High Court refuses to apply the so-called Arkin “cap” to adverse costs order against litigation funder

In one of the first decisions to consider the application of the so-called Arkin “cap” following the Court of Appeal’s decision in Chapelgate Master Fund Opportunity Ltd v Money [2020] EWCA Civ 246, the High Court has once again made a third party costs order against a litigation funder, and refused to cap that order: Laser Trust v CFL Finance Ltd [2021] EWHC 1404 (Ch).

Laser Trust had previously obtained three costs awards in its favour against CFL Finance Limited (CFL) in litigation where CFL had been funded by Colosseum Consulting Limited (Colosseum). CFL failed to pay a significant proportion of the costs which it had been ordered to pay. Laser Trust therefore applied for a third party costs order against Colosseum, seeking the remainder of the funds owed.

The court made the costs award against Colosseum and did not apply a cap on the costs to be paid by it. In reaching its conclusion regarding the Arkin cap, the court held that the nature of Colosseum’s interest in the proceedings was so great that the cap should not apply, commenting that Colosseum had a “massive” degree of control. It is not clear whether the court was referred to Chapelgate when considering the cap but, to the extent the decision suggests that there needs to be a high threshold of funder interest in order to dis-apply the Arkin cap, that would not be consistent with the Court of Appeal’s conclusion in Chapelgate.

The decision in Chapelgate confirmed that the Arkin cap is not a binding rule, that the court retains a broad discretion as to the extent to which a funder should be liable for adverse costs, and that it need not limit the funder’s liability to the amount of funding provided (see our blog post: Court of Appeal confirms funders’ adverse costs liability not limited to amount of funding provided: Arkin “cap” not a binding rule).

Damien Byrne Hill
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Ceri Morgan
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Court of Appeal clarifies that cross-undertakings should rarely be required as a condition of security for costs

In a marked shift from previous first instance decisions, the Court of Appeal has provided guidance on the circumstances in which a defendant seeking security for costs may be required to provide a cross-undertaking in damages: Mr Nigel Rowe & Ors v Ingenious Media Holdings & Ors [2021] EWCA Civ 29.

The court held that cross-undertakings should only be required as a condition of security for costs in “rare and exceptional cases” and, where the claimants are funded by a commercial litigation funder, “even rarer and more exceptional cases”. A number of first instance decisions which had indicated an emerging practice of cross-undertakings being generally required (including a decision in the RBS Rights Issue Litigation, considered here) should no longer be followed.

The court commented that it is critical to the business of litigation funders that they are adequately capitalised such that they can meet any potential liabilities arising from the litigation they choose to fund. It follows that there should rarely be any need for security from a “properly run” litigation funder, and disallowing cross-undertakings where security is required from a litigation funder “can be expected to incentivise improvements in the way in which the commercial litigation funding market operates”.

The court also suggested that, if there were to be a new practice in this area, it would be best developed by primary or delegated legislation, particularly in light of the likely effects on the litigation funding market and the potential engagement of considerations of access to justice.

For a more detailed analysis of the decision, see our litigation blog post.

Costs recovery when you win – guidance from recent cases

One of the key features of the commercial litigation landscape in England and Wales is that costs generally follow the event, creating a disincentive for claimants to commence unmeritorious claims given their exposure to the defendant’s legal costs if the claim ultimately fails. This is also true (indeed, potentially even more so) if, as is increasingly the case, a claim is backed by a litigation funder and/or the claimant has obtained cover in the after the event insurance market for that exposure. How much of the defendant’s costs can be recovered from the unsuccessful claimant is an important consideration for claimants, insurers, funders and, of course, defendants, but is largely a matter of discretion on the part of the court following its determination of the substantive issues. Where the claim is defeated comprehensively, all other things being equal, defendants can reasonably expect to receive a significant proportion of their actual costs (subject to those costs being reasonably incurred). However, particularly in more complex claims, where the claimants are able to point to certain issues on which they were successful, arguments might be run that the court should exercise its discretion to reduce the defendant’s ability to recover its costs.

A couple of recent cases have shed some light on the approach that the courts will adopt when faced with such arguments and provide useful guidance to defendants in managing their expectations of recovery in cases where costs following the event is less straightforward to apply.

The general rule

Pursuant to CPR 44.2(2)(a), the general rule in respect of orders for costs is that costs follow the event (i.e. the unsuccessful party should be ordered to pay the costs of the successful party).

However, pursuant to CPR 44.2(2)(b), the court has discretion to make a different order. Moreover, CPR 44.2(4) directs the court, in deciding what order (if any) to make about costs, to have regard to a number of matters including whether a party has succeeded on part of its case, even if that party has not been wholly successful.

Notwithstanding the discretion that the court undoubtedly has, there is a line of reasoning which suggests that it ought not to be exercised too readily for fear of undermining the rationale for the general rule. Most notably, in Fox v Foundation Piling Ltd [2011] EWCA Civ 790, Jackson LJ criticised the “growing and unwelcome tendency” of judges to depart from the general rule because of “the uncertainty which such an approach generates”.

Lloyds/HBOS Litigation

The Lloyds/HBOS Litigation provides a very good example of a case where it was open to the unsuccessful claimants to attempt to point to aspects of the judgment that went in their favour and say that this justified the court departing from the general rule and reducing the amount of costs which the defendants could recover. This is because, whilst the claim failed in its entirety, the court did find that, in two respects, the disclosures which Lloyds made in its shareholder circular about the acquisition of HBOS were deficient. Please see our blog post for more details on the Lloyds/HBOS Litigation.

In the consequentials hearing, the claimants’ argued that the costs award in favour of the defendants should reflect the fact that, in these two respects, the defendants had been found to have breached their disclosure duties. However, the trial judge comprehensively rejected this approach (Sharp v Blank & Ors [2020] EWHC 1870 (Ch)). In doing so he made the following observations, which are particularly useful in providing guidance on the correct approach in such circumstances:

  1. It is a commonplace that a successful party will not succeed on every aspect of its case. But notwithstanding that very frequent occurrence in litigation, the general rule still applies. Costs are determined by reference to overall success. Here, the defendants had completely defeated the claims which were made.
  2. A degree of caution is needed against a too-ready departure from the general rule for the reasons explained by Jackson LJ in Fox.
  3. There is no reason in principle why a party who succeeds in establishing one element of his cause of action but fails to establish the others should be regarded as partially successful. The cause of action should be viewed as a whole – here breach was but one element of the cause of action. The claimants totally failed to prove that the breaches which were found were causative of any loss since the judge found that the acquisition would have proceeded in any event.
  4. Given the breadth of the attack, which extended to the recommendation given by the directors (which was found not to have been negligent) and well beyond the two disclosure breaches which were made out, the claimants’ degree of success in this case was in fact small.
  5. Even the measure of success achieved by the claimants was so achieved on a fine balance – the judge’s findings of breach were far from clear cut.
  6. It is, of course, not the law that a successful party can only be deprived of the costs of an issue if he has unreasonably resisted that issue any more than it is the law that he should be deprived of the costs of the issue simply because he lost it. In singling out an issue for separate treatment by way of costs the court must look for some objective ground (other than failure itself) which, alongside failure, distinguishes it from other issues and causes the general rule to be disapplied.

Terracorp Limited v Mistry & Ors [2020] EWHC 2623 (Ch)

A further example is found in the recent decision of Mr Justice Miles in Terracorp Limited v Mistry & Ors [2020] EWHC 2623. This decision followed an appeal by the claimant of the first instance decision of HHJ Johns QC.

At first instance, the defendants in Terracorp were successful overall in defending the claim. However, they ran a number of unsuccessful defences and counterclaims, which the claimants estimated took up to 85% of the court and preparation time. As a result, the claimant sought an issues-based costs order, with the defendants being required to pay 90% of their own costs.

In his costs judgment, HHJ Johns QC referred to the relevant provisions of CPR 44.2 and cited a helpful summary of the applicable principles in Sycamore Bidco v Breslin [2013] EWHC 583 (Ch):

  1. In commercial litigation where each party has claims and asserts that a balance is owing in its own favour, the party which ends up receiving payment should generally be characterised as the overall winner of the entire action.
  2. In considering how to exercise its discretion the court should take as its starting point the general rule that the successful party is entitled to an order for costs.
  3. The judge must then consider what departures are required from that starting point, having regard to all the circumstances of the case.
  4. Where the circumstances of the case require an issue-based costs order, that is what the judge should make. However, the judge should hesitate before doing so, because of the practical difficulties which this causes.
  5. In many cases the judge can and should reflect the relative success of the parties on different issues by making a proportionate costs order.
  6. In considering the circumstances of the case the judge will have regard not only to any Part 36 offers made but also to each party’s approach to negotiations (insofar as admissible) and general conduct of the litigation. The conduct of the parties, both before and during the proceedings, is capable of being relevant.
  7. In assessing a proportionate costs order the judge should consider what costs are referable to each issue and what costs are common to several issues. It will often be reasonable for the overall winner to recover not only the costs specific to the issues which he/she has won but also the common costs.
  8. The fact that a party has not won on every issue is not, of itself, a reason for depriving that party of part of its costs.
  9. The reasonableness of taking a failed point can be taken into account.
  10. The extra costs associated with the failed points should be considered.
  11. One still has to stand back and look at the matter globally, and consider the extent, if any, to which it is just to deprive the successful party of costs.

Ultimately, in a decision which demonstrates the uncertainty that the discretion can introduce to the general rule, HHJ Johns QC awarded the defendants only 50% of their costs on the basis that the failed defences which the defendants ran accounted for a large part of the trial (albeit he did not accept that they took as much time as was contended by the claimants). The judge reached this conclusion even though he did not consider that the defendants were unreasonable in running those defences.

The claimant was granted permission to appeal on the question of whether a proportionate order of 50% of the respondents’ costs was unjustifiably high and therefore wrong, given that the appellants were not awarded any of their costs for the issues on which they succeeded at trial. Mr Justice Miles dismissed the appeal, finding that an appellate court will only interfere if satisfied that the judge’s decision was plainly wrong, emphasising the fact-dependent nature of the assessment which the trial judge will be conducting.

Harry Edwards
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Sarah Penfold
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Lloyds/HBOS Litigation: Consequentials Judgment

Mr Justice Norris has now handed down judgment following the consequentials hearing in the landmark Lloyds/HBOS Litigation: Sharp & Ors v Blank & Ors [2020] EWHC 1870 (Ch). Norris J resoundingly refused permission to appeal the judgment on liability and made a number of interesting findings on the adverse costs position of the claimants, and the litigation funders who backed the claim, following their failure.

The findings are split into two main parts:

  1. Costs
  2. Permission to Appeal

Costs

Should the costs award be determined by reference to overall success?

The court considered whether, in light of the outcome of the case, there was any reason for departing from the general rule that costs are to be determined by reference to overall success.

The claimants argued that they should only be required to pay 60% of the defendants’ costs on the basis that they “succeeded” on two issues; namely that the defendant Directors were in breach of a duty of care in respect of two issues which the judge had held ought to have been disclosed. The claimants submitted that the defendants should have conceded the case on the disclosure duty and that, had they done so, costs would have been saved.

The court firmly rejected these arguments however. Norris J said that “there is no reason in principle why a party who succeeds in establishing one element of his cause of action but fails to establish the others should be regarded as partially successful”. Given the breadth of the attack made by the claimants against Lloyds and its Directors (which included both allegations of a number of disclosure defects and also an allegation that the recommendation given to shareholders to vote in favour of the acquisition was made negligently), their degree of success was in fact small. Moreover, the claimants failed to establish that the breaches were causative of any loss, or indeed that any loss was suffered. Even the points on which they were successful were finely balanced.

In singling out an issue for separate treatment by way of costs the court held that it must look for “some objective ground (other than failure itself) which alongside failure distinguishes it from other issues and causes the general rule to be disapplied”. Such a distinctive ground may include:

  1. the comparative weakness of an argument (even if not unreasonably maintained);
  2. the necessity for particular evidence relevant only to that issue; or
  3. extensive and intensive legal argument directed to that issue which gives it an especial significance in the costs context.

The court held that such a factor is missing in this case. As such, the general rule was found to apply, and costs will follow the event.

The liability of litigation funders to cover costs

Therium, the claimants’ litigation funder, accepted in principle that it was liable to pay costs awarded against the claimants. However, it submitted that it should be liable only

  1. to the extent that the Claimants did not satisfy the adverse order; and
  2. to the extent of the funding that Therium actually provided (i.e. subject to “the Arkin cap”: see Arkin v Borchard Lines Ltd [2005] 1 WLR 3055).

In an order which reflects the realities of the litigation funder’s role in group litigation such as this, the court found that Therium’s liability ought to be joint and several with the claimants’ own.

The court considered the recent Court of Appeal decision in Davey v Money [2020] 1 WLR 1751 on the application of the Arkin cap, noting that it “is not a binding rule, but simply guidance given to individual judges, who retain a complete discretion in relation to third party costs orders”, but ultimately withheld from making a decision regarding the application of the Arkin cap to this case at this stage given that the interim payment which he ordered was below what would have been the Arkin cap in this case.

“Risk-free” shareholder litigation

The judgment acknowledges that this may have been a case in which many of the claimant shareholders thought that they were “litigating risk-free”. However the judgment makes clear that this was “most unfortunately” not the case:

  1. the ATE insurance cover which was meant to protect the claimants from cost risk fell short of the defendants’ costs;
  2. the level of ATE insurance cover which had been put in place was affected by the insolvency of some of the insurers;
  3. the claimants had failed to cover the risk that interest would be awarded on the defendants’ costs (see further below); and
  4. pursuant to the Group Litigation Order, the court held the claimants severally liable for any costs awarded to the defendants.

Interim costs

The court awarded interim costs comprising of (a) 50% of the incurred costs identified in the cost budget; 90% of the budgeted costs; and (c) VAT thereon. In making this finding the court followed MacInnes v Gross [2017] 4 WLR 49 which held that:

  1. the approved costs budget almost always provided the starting point for assessing a payment on account, because the costs management process had established it to be a reasonable and proportionate sum; and
  2. a discount of 10% was the maximum deduction appropriate in a case where there is was an approved costs budget.

Interest on costs

The court considered whether it should award interest on pre-judgment costs. The claimants argued that it should not because the Defendants did not signal an intention to claim pre-judgment interest on costs at any time when costs budgets were under consideration, and a possible claim for interest was not factored in to the level of ATE cover obtained.

However, the court found in favour of the defendants noting that “it was ultimately for the Claimants to decide against what risks to insure and what risks to bear themselves. A claim for pre-judgment interest on costs is commonplace, and it was for the Claimants to decide whether any protective measures were required, not for the Defendants to call for them”.

Permission to Appeal

The court resoundingly rejected the claimants’ application for permission to appeal the judgment. In doing so, the court clarified findings made in the judgment handed down on 15 November 2019. Given that the court had found there to be two breaches of disclosure duties, but that those breaches were not causative of any loss, in order to successfully appeal the judgment, the claimants would need to overturn the court’s findings on both causation and loss, findings which the defendants alleged were factual, as opposed to legal.

In its November 2019 judgment the court held that the existence of both the repo facility entered into between Lloyds and HBOS (the Repo), and the Emergency Liquidity Assistance (ELA) facility being drawn upon by HBOS ought to have been disclosed. The judge also formulated hypothetical disclosures which in his view would have met the disclosure requirements. Those hypothetical disclosures did not contain details of the features of the Repo and ELA. The claimants contended that the court’s conclusions in that respect were wrong as a matter of law, and that the details ought to have been disclosed. The claimants then argued that the court’s findings in relation to causation were dependent upon its conclusions regarding the limited nature of the disclosures, and were therefore flawed.

The court accepted that the actual disclosures which could have been made in relation to the Repo and ELA may have been different to the hypothetical disclosures it had formulated in its judgment in November 2019, but did not accept that the conclusions it had reached were “plainly wrong” (which is the test that the defendants submitted to be the correct threshold for re-assessments by the Court of Appeal of intensely complex mixtures of fact and law).

However, more importantly, the court made clear that the findings it had reached regarding the causative effects of disclosure of each of the repo facility and ELA were not dependent upon the precise nature of the disclosure which was made: “The evidence assembled by the Claimants and the case put to the Defendants related to “detailed disclosure”: and my conclusion rests on an analysis of that evidence”.

The claimants also argued that the judgment did not consider whether the Repo or ELA constituted material contracts pursuant to the Listing Rules. The court clarified that it did not consider that a breach of the Listing Rules can found any claim for damages by an individual against a listed company or the directors of a listed company.

The claimants also sought permission to appeal on the basis that the court erred in law in holding that they had failed to make out a case on loss. However, the court explained in this judgment that the claimants’ loss case was built around their “recommendation case”, which was a part of the case in which the claimants had failed to establish there had been a breach (a conclusion which the claimants were not seeking to appeal). The court did not consider that the claimants had provided it with evidence establishing losses arising solely from disclosure breaches.

Finally, the court addressed the claimants’ argument that there was a “compelling reason” to grant permission to appeal because the decision sets a standard for disclosure which is too low. However, the court reiterated in its judgment that the test it had set in the November 2019 judgment was “that directors, when considering the materiality of items for disclosure, must not focus only on material supportive of the recommended outcome but ought, when laying out the proposal and in enumerating the risks attendant upon it, to set out in a balanced way material which shareholders might see as indicating disadvantages”, which, it contended, could not be controversial. The court refuted any suggestion that the application of that standard to the extraordinary facts of this case could be seen as setting any standard of wider significance.

Harry Edwards
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Sarah Penfold
Sarah Penfold
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Class actions against financial institutions: impact of High Court decision to order security for costs against a litigation funder

In a recent decision which will be welcomed by defendants to funded group litigation, including financial institutions, the High Court has ordered security for costs against a commercial litigation funder in Rowe v Ingenious Media Holdings PLC [2020] EWHC 235 (Ch).

The decision follows the court’s approach to security applications against litigation funders in the RBS Rights Issue Litigation [2016] EWHC 3161 (Ch) (considered here) and is the first successful such application against a member of the Association of Litigation Funders.

As in the RBS case, it was a significant factor in granting security that, if the claim failed, the claimants would each be liable for only a proportion of the defendant’s costs, in light of the court’s order providing for several rather than joint liability. It was also significant that the funder had provided no evidence as to its financial position, and therefore the court could not be confident that it would meet any order for costs made against it. Whilst some value was attributed to the after-the-event (ATE) insurance policies the claimants had in place in respect of their potential adverse costs liability, those policies were not a complete answer to the application given the risk that they would not respond in full.

The key impact of this decision from a defendant bank’s perspective is twofold. Firstly, it has the potential to reduce the risk for banks of successfully defending group litigation and being unable to recover costs from the losing claimant side. While the RBS decision provided some comfort, this has been bolstered by a second decision going the same way, with further comfort provided by the fact that the funder was a member of the Association of Litigation Funders (suggesting that membership will not provide any form of shield to such applications). Secondly, the decision may affect the merits threshold applied by litigation funders to determine whether to pursue a claim, given the potential for early financial exposure for the funder itself. This may in turn impact the volume of funded claims faced by financial institutions.

For a more detailed analysis of the decision, see our litigation blog post.

In another recent development affecting litigation funders and defendants to funded claims, the Court of Appeal has recently found that there is no fixed limit on a funder’s liability for adverse costs when the claim fails. See our litigation blog post on that decision.

Damien Byrne Hill
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John Mathew
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Holly McCann
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Ceri Morgan
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Court of Appeal confirms funders’ adverse costs liability not limited to amount of funding provided: Arkin “cap” not a binding rule

A decision handed down by the Court of Appeal today has dismissed the suggestion that there is a fixed limit on a commercial litigation funder’s liability for the other side’s costs when a claim it has funded fails: Chapelgate Master Fund Opportunity Ltd v Money [2020] EWCA Civ 246.

This is a significant decision and represents good news for financial institutions, which are commonly in the position of a defendant facing claims supported by litigation funders. The impact of the decision should be to reduce the risk which such institutions face of being unable to recover costs – where they have successfully defended a funded claim – from the funder itself.

Prior to this decision, there was conflicting authority as to whether the so-called Arkin cap was a binding rule (derived from the case of Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655), which would limit the funder’s liability in respect of an adverse costs order to the amount of the funding it had provided to the unsuccessful claimant.

This decision demonstrates that the Arkin cap is not a binding rule and that the court retains a broad discretion as to the extent to which a funder should be liable for adverse costs, and need not limit the funder’s liability to the amount of funding provided.

For a more detailed discussion of the decision, read our litigation blog post.

Chris Bushell
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Maura McIntosh
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Ceri Morgan
Ceri Morgan
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High Court declines to impose costs sanctions for refusal to mediate

In ADS Aerospace Limited v EMS Global Tracking Limited [2012] EWHC 2904 (TCC), Mr Justice Akenhead sitting in the Technology and Construction Courtheld that a successful party was not unreasonable to refuse mediation and should not be penalised in costs on that basis. The judge’s approach was similar to the Court of Appeal in Swain Mason v Mills & Reeve (a firm) [2012] EWCA Civ 498  (see post), and demonstrates that, applying the non-exhaustive Halsey factors, a refusal to mediate may, in some circumstances, be justified. Mr Justice Akenhead cited the lack of prospects of settling the matter at mediation and the proximity to trial as influencing factors.

For more information, please see our ADR Notes blog.

Part 36 offers in context of counterclaims and negative declarations

A recent High Court judgment highlights the scope for confusion in applying Part 36 in a case where the formal roles of claimant and defendant do not reflect the reality of who is seeking a (greater) remedy in financial terms: The Procter & Gamble Company v Svenska Cellulosa Aktiebolaget SCA and another[2012] EWHC 2839 (Ch). The Civil Procedure Rule Committee is currently considering a number of issues regarding the operation of Part 36. It is not clear whether that review encompasses the application of the rules in the context of counterclaims and claims for negative declaratory relief, but in light of this decision such a review would be welcome.

The decision also raises interesting issues regarding the principles the court should apply in deciding which party is the “successful party” who should (in principle) be awarded its costs and whether it is possible to include a term as to costs in a Part 36 offer.

For more information, please see our Litigation Notes blog.

50% cap on contingency fees for commercial cases

The government has given further details of its plans to introduce contingency fees, or “damages based agreements” (DBAs), for civil litigation. It has said that in non-personal injury claims (excluding employment tribunal cases) there will be a 50% cap on the amount of damages that can be taken as a contingency fee (see the new webpage launched by the MoJ to provide further information on its civil justice reforms being implemented in April 2013).

For more information, please see our Litigation Notes blog.

Costs awarded against claimant who failed to beat non-Part 36 offer

A recent High Court decision illustrates that a defendant’s offer to settle made outside the Part 36 regime may lead to a similar result as a Part 36 offer, although it will not carry automatic costs consequences: Brit Inns Limited (in liquidation) v BDW Trading Limited [2012] EWHC 2489 (TCC). Claimants on the receiving end of such offers should therefore consider their position carefully.

For more information, please see our Litigation Notes blog.