The Court of Appeal confirmed last month in Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors that the Arkin rule is not binding, and in an unexpected ruling found a litigation funder can be exposed to higher costs than those they committed to when backing a claim.
Facts of Chapelgate
In Chapelgate it was heard that business owner Julie Davey had entered a funding agreement with funder ChapelGate to support her £10m claim. The total funding commitment was set at £2.5m, conditional upon agreement of a costs budget, the conclusion of CFAs with her lawyers, and Davey obtaining after-the-event insurance against any adverse costs order. It was agreed that any money received by Davey from the litigation would firstly repay the ChapelGate funding, then pay the funder's profit share and then pay all outstanding legal and expert fees. Davey would receive the remainder. Davey entered into CFAs with counsel and solicitors, Mishcon de Reya, but did not obtain ATE insurance. ChapelGate then sought to halve its funding commitment while keeping its profit entitlement, and took out its own ATE insurance.
At trial, Mr Justice Snowden dismissed Davey’s claims and ordered her to pay her opponents’ costs on an indemnity basis, with the funder, ChapelGate, joined as a party. Significantly, Snowden J subsequently ordered the funder to pay costs on the indemnity basis without any cap. This was despite the funder arguing its liability should be capped at the overall total of the funding it had provided, on the basis of the decision in Arkin.
What is the Arkin rule:
In the 2005 decision in Arkin, the court had held it was appropriate to cap a commercial funder's liability to the amount of its funding. Although the Arkin cap has since been criticised by Sir Rupert Jackson in his landmark costs review in 2009 it has nevertheless continued to apply in civil litigation, until now.
A new direction:
Contrary to Arkin, in Chapelgate Lord Justice Newey ruled that judges should have discretion to make higher costs orders.
In ChapelGate, the funders submitted that if the Arkin decision was not followed, commercial litigation funders would be discouraged from providing finance in the future if they were held to open-ended costs orders (which would be wrong in principle). The lawyers for the funder further argued it was not for the court to seek to undo what had been settled since Arkin. On the other hand the court also heard submissions that the Arkin judgment was not attempting to lay down a binding rule – instead judges had proposed a solution that might over time become generally accepted.
Ultimately, it was held that funders being forced to watch costs more closely was not contrary to access to justice. Newey LJ stated that a financier in today's climate of litigation funding should be able to protect its position by ensuring the claimant has ATE cover, without having to rely on Arkin. He also stressed that the previous approach of the Court of Appeal was by no means redundant, but should only be relevant where the facts of the case are closely comparable to Arkin.
Newey LJ stated that Snowden J had been right to conclude that judges do not necessarily have to adopt the Arkin approach when determining liability for costs, and a decision should be made in line with the facts of the case. Newey LJ maintained judges have the right to 'retain a discretion and, depending on the facts, may consider it appropriate to take into account matters other than the extent of the funder’s funding and not to limit the funder’s liability to the amount of that funding’.
This ruling has therefore reopened uncertainty about litigation funders’ exposure to punitive orders. Following this decision, funders will no doubt deliberate how they structure and finance their funding in the event litigation is not successful, and litigants need to be alive as to how this will impact the criteria (and cost) for funding claims.
To view last months Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors click here
Trowers & Hamlins regularly work with litigation funders and are well placed to advise you of any associated risks and issues. Please get in touch with the team if you would like to discuss potential litigation funding for your matter.