In ChapelGate Credit Opportunity Master Fund Ltd v James Money, the Court of Appeal ordered a funder to pay the full amount of adverse costs.(1) In a significant judgment for commercial litigation funders, the court found that the 'Arkin cap' (which can cap a litigation funder's liability for adverse costs to the amount of funding that was provided) is not a binding rule to be applied automatically in every case involving a litigation funder. Instead, the court considered all of the facts of the case and exercised its discretion in determining whether to cap the litigation funder's liability for adverse costs.
Commercial litigation funder ChapelGate had previously funded a substantial claim in the Companies Court.
Following a lengthy trial, this claim was ultimately unsuccessful and, in light of the nature of the claim and the manner in which it had been pursued (described as "out of the norm"), the claimant was found liable to pay the defendant's costs on the indemnity basis. A substantial costs order was awarded in the defendant's favour. The claimant failed to pay any part of this adverse costs bill, so the defendant sought a third-party costs order against ChapelGate.
ChapelGate accepted that a third-party costs order was appropriate but contended that its liability should be limited to the maximum amount of the funding – namely, £1.25 million. ChapelGate relied on the Arkin cap(2) and argued that it was a binding rule which should be applied in this case to limit its costs liability.
At first instance, Mr Justice Snowden disagreed and, rather than capping ChapelGate's liability at £1.25 million, ordered ChapelGate to pay the defendant £4.3 million.
In reaching this decision, Snowden concluded that the Court of Appeal in Arkin had not intended to create a prescribed rule applicable in every case involving commercial funders. Instead, the court retained a broad discretion in respect of costs orders and, while it may be appropriate to apply Arkin in cases with similar facts (eg, where a funder has funded only a discrete area of a case, such as the costs of expert evidence – as in Arkin), the judge was not bound to apply the Arkin cap.
Having concluded that the court retained a discretion regarding costs, Snowden considered the particular facts of the case and determined that there was a clear risk of injustice if the defendant, having been forced to incur significant costs while defending itself, was limited to recovering only a small proportion of its legal costs because of funding arrangements between the claimant and ChapelGate over which it had no control. Accordingly, on the facts of this case, it was not appropriate to apply the Arkin cap. Instead, Snowden held that ChapelGate should pay an increased sum in legal costs.
The Court of Appeal dismissed the appeal. It found that the Arkin cap was not a binding rule which automatically applies in all cases involving funders and instead held that the court retained a discretion not to apply the Arkin cap, depending on the facts of a particular case.
As regards Snowden's exercise of his discretion, the Court of Appeal found that while a different judge may not have reached the same conclusion, the order made by Snowden was clearly one which was reasonably open to him and therefore should not be disturbed by the Court of Appeal.
The court found that Snowden had been entitled to consider numerous factors, including the following:
- Unlike in Arkin, ChapelGate had funded the whole claim, not just a distinct part.
- If the claimant had won, ChapelGate stood to receive a substantial upside (500% of the amount that it had committed in funding), in priority to any payment to the claimant. In these circumstances, the court considered that ChapelGate could be seen as the party with the primary interest in the claim.
- ChapelGate was aware that the nature of the case being pursued meant that it would inevitably require the defendant to incur legal costs significantly in excess of the amount of funding provided by ChapelGate. It also knew that the claimant did not have after-the-event (ATE) insurance to meet the defendant's legal costs in the event of an adverse costs order (and ChapelGate had not insisted that the claimant take out ATE insurance).
Summarising its assessment, the Court of Appeal stated that:
In the case of a funder who funded the lion's share of a claimant's costs in return for the lion's share of the potential fruits of litigation against multiple parties, it would not be surprising if the judge ordered the funder to bear at least the lion's share of the winner's costs, regardless of whether the funder's outlay on the claimant costs had been a lesser figure.
Significantly, the court also commented on the increasing sophistication and maturity of the commercial litigation funding market, noting that while litigation funding and ATE insurance had been nascent at the time of the 2005 Arkin judgment, they are now much more established. In these circumstances, the court clearly felt that that there was little risk of litigation funders exiting the market because of this judgment (which could give rise to access to justice issues) and that the wide availability of ATE insurance means that funders will remain willing to support good claims.
This is a significant judgment for the commercial litigation funding market which makes it clear that funders cannot assume that their liability for adverse costs will be capped by reference to their funding commitment.
While the Arkin cap may still be applied by the courts on the facts of a particular case, following this judgment, funders which stand to profit from a high proportion of any damages awarded are now exposed to an increased risk of an uncapped adverse costs orders.
However, it will likely remain rare for a costs order to be made against a sophisticated litigation funder, with such orders arising only in circumstances where a funded claimant is both unable to meet its adverse costs bill and ATE insurance has not been obtained.
Accordingly, this judgment is unlikely to have a material impact on larger and more sophisticated funders which already conduct extensive due diligence and ongoing monitoring in respect of potential claims and claimants and invariably require claimants to take out ATE insurance as a condition of any funding agreement. However, this judgment will increase the pressure on the ATE market, which is already struggling to meet demand on the largest cases.