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Tim Mayer and Jeunesse Mensier write in the ‘Litigation Funding’ Magazine about a judge’s decision not to apply the Arkin cap

The original article is also available for download.

The UK funding market has evolved considerably since its inception in 2009 and is now an established and accepted legal costs and risk management tool. However, the UK market is not subject to any formal regulation and as such, it has largely been left to the courts to shape the parameters of funding in this jurisdiction, one of which is the extent to which a funder may be liable to meet the adverse costs of a successful party when a funded claim fails. This issue has recently come before the English courts in the case of Davey v Money v ChapelGate [2019] EWHC 997 (Ch).

THE ARKIN CAP

Under the CPR, the court has a discretion to make orders for costs against a non-party. In Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, the Court of Appeal was asked to consider the position where funders had provided financing of c.£1.3m for the cost of the experts, and the adverse costs ordered against the claimant were c.£6m. The court limited the funder’s exposure by reference to the limited amount of funding, and the so-called ‘Arkin cap’ became the epithet of choice.

Since it was a case based on its facts, the funding market, and particularly the funder members of the Association of Litigation Funders of England & Wales, viewed the ‘Arkin cap’ with some circumspection, recognising that given a slightly different factual matrix, a funder’s liability could conceivably exceed the amount of funding. Indeed, that view was supported extra-judicially by Sir Rupert Jackson in his Final Report of the Review of Civil Litigation Funding (2009), who opined that there was no basis for such ‘cap’ as a matter of principle, and recommended that rule change or legislation ought to be promulgated making it clear that funders should be exposed to liability for adverse costs in respect of the litigation they fund, with the extent thereof being a matter for the discretion of the judge in any particular case. Despite this recommendation, no formal rules were introduced, but the opportunity to revisit the ‘cap’ presented itself to the High Court recently in the case of Davey.

THE DAVEY JUDGMENT

In Davey, Snowden J handed down a judgment that well and truly confined the notion of an ‘Arkin cap’ to the sartorial bin.

The claimant brought proceedings against inter alios the administrators of her former company and the secured creditor, making serious allegations of breach of fiduciary duty and allegations of serious misconduct tantamount to dishonesty. At the date of the funding agreement substantial costs had already been incurred by the defendants.

The funder originally committed £2.5m of funding, £1m of which was earmarked for the purchase by the claimant of ATE insurance against adverse costs of up to £2.5m. The claimant did not obtain ATE insurance and the funder reduced its commitment by 50%, and waived the claimant’s requirement to obtain ATE, while the funding terms remained the same.

In April 2018, Snowden J dismissed the claimant’s case, rejecting the allegations of breach of duty and misconduct against the administrators. He ordered the claimant to pay the defendants’ costs on an indemnity basis. The defendants’ costs were claimed at c.£7.5m. The claimant was ordered to make payments on account of those costs in the sum of £3.9m; she failed to do so. The defendants subsequently brought an application for a non-party costs order against the funder under s. 51 of the Senior Courts Act 1981. The funder accepted the principle of their liability (standing in the shoes of the claimant), but argued that its total liability should be limited to the overall maximum of the funding provided to the claimant, namely c.£1.275m, relying on the Arkin cap.

In a judgment addressing the costs applications handed down in April 2019, Snowden J made an order against the funder compelling them to pay the defendants’ costs on an indemnity basis from the date of the funding agreement (but not before).

In reaching his decision, Snowden J considered the following to be material:

  1. The funder had financed all the claimant’s legal fees and costs from the date it became involved in the case predominantly (if not exclusively) based on a commercial motive; access to justice was a secondary concern;
  2. The funder conducted its own due diligence on the claim, and the case was well-developed at the point they became involved;
  3. The funder was aware that (i) the claimant would not have been in a position to meet an order for adverse costs, and (ii) that the defendants’ costs were likely to be significant and in excess of the funder’s own investment into the litigation;
  4. There was a risk of injustice to the defendant if the Arkin cap was applied, in circumstances where the defendant had no control over the claimant’s funding arrangements;
  5. Had the claim been successful, the funder would have received a significant profit in priority to the other parties, and as such the funder was the only party with a real financial interest in the case; and
  6. The litigation funding market had evolved significantly since the Arkin judgment and as such the policy reasons which established the Arkin cap were no longer a legitimate concern.

In summary, Snowden J concluded that ‘on the facts of the instant 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’ (emphasis added, paragraph 111 of the judgment).

DAVEY; SOME OBSERVATIONS

Davey confirms the principle that costs (including adverse costs against non-parties) are in the complete discretion of the court and are dependent on the facts. An order against a funder and the extent of that order will depend on the court seeking to strike a just balance between a successful defendant’s legitimate expectation of receiving a costs award in their favour where a claim has failed, and creating a jurisdiction which is hostile to funding.

The facts of Davey were relatively unusual with a number of aggravating factors striking a chord with Snowden J. The claimant’s allegations were speculative, serious and exaggerated and they failed unceremoniously. Applying a costs cap would have shielded the claimant from paying those costs, undermining the court’s assessment of the nature of the claim and conduct of the proceedings.

Not, therefore, an apparent case of a ‘hard case making bad law’.

Perhaps of greater interest to funders were a number of facts relevant to the funding background.

As set out above, during the proceedings the funding terms were amended due to the claimant’s failure to secure an ATE insurance policy. Evidence was given in court that the funder evaluated their potential downside risk by relying on the Arkin cap when the position on the availability of ATE insurance became apparent, in order, in their view, to maintain the same total financial exposure. They also amended the agreement to retain the same potential upside. It appears that the funder itself bought insurance cover to meet an element of the adverse costs risk.

That might be said to have been injudicious given the funding market’s ‘take’ on the Arkin cap (above) and the ultimate extent of the defendants’ costs; indeed, Snowden J remarked, relying on the Court of Appeal’s invitation to funders in Excalibur to undertake ‘rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals’ ([31]) that ‘if the possibility that a funder may not be able to take advantage of the Arkin cap causes funders to keep a closer watch on the costs being incurred … I do not see that as contrary to access to justice or any other public policy’ ([110]).

Accordingly, funders are reminded again that they need to be prepared to engage in due diligence and case management vigorously, short of champerty and maintenance, lest they suffer the consequences. The fact that the claimant’s legal team were evidently convinced of the merits of the claim, describing elements of the evidence as ‘compelling’ and the prospects in respect of some of the causes of action in the 75% range, appears to be neither here nor there.

And that need to engage flows into a rigorous assessment of quantum too, given the waterfall arrangements prevailing between the funder and the claimant. Snowden J rejected the suggestion that the funder ‘could have been seen from the start of its involvement to be the only person with a financial interest in the [c]laim’ ([103]), a view which would have elevated hindsight to a touchstone, but did accept that the funding terms and the waterfall meant that the claimant’s ‘..access to justice came a clear second to [the funder] receiving a significant return on its commercial investment’. The ‘take away’ for funders is that confidence in the realistic quantum range needs to be carefully analysed from the outset, and carefully monitored thereafter.

CONCLUSION

It might be described as setting a new precedent, but the better view is that Davey merely reflects the funding market’s understanding with respect to exposure to adverse costs that has persisted for some time. For the established and reputable funders in the market, it does not therefore require a marked departure from current practice; it merely confirms that a rigorous process and cautious assessment of overall risk is necessary and appropriate, coupled with close case monitoring (particularly on the level of adverse costs) and the need for satisfactory ATE insurance arrangements (or alternative structures with like effect) in order to track the adverse costs risk.

Jeunesse Mensier and Tim Mayer are senior investment officers at Therium Capital Management

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