funding of up to £1.2m, in exchange for a share in any recovery. Justice Foskett (Fosket J) ordered that they provide security of £1.75m, well in excess of that funding. In doing so he considered that the circumstances fell within the range of situations where its application was “inappropriate” and that the Cap was simply one of the factors to consider when determining the amount of any security.

The Cap was not to be applied in an "unquestioned" way, since this would fetter the Court's discretion on costs. He also noted that in Arkin, the Court was concerned with a situation where the funder had funded only a discrete element of the case (document management), and so to hold them liable for all costs might have seemed disproportionate. That was not the case here.

The Court of Appeal in Arkin also highlighted some policy concerns that it felt the Cap would help to achieve:

1. The Cap would naturally limit the funding provided by third parties to a "reasonable amount" which might have "a salutary effect in keeping costs proportionate". Given that the costs claimed in Bailey were between 5-6 times the funding provided (£6.8m v £1.2m), this policy consideration receded as a justification for the Cap;

2. Ensure that professional funders considered with "even greater care" whether the prospects of litigation justified their financial support. Whilst there are many funders with excellent case evaluation processes some recent cases, notably the November 2016 case of Excalibur Ventures LLC v Texas Keystone Inc. (above), where the claim suffered a "catastrophic" defeat leading to indemnity costs, suggest that as a market wide impact, this too is optimistic.

The other factors that led Foskett J to the “broad justice” of his order included the limited financial resources of both the Claimants and the funder. In particular it was undisputed that the funder was “balance sheet insolvent", was reliant for its liquidity on its sole shareholder, and had no capital and so would need to borrow to provide any security ordered. It was also noted that the funder was not a member of the Association of Litigation Funders, a consideration which related to the ALF's rules around capital adequacy and access to funds.

Defendants who are faced with funded Claimants will take some encouragement from this decision. Whilst there are many large and well established funders, membership of ALF remains at only 9, a fraction of the market. There remains a sizable group of smaller funds, whose resources, financial standing and other commitments will now be questioned and scrutinized by Defendants seeking security, for both practical and tactical reasons.