The High Court has recently held in Davey v Money & Anor that the Arkin cap, whereby the adverse costs liability of a commercial litigation funder is limited to the amount of its investment, should not be applied automatically in all cases involving commercial litigation funders. The judge in Davey v Money decided that the Arkin cap did not apply and that the funder should be fully liable for the successful party's indemnity costs since the date of the funding agreement.
The Arkin cap
The concept of the Arkin cap was introduced by the case of Arkin v Borchard Lines Ltd & Ors, which effectively gave the "green light" to the third party litigation funding market in the UK, sidestepping the now largely historic doctrine of champerty on the grounds of improving access to justice.
Having successfully defended the claim, the defendants in Arkin were unable to recover their costs from the claimant and so they sought an order imposing adverse costs liability on the claimant's funder. Weighing the importance of access to justice against the need for successful defendants to be able to recover their costs, the Court of Appeal held that the funder was liable for the defendants' costs, but only up to the amount of their investment. That limitation, which the Court of Appeal said would not apply if the agreement offended the doctrine of champerty, has since become known in the market as the Arkin cap.
However, the Arkin cap has been subject to criticism in the legal market, with Lord Justice Jackson concluding in his 2010 Review of Civil Litigation Costs that funders should face full liability for adverse costs.
Since then, the application of the Arkin cap has been narrowed by the court in a number of decisions. For example, in Excalibur Ventures LLC v Texas Keystone Inc & Ors, a case in which the court upheld an order making the funders liable for adverse costs on the indemnity basis, the Court of Appeal confirmed that funds advanced by a funder to enable a litigant to pay court-ordered security for costs should form part of the Arkin cap.
Further, in Bailey & Ors v Glaxosmithkline UK Ltd, the court considered a security for costs application made directly against the claimant's litigation funder. The judge in that case ordered the funder to put up security in excess of the Arkin cap, albeit having reduced the amount of security because (as is typical in funded cases) ATE insurance cover was in place. In Bailey, the Arkin cap was treated (at least in the context of security for costs) as a relevant, but not determinative factor in the exercise of the court's general costs discretion.
Davey v Money & Anor is the latest instalment in this series of cases limiting the application of the Arkin cap.
Davey v Money & Anor
The Defendants in Davey v Money & Anor had been successful in a prior judgment in defending substantial claims and counterclaims brought against them by Ms. Davey, who was ordered to pay each of the Defendants' costs (totalling nearly £7.5 million) on the indemnity basis. Ms. Davey had been ordered to make payments on account of £3.9 million, but she had failed to make any such payments.
The Defendants applied for non-party costs orders under Section 51 of the Senior Courts Act 1981 against Ms. Davey's commercial funder, ChapelGate Credit Opportunity Master Fund Limited (ChapelGate). Although ChapelGate accepted that a non-party costs order should be made against it (on the same indemnity basis as ordered against Ms. Davey), it argued that its liability should be subject to the Arkin cap and therefore limited to the amount of the funding it had provided, namely £1,275,166.34. The Defendants submitted that the Court of Appeal in Arkin did not intend to lay down a principle of general application to be followed in every subsequent case involving commercial funders.
In his judgment, Snowden J found that he was not bound to apply the Arkin cap. The Court of Appeal in Arkin was "simply setting out an approach that it envisaged might commend itself to other judges exercising their discretion in similar cases in the future". In reaching this conclusion, the judge found that the Arkin cap was in fact 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".
Free to exercise his general discretion as to costs, therefore, the judge decided that ChapelGate should be liable for the full amount of the costs awarded against Ms. Davey from the date on which the funding agreement was entered into, irrespective of the Arkin cap. In exercising his discretion in this way, the Snowden J placed particular weight on the following factors:
- Although it was Ms. Davey and not ChapelGate that was responsible for the conduct of the litigation which resulted in the indemnity costs order (which included speculation, exaggeration and a lack of discrimination in the allegations made), ChapelGate "had every opportunity to investigate and form a view as to the nature of [Ms. Davey's claim] and the support for the allegations which were being made before choosing to fund it". Accordingly, there was "no principled basis upon which the funder can disassociate itself from the conduct of those whom it has enabled to conduct the litigation and upon whom it relies to make a return on its investment", which is exactly what it would be allowed to do if the Arkin cap were to be applied.
- It must have been apparent to ChapelGate that the claimant was unlikely to be able to pay any substantial costs awarded against her and that the defendants' costs were likely to be substantially in excess of the amount ChapelGate proposed to invest. In fact, through an amendment to the funding agreement, ChapelGate had effectively halved its funding commitment (from an initial £2.5 million) whilst retaining the same potential share in recoveries and removing the requirement for Ms. Davey to purchase ATE protection for adverse costs liability.
- Although there is no obligation for a funder to ensure there is ATE cover in place, these facts showed that ChapelGate 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". This was to be contrasted with the position in Arkin, where there was likely to be some comparability between the costs incurred by both sides in relation to experts (which was the extent of the funder's financing).
- Whereas the Court of Appeal in Arkin saw injustice in those circumstances in making a funder liable for all the defendants' costs of the action, in Davey v Money & Anor the judge felt there was "an obvious risk of injustice in the other direction if a number of defendants are forced to incur significant costs in defending themselves, but are limited to recovering only a proportion of those costs because of entirely different funding arrangements over which they have no control between the claimant, his funder and his lawyers."
- Snowden J also saw force in the point that ChapelGate had negotiated to receive a substantial commercial profit which, under the terms of the particular funding arrangements, would have taken priority over any compensation payable to Ms. Davey. Those arrangements showed that "Ms. Davey's access to justice came a clear second to ChapelGate receiving a significant return on its commercial investment" with the result that it was ChapelGate that had the primary interest in the claim.
The judge was not persuaded by the policy argument made by the funder that declining to apply the Arkin cap would discourage commercial litigation funders on the basis of a potentially "open-ended" exposure to adverse costs, stating that "I am not inclined to accept the proposition that, 14 years after Arkin and ten years on from Sir Rupert Jackson's Report, the commercial litigation industry would be unable to factor into its operations the possibility that, in an appropriate case – especially one involving an award of indemnity costs - the Arkin cap might not be applied."
Ultimately, Snowden J found that on the particular facts of the case, "the balance between the principle that the successful party should have its costs, and enabling commercial funders to continue to provide the finance to facilitate access to justice, should be struck differently than it was in Arkin" and that this was not a case in which it would be just to apply the Arkin cap.
Following Davey v Money & Anor, it is now clear that funders will not always be able to benefit from the Arkin cap when the claim they have funded proves to be unsuccessful. When considering an application for a non-party costs order against a funder, the court is free to exercise its broad discretion as to costs, weighing up all relevant factors.
The case comes as a stark reminder for litigation funders of the risk of significant adverse cost exposure when funding potentially unmeritorious cases, especially where the losing party's unreasonable conduct has increased the costs of the matter. This risk emphasises the importance, from the funder's perspective, of conducting thorough due diligence before investing in claims. As the judge in Davey v Money & Anor hinted, the possibility of not being able to take advantage of the Arkin cap may cause funders to keep a closer watch on the costs being incurred in the funded litigation and to consider appropriate mechanisms for limiting their adverse costs exposure in each case.
In addition, the funding market may now look to factor in the increased risk of major adverse costs liabilities at the pre-funding stage, for example when negotiating the price of funding. In practice, however, funders typically protect themselves against the risk of adverse cost liability by insisting that ATE insurance is taken out and, as a result, it may be that an increase in ATE insurance premiums is a more likely consequence of this judgment.