The Court of Appeal has today dismissed an appeal against a decision that a commercial funder of a failed claim was liable for all of the defendants’ costs from the date on which the funding agreement was entered into. There was no basis for interfering with the judge’s discretion in declining to apply the so-called Arkin cap to limit the funder’s liability to the amount of the funding it had provided: Chapelgate Master Fund Opportunity Ltd v Money  EWCA Civ 246.
This is a significant decision as it confirms that the Arkin cap is not a binding rule. 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. The decision suggests that, in some cases, the courts may wish to take into account the extent to which the funder stood to gain from a successful claim, as well as the extent of the funding provided. In other cases, however, it may be appropriate to apply the Arkin approach, particularly where the funder funded a discrete part of the claim.
The decision will be welcome to defendants facing claims supported by litigation funders, as it reduces the risk of facing irrecoverable costs due to an automatic application of the Arkin cap.
Chris Bushell and Maura McIntosh outline the decision below.
The claimant brought various claims against the defendants with the benefit of litigation funding provided by a commercial funder, ChapelGate. Under the original funding agreement, entered into on 23 December 2015, ChapelGate was to provide £2.5 million, including the cost of an ATE insurance premium, in return for the greater of 2.5 times its committed funding or 25% of net winnings. The claimant failed to obtain ATE insurance, in breach of a condition of the funding agreement, and the agreement was amended to waive that condition and reduce ChapelGate’s total funding commitment to £1.25 million, but with its return calculated on the basis of the original £2.5 million commitment. ChapelGate later purchased ATE cover in the sum of £650,000 to limit its own exposure to adverse costs.
The claims failed in their entirety and the claimant was ordered to pay the defendants’ costs to be assessed on the indemnity basis. The defendants applied for a non-party costs order against ChapelGate. ChapelGate accepted that a non-party costs order should be made against it on the same indemnity basis as the order made against the claimant, but argued that its liability should be: (i) limited to costs incurred after 23 December 2015 (the date of the original funding agreement); and (ii) capped at the overall amount of funding it had provided, applying the so-called Arkin cap derived from the case of Arkin v Borchard Lines Ltd (Nos 2 and 3)  EWCA Civ 655.
The defendants claimed to have incurred costs of some £4.33 million after 23 December 2015 and about £3.15 million before that date.
The High Court (Snowden J) found in favour of ChapelGate on the first issue, ie that its liability should be limited to costs incurred after 23 December 2015, but found against it on the second, ie the application of the Arkin cap. ChapelGate was therefore ordered to pay the defendants’ costs on the indemnity basis from 23 December 2015 without any cap.
The Court of Appeal dismissed the appeal (Newey LJ giving the lead judgment with which Patten and Moylan LJJ agreed). It found that Snowden J was right to conclude that judges do not necessarily have to adopt the Arkin approach when determining the extent of a commercial funder’s liability for costs.
Newey LJ referred to indications in Arkin that the Court of Appeal was not attempting to lay down a binding rule. In particular, the court had spoken of commending an approach and suggesting and proposing a solution, and had foreseen certain consequences if the course it proposed became generally accepted. Those words did not suggest a binding approach.
In Newey LJ’s view, that may well have reflected the Court of Appeal’s perception that a decision as to what, if any, costs order to make against a commercial funder is in the end discretionary. As Moore-Bick LJ noted in Deutsche Bank AG v Sebastian Holdings Inc  EWCA Civ 23, when it comes to costs orders against non-parties, “the only immutable principle is that the discretion must be exercised justly”.
Newey LJ pointed out that it is possible to envisage circumstances in which applying the Arkin cap might not be considered “just”, for example if the funder would have received a very large proportion of any winnings. In such a case, he said, a judge might wish to have regard to what the funder had stood to gain, whereas the Arkin approach focuses exclusively on the extent of the funding provided.
It was also relevant that Arkin was decided when third party funding of litigation was still “nascent” and conditional fee agreements and ATE insurance relatively new. Now that such arrangements are much more established, the risk of deterring funders through an uncapped costs liability has diminished.
Newey LJ emphasised that he was not saying the Arkin approach had become redundant; there would no doubt continue to be cases in which judges decide that it is right to follow that course, particularly on facts closely comparable to those in Arkin where the funder had funded a discrete part of the claim (ie the costs of instructing expert witnesses). However, the Arkin approach does not represent a binding rule. Judges retain a discretion and may consider it appropriate to take into account matters other than the extent of the funding provided.
In the present case, Newey LJ found, there was no basis for criticising the exercise of the judge’s discretion in deciding not to adopt the Arkin approach. While a different judge might or might not have arrived at the same conclusion, the order made was reasonably open to him and it could not be said to have been founded on irrelevant considerations.