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Freshfields Risk & Compliance

| 3 minutes read

Litigation funding in the UK: a further nail in the coffin of the 'Arkin cap'?

Today the High Court has handed down a judgment that may have significant repercussions for the commercial litigation funding industry and defendants who face funded claims.

Since 2005 commercial litigation funders have been insulated from a key negative consequence of funding an unsuccessful claim, namely having to pay the full amount of the successful party’s legal costs. This protection has become known as the ‘Arkin cap’ after the case in which it was first put forward - Arkin v Borchard Lines Ltd [2005] EWCA Civ 655. In Arkin, the Court of Appeal said that where a funder has funded an unsuccessful claim, it can be liable for the costs of the successful party but its liability will be limited to the amount of the funding it provided. As a result, its liability for the costs of the litigation, however high, would be capped at the level of its actual investment in the claim. This clearly has a significant economic benefit for funders when they weigh up the potential downsides of funding a dispute.

The ‘Arkin cap’ was put in place largely for policy reasons to encourage the then nascent litigation funding industry. It has, however, been the subject of significant criticism since then, particularly as the funding industry has grown and become more established and sophisticated. The key criticism is a policy one: that it is wrong that a funder “which stands to recover a share of damages in the event of success, should be able to escape part of the liability for costs in the event of defeat” (Final Report of the Review of Civil Litigation Funding, December 2009).

In Davey v Money v ChapelGate [2019] EWHC 997 (Ch) handed down today, the court concluded that the Court of Appeal had not intended the 'Arkin cap' to apply in every situation. Nor was it intended to limit a court’s wide discretion when considering costs orders against a non-party. As a result, the court was free not to apply the 'Arkin cap'. This is the first decision directly declining to apply the cap on funders’ liability in respect of post-litigation adverse costs.

Some of the factors the Judge took into account when reaching his decision included:

(a) the funder’s involvement was clearly a commercial investment;

(b) the funder had the opportunity to investigate the underlying claim before agreeing to fund it. That claim had failed completely and, in some respects, was judged to have been highly speculative. If the 'Arkin cap' were to be applied it would mean that the funder would have been insulated from the conduct of the litigation, even though the claim might not have been brought absent their funding;

(c) the funder would have known that: (i) the litigant it was funding was very unlikely to be able to pay her opponents’ costs (if she lost); (ii) there was unusually no after the event (ATE) insurance in place to meet those costs; and (iii) that the costs were bound to outstrip significantly the amount of its funding; and

(d) due to the way the funding agreement worked and the likely level of damages that could be ordered in favour of the funded party, in a number of scenarios that party would only receive a very small share of those damages. The Judge noted that there was, as a result, some force to the submission that the funded party’s “access to justice came a clear second to [the funder] receiving a significant return on its commercial investment”.

As a result of this decision, funders that fund an unsuccessful claim are now potentially exposed to the full amount of a successful party’s legal costs and will need to ensure that they have sufficient ATE insurance to protect against such exposure. Increased adverse costs risk may be of particular concern to smaller commercial funders.

Conversely, the result is clearly encouraging for entities who regularly face claims from commercially funded litigants, some of which may appear speculative, and even vexatious. Their defence costs will be recoverable to the fullest extent possible from third party funders, without whom it might not have been possible for these claims to proceed.

This is a first instance decision, and may be subject to appeal.

Neil Golding, Nick Stern, Holly Samuel and Michael Willett from Freshfields acted for one of the parties that succeeded in overturning the ‘Arkin cap’.