One of the issues that has been floating around for years in the field of litigation funding is the “Arkin” cap, which has been thought to apply to cap the adverse costs liability of third party litigation funders when a case they have funded crashes ignominously to earth and an application for non party costs then follows against the funder.
In brief the “Arkin” cap is a principle that the costs liability of a litigation funder is not co-equal with that of the costs liability of the losing party who received the litigation funding, but rather is “capped” at the amount of money provided by way of funding or to put it another way, by the extent of the investment made by the litigation funder.
The principle has long been the subject of academic and (quasi) judicial criticism and indeed could be said to not be a principle at all : but rather a pragmatic rule of thumb for gauging the funder’s likely liability under a non party costs order
The decision of Snowden J in Davey v Money and others  EWHC 997 (Ch) rejecting the notion that there is such a principle which applies to all cases, and all funders irrespective of the factual circumstances, was accordingly a decision that was always on the cards. It does however represent the first substantive decision, that the Arkin principle is no such thing, despite rumblings that this might be so in other cases.
Snowden J analysed the various considerations in play, when asked to make a non party costs order against a funder who had bankrolled substantial commercial litigation, unfettered by the Arkin cap:
89. In short, what has become known as the Arkin cap is, in my judgment, best understood as an approach which the Court of Appeal in Arkin intended should be considered for application in cases involving a commercial funder as a means of achieving a just result in all the circumstances of the particular case. But I do not think that it is 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.
90. I therefore turn to consider the various factors urged upon me by the parties in this case.
91. The first, and obvious, point is that although the provision of funding by ChapelGate undoubtedly assisted Ms. Davey to be able to take her case to trial, the evidence to which I have referred clearly demonstrates that ChapelGate approached its involvement throughout as a commercial investment. There is, of course, nothing wrong with that as such, but it brings the case squarely within the observations of Lord Brown in Dymocks to which I have referred, together with those of Tomlinson LJ in paragraph 1 of his judgment in Excalibur, namely,
“It is true that the facilitation of access to justice is an incidental by-product of commercial funding, but that is not the essential motivation of the commercial funder. The commercial funder is an investor who hopes to make a return on his investment. For that reason, justice will usually require that, if the funded proceedings fail, the funder or funders must pay the successful party’s costs.”
92. The second feature is that the instant case involved conduct of the litigation by and on behalf of Ms. Davey which I found to be significantly out of the norm, and which warranted an order for indemnity costs. Ms. Davey made some very serious allegations against the Defendants. In the case of Dunbar, these included allegations that they had colluded with APAM to interfere in the conduct of the administration by the Administrators; and in relation to the Administrators it was not clear until a relatively late stage that allegations of personal dishonesty were not being made. I have also set out above the observations that I made to the effect that the lack of discrimination in the allegations that were made, and the elements of speculation and exaggeration which accompanied them, meant that the costs which the Defendants were forced to incur in defending their professional reputations were significantly increased.
93. Whilst, for reasons that I have already given, I do not suggest that ChapelGate itself directed the way that the case was conducted, it nevertheless had every opportunity to investigate and form a view as to the nature of the Claim and the support for the allegations which were being made before choosing to fund it. Specifically, by the time ChapelGate entered into the Funding Agreement, pleadings had long closed, discovery had taken place and witness statements had been exchanged.
94. In such a situation, as Tomlinson LJ remarked in paragraphs  and  of his judgment in Excalibur to which I have referred in paragraph 38 above, a commercial funder chooses which claims to support, its involvement is derivative, and there is 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. But if the Arkin cap were to be applied in the instant case, it would certainly have the effect that ChapelGate would be insulated from my decision that costs should be assessed against it on the indemnity basis to reflect the manner in which the Claim was pursued. That was not a factor that was present or considered in Arkin, where there was no award of indemnity costs. I have also already indicated that I regard Tomlinson LJ’s comments in paragraph  of Excalibur simply to be a statement that the Arkin cap might be applied in a case where indemnity costs were awarded on a derivative basis, not that the cap necessarily has to be applied in such a case.
95. Thirdly, it must in any event have been apparent to ChapelGate (i) that Ms. Davey was most unlikely to be able to pay any substantial costs awarded against her, and (ii) that the costs of Dunbar and the Administrators were likely to be very substantial and well in excess of the amount which ChapelGate itself proposed to invest in the litigation. Appreciation of the former doubtless drove the initial requirement for an ATE policy to be taken out by Ms. Davey, and the latter must have been obvious from the fact that the Defendants had instructed separate sets of lawyers and experts to deal thoroughly with the different cases made against them. Given the allegations and the potential professional and regulatory consequences for the Defendants, there is no basis upon which the Defendants could reasonably have been expected to share lawyers; or to have been limited in their selection of lawyers to those who would have been prepared to work on the same contingency basis as Ms. Davey’s lawyers. It was equally obvious that the Defendants would be motivated to resist the wide variety of allegations made against them strenuously.
96. Fourthly, and following on from the previous point, is the fact that as a result of the A&W Agreement, ChapelGate effectively halved its commitment to the funding of the litigation from £2.5 million to £1.25 million, whilst retaining the same potential share of the recoveries, and removing the requirement for the purchase by Ms. Davey of ATE protection for adverse costs liability to the Defendants. I have no real frame of reference to express any view on whether that was, when compared to industry norms, “greedy” (as Mr. Fenwick QC suggested). I also accept Mr. Marven’s point that there is no legal obligation upon a funder to ensure that an ATE policy is purchased to protect a defendant. Nevertheless, the decision to enter into the A&W Agreement does highlight the fact 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.
97. Both those points illustrate very well the issue that was briefly alluded to by Foskett J in paragraph  of his judgment in Bailey, namely that it is not easy to see why the choice of the funder as to the amount of its funding should dictate the amount of costs it should pay to the litigant’s opponent if the litigation fails. That is because the amounts provided by a funder to a claimant may have no correlation whatever to the costs which a defendant or defendants are thereby caused to incur in defending themselves.
98. On the specific facts of Arkin, there was likely to be some comparability between the costs incurred by both sides in relation to experts. They were limited in number, there was some sharing of experts between the defendants, and none of the experts could act on a contingency fee basis. The Court of Appeal obviously thought that it was unjust if a funder whose involvement was limited to providing funding for the claimant’s expert evidence was made liable for all the defendants’ costs of the action. However, I consider that there is 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. The disparity between the amounts that defendants may be forced to incur, and the amount provided by the funder to the claimant, may, as in the instant case, be accentuated in a case where the claimant’s lawyers are prepared to operate on the basis of CFAs, but the defendants’ lawyers are not.
99. Fifthly, there is force in the point that ChapelGate negotiated to receive a substantial commercial profit which would have taken priority over any compensation payable to Ms. Davey.
100. The conceptual background to this point is that, as Lord Brown indicated in paragraph [25(3)] of the judgment in Dymocks, a costs order can be made against a commercial funder that stands to benefit from its investment in proceedings because it is, in essence, “the real party” to the proceedings. But Lord Brown went on to make the point that it is not necessary that the funder be the only real party to the litigation provided that it is “a real party … in very important and critical respects”. It seems to me that once that threshold requirement has been satisfied, the extent to which a funded party is afforded access to justice by retaining a financial interest in any recoveries from the litigation, and the extent to which the funder seeks to obtain a profit from the litigation, may well be relevant factors in determining both whether to make a costs order against a funder, and if so, for how much.
101. In the instant case, the use of the Waterfall structure in the Funding Agreement meant that ChapelGate had first priority to any recoveries from the litigation. As might be expected, the structure was that ChapelGate was always entitled to be repaid the funding which it had spent on professional fees of up to £1.25 million before any other payments could be taken from any recoveries. There cannot, I consider, be any criticism of that. In addition to recovering its outlay, however, ChapelGate was entitled to a substantial Funder’s Profit Share of any recoveries. That profit share increased with time, so that after commencement of the trial, that Funder’s Profit Share would have amounted to five times the commitment amount – i.e. £6.25 million. Only once such Funder’s Profit Share had been paid would MdeR and counsel have been entitled to receive their CFA uplifts, and only after that would Ms. Davey have been entitled to receive the balance of any compensation recovered in the Claim.
102. Mr. Fenwick submitted that on the basis of Mr. Davies QC’s more conservative opinion of the value of the Claim of around £10 million, and given that AHDL had about £2.5 million of external creditors which would have needed to be paid, the use of this Waterfall structure and these levels of profit for ChapelGate meant that Ms. Davey would have been unlikely to see any material proportion of any recoveries. He submitted that the only prospect of Ms. Davey recovering any significant amounts would have been if the Court had accepted a figure at the higher end of the range of valuation figures for Angel House put forward by Mr. Wolfenden. Mr. Fenwick therefore suggested that, in reality, ChapelGate was the only person with a financial interest in the Claim; and he contrasted that situation unfavourably with the sharing structure used in Arkin, under which Mr. Arkin and MPC ranked together and each received a proportion of any recoveries.
103. It is obviously important to avoid assessing these matters with the benefit of hindsight as to how Ms. Davey’s case and Mr. Wolfenden’s evidence fared at trial. With that in mind, I do not accept Mr. Fenwick’s submission that ChapelGate could have been seen from the start of its involvement to be the only person with a financial interest in the Claim. On the basis of the figures and advice obtained before trial, it was possible that Ms. Davey could have obtained a significant part of a higher settlement or award of compensation, notwithstanding the amounts that would first have been payable to ChapelGate and to Ms. Davey’s lawyers.
104. I also do not have any evidence of comparables and am not in a position to form an objective view as to whether the return on its investment for which ChapelGate bargained was out of the norm for the commercial funding industry.
105. That said, there is undoubted force in Mr. Fenwick’s submission, which I accept, that the use of the Waterfall structure and the level of ChapelGate’s Funder’s Profit Share meant that, if measured in terms of her prospects of receiving compensation, Ms. Davey’s access to justice came a clear second to ChapelGate receiving a significant return on its commercial investment. In that sense, ChapelGate plainly was the party with the primary (i.e. first) interest in the Claim.
106. Finally, I am not persuaded by the policy argument made by Mr. Marven that if I were not to apply the Arkin cap in this case, commercial litigation funders would be discouraged from providing funding in the future, essentially because my decision would signal that they might have an “open-ended” exposure to adverse costs.
107. Mr. Marven essentially invited me to draw that conclusion on the basis of the decision and comments of the Court of Appeal in Arkin. For the reasons that I have endeavoured to explain, I do not think that I am bound to apply the cap which the Court of Appeal suggested on the different facts of this case. Moreover, as the judgment in Excalibur indicates, the litigation funding industry in the UK has developed and moved on significantly since Arkin. For example, the Court in Excalibur had evidence from the Association of Litigation Funders (“ALF”) which was formed in 2011 which gave some insight into the likely effect of the decisions of the Court on the litigation funding industry: see paragraphs  and  of the judgment.
108. In contrast, I had no such evidence to support Mr. Marven’s submissions as to the likely effect of my decision on the litigation funding industry in 2019. In particular, I had no evidence to counter the observations of Sir Rupert Jackson in his Report in 2009 that experience in other jurisdictions suggests that litigation funders are not deterred by the potential of full liability for adverse costs, or his assessment that litigation funders can use business models which encompass full liability for adverse costs. In the absence of such evidence, 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.
109. In that regard it is, I think, also important to note the observations of Tomlinson LJ in Excalibur as to the way in which a commercial funder is entitled to protect its interests and minimise the likelihood of being exposed to the risk of significant adverse costs orders. Tomlinson LJ rejected an argument that funders who took a close interest in the conduct of litigation would run the risk of being accused of champerty. He remarked, at paragraph ,
“…champerty involves behaviour likely to interfere with the due administration of justice. Litigation funding is an accepted and judicially sanctioned activity perceived to be in the public interest. What the judge characterised as “rigorous analysis of law, facts and witnesses, consideration of proportionality and review at appropriate intervals” is what is to be expected of a responsible funder—as the ALF to some extent acknowledges and as did some of the funders in this case in their evidence presented to the judge—and cannot of itself be champertous. I agree with Mr Waller that, rather than interfering with the due administration of justice, if anything such activities promote the due administration of justice. For the avoidance of doubt I should mention that ongoing review of the progress of litigation through the medium of lawyers independent of those conducting the litigation, a fortiori those conducting it on a conditional fee agreement, seems to me not just prudent but often essential in order to reduce the risk of orders for indemnity costs being made against the unsuccessful funded party. When conducted responsibly, as by the members of the ALF I am sure it would be, there is no danger of such review being characterised as champertous.”
110. In this regard, in the instant case it is also notable that ChapelGate’s Funding Agreement included a provision under which Ms. Davey was to instruct MdeR to monitor the Defendants’ costs and to keep ChapelGate informed of them. 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, both by the funded party and the opposing side, and if careful consideration is given to employing the mechanisms in the CPR to limit exposure to adverse costs in an appropriate case, I do not see that as contrary to access to justice or any other public policy.
111. Taken together, the factors that I have identified lead me to conclude 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. In my judgment, this is not a case in which it would be just to apply the Arkin cap.
112. For the reasons set out, I will make a costs order under Section 51 to the effect that ChapelGate should pay each of the Defendants’ costs of the Proceedings incurred after 23 December 2015, such costs to be assessed on the indemnity basis if not agreed.
It remains to be seen if this case will proceed to the Court of Appeal: certainly there is enough at stake to warrant it, given the magnitude of the liability but also more prosaically the interpretation of the binding nature-or not-of Arkin itself.
On any appeal one would have thought that more evidence might be required by the Court of Appeal: instead of assertion or speculation, as to what the consequences of this approach might be, particularly for the attractions of litigating big ticket litigation whether commercial disputes, or class actions, in London.
Assuming that the decision stands, and indeed is adopted in other such cases, the liability of litigation funders to non party costs will have increased significantly: this may be capable of being priced into future transactions, and may be capable of being defrayed by ATE insurance, but it raises an interesting question for those cases currently proceeding towards trial with litigation funding, whether the litigation funders fall to be caught short, should there liabilities be far more extensive than anticipated.
With each new decision in the field of non-party costs, the jurisdiction becomes more and more Balkanised, with such principles as there are, giving way to soft-focus fact sensitive evaluations. In a sense, this latest decision continues a worrying trend in uncertainty since at least the decision of the Court of Appeal in Deutsche Bank v Sebastian Holdings  EWCA Civ 23.