The recent decision in Sandra Bailey & Others v GlaxoSmithKline UK Ltd represents an important development in the law concerning the liability of third party funders for opponents’ costs. In addition to affecting funders themselves, the decision is relevant to parties involved in funded litigation befor the English Courts, or involved in funded LCIA or ICC arbitrations. It is also relevant to those providing or purchasing Afer The Event insurance.
In English legal proceedings, the general rule is that the losing party will be ordered to pay a proportion of its opponent’s costs. Unsurprisingly, unsuccessful parties at the end of costly litigation or arbitration are not always able, or willing, to do so. An English Court, or an LCIA or ICC Tribunal, may therefore order a Claimant to provide security for costs, which involves ringfencing funds so that they will be available to meet any future adverse costs awards.
Funders may also be ordered to provide security for costs. The Court of Appeal decided in Arkin v Borchard Lines Ltd and Others  EWCA Civ 655 that it was appropriate to cap a funder’s liability for an opponent’s costs at the value of the funding facility. This principle is known as the “Arkin cap”. In Sandra Bailey & Others v GlaxoSmithKline UK Ltd  EWHC 3195 however, Mr. Justice Foskett ordered the Claimants’ funder to pay security for costs in the sum of £1.75 million, an amount substantially in excess of its facility commitment of £1.2 million. The Arkin cap was not applied.
The Courts will generally take the existence of After The Event (ATE) insurance into account when determining the appropriate value of an order for security for costs. This is because ATE insurance provides coverage against the risk that a party to legal proceedings will be ordered to pay its opponent’s costs. The Claimants in this case held ATE insurance coverage of £750,000. However, although the Court did take this into account, it was not prepared to discount the security awarded by the full value of the ATE coverage.
Why no Arkin cap?
Several factors resulted in Mr. Justice Foskett’s decision not to limit the funders’ liability to the value of its commitment. First, Arkin v Borchard Lines Ltd and Others was not a case about an interlocutory application for security for costs, but about a funder’s liability for costs at the conclusion of a case. The Judge therefore held, as a matter of general principle, that the issue of whether to apply the Arkin cap could not arise until the conclusion of the proceedings. He also recognised that even at that stage, the Court could – if appropriate – refrain from applying the cap as part of its general discretion concerning costs. It was not therefore appropriate to pre-judge the issue by applying the Arkin cap at an earlier stage. Secondly, the Judge noted that if the Arkin cap was ultimately applied at the end of the proceedings, then no injustice would be done: any security that had been awarded in excess of the Arkin cap would simply be returned to the funder. Conversely, justice would not be done if the Defendant found itself unable to recoup its costs because insufficient security had been posted. The Judge also sought to cater for any possible detriment to the funder by ordering the Defendant to undertake to compensate the funder in the event that the Defendant did not ultimately defeat the claim and it could be shown that the funder had suffered loss as a result of having provided security.
A number of additional factors peculiar to the case also militated against applying the Arkin cap. The funder held no capital and was balance sheet insolvent, the Court noting that funders’ capital adequacy had been highlighted as a general concern by Sir Rupert Jackson in his Review of Civil Litigation Funding in December 2009. Furthermore, the funder relied on its sole shareholder, an individual, for liquidity. It was not a member of the Association of Litigation Funders (the ALF), and the Judge found it difficult to see how the funder would be able to abide by a number of the requirements in the ALF Code of Conduct, including the requirement of immediate access to funds and the ability to pay all debts as they became due and payable. The Court was clearly concerned by these factors and by the funding arrangements themselves. This in itself meant that there was an increased prospect that the Court might refuse to apply the Arkin cap at the end of the litigation.
Why did the Court not reduce the security by the full value of the Claimants’ ATE policy?
One potential benefit of ATE insurance is that it can be cited in response to any security for costs application made against the policyholder. The logic is that, if insurance coverage is available to meet an adverse costs award, the risk of funds being unavailable to meet such an award disappears and so there can be no need for security for costs. There have certainly been a number of decisions where the Court has either declined to order security because a Claimant held ATE cover or only ordered security to the extent that the requisite security exceeded the value of the ATE coverage.
The Court in Sandra Bailey & Others v GlaxoSmithKline UK Ltd took a more nuanced approach, placing reliance on the recent decision of the Court of Appeal in Premier Motorauctions Ltd v PwC LLP and another  EWCA Civ 1872. In that case, whilst the Court of Appeal recognised that “an appropriately framed ATE insurance policy can, in theory, be an answer to an application for security,” it was necessary to assess the risk that the policy could be avoided, for example because of some misrepresentation or non-disclosure by the policyholder. The Judge in Sandra Bailey & Others v GlaxoSmithKline UK Ltd looked at the terms of the ATE policy and noted that it contained no antiavoidance clause. It also contained conditions precedent requiring a proper assessment of the merits by the Claimants and the making of adequate disclosures to the insurer about the prospects of success and likely costs. The Judge expressed concern “that the Claimants’ legal team appear to have had an unrealistic appreciation of the likely level of damages” and referred to the “apparently less than wholly accurate way in which certain things about the funding of the litigation have been expressed”. Taking these concerns into account, the Judge held that there was a risk that the policy might ultimately be avoided by the insurer and, for that reason, disregarded one-third of the value of the ATE policy when calculating the amount of security to be awarded.
This case is best described as an evolutionary step in the law regarding funders’ liability for costs, as opposed to a change in direction. The principle of the Arkin cap remains intact, but the Court in this case did limit and clarify the scope of its application. Parties to funded proceedings should not assume that the Arkin cap will limit a funder’s costs exposure prior to the conclusion of the case – or indeed at all. Parties can also expect the Courts to focus increasing scrutiny on the financial standing of funders when dealing with applications for security for costs. The funders’ membership of the Association of Litigation Funders, and a proven ability to comply with its Code of Conduct, is likely to be important in such cases. It is also now clearer that ATE insurance cannot necessarily be relied upon as a defence to applications for security for costs, even where the value of the policy exceeds the security sought. Courts may look in detail at limitation and exclusion terms within the policy, and can be expected to assess the quality of the protection afforded by the policy as a whole.
Some practitioners and members of the judiciary – including Sir Rupert Jackson – have criticised the Arkin cap on the basis that it might be regarded as overly protective of funders. On the other hand, there is the argument that imposing unlimited liability for costs could stifle the funding market and ultimately impede access to justice. This is an ongoing and more fundamental debate, which has yet to be determined by the Courts.