To (not) cap it all: the UK Court of Appeal clarifies litigation funders' potential liability for costs

If a party receives litigation funding but is unsuccessful, the winning party may be able to recover its legal costs from the funder.  Following a Court of Appeal decision in 2005 (Arkin v Borchard Lines [2005] EWCA Civ 655), a funder’s liability for those costs was understood to be limited to how much it had funded.  This “Arkin Cap” became one of the pillars of the rapidly growing commercial funding market in the UK as it meant that a funder knew, at the time of funding litigation, its total potential downside liability if the claim failed.

On Tuesday, the Court of Appeal delivered a judgment which effectively means that the Arkin Cap no longer exists as a fixed limit and that a commercial funder’s potential liability for costs is now significantly more open-ended. 

The appeal was of last year’s decision in Money & Anor v ChapelGate [2019] EWHC 997 (Ch), which was the first time a court had declined to apply the Arkin Cap, instead finding that the funder was liable for all of the winning parties’ costs from the date that the funding commenced (this was considered in this blog).

The Court of Appeal’s decision – Chapelgate v Money & Anor [2020] EWCA Civ 246

The Court dismissed the litigation funder’s appeal, finding that the Arkin Cap was not intended to apply in every situation nor to limit the Court’s discretion when making costs orders against commercial funders.

It noted that Arkin had been decided in the early days of the third-party litigation funding and that part of the purpose of the decision in Arkin was to ensure that funders were not deterred by “the fear of disproportionate costs consequence if the litigation they are supporting does not succeed” (to quote from the Arkin decision). The Court of Appeal in Money recognised, however, that the professional funding market in 2020 was significantly more established and, most importantly, was able to protect its downside using After the Event (ATE) insurance.

The Court of Appeal said that judges may wish to consider factors other than the total amount of the funding provided, when setting a funder’s liability for costs including:

• the extent of the funding - in Arkin, the funder funded only a discrete part of the claim (i.e. expert reports), and therefore the Court of Appeal did not want to shackle the funder with all the costs of the unsuccessful claim. However, where a funder funds the whole of a dispute, it may not be just to limit its liability in the same way;
• the funder’s potential return on its investment and how that compared to the funded party’s recoveries, if the claim succeeded. As the Court noted:

In the case of a funder who funded the lion’s share of a claimant’s costs in return for the lion’s share of the potential fruits of litigation against multiple parties, it would not be surprising if the judge ordered the funder to bear at least the lion’s share of the winner’s costs, regardless of whether the funder’s outlay on the claimant costs had been a lesser figure.

(para 39).

• whether the application of the Arkin Cap would leave the winning party out of pocket.  In this case, the Court noted that 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 ATE insurance in place to meet those costs; and (iii) that the defence costs were bound to outstrip significantly the amount of its funding of the claims.  As a result, there is an onus on funders to balance these considerations, when deciding whether to provide funding.

The Court recalled that third-party funding can take different guises, and that open-ended liability for the defendants’ costs here was appropriate as the funder had approached the litigation as a commercial investment. By contrast for “pure funders”, without a personal interest or benefit in the case, the usual approach would be to prioritise the funded party’s ‘access to justice’ over the successful defendant’s ability to recover its costs.

What this decision means?

On its face, the removal of the Arkin Cap appears to alter significantly the risk landscape for professional third-party funders. Losing the comfort of the Cap, means they are now potentially exposed to far higher adverse costs liabilities. However, given that nowadays ATE insurance is commonly a compulsory element of most funding packages, the economic effect of the decision may ultimately be more limited. This is because the ATE insurance ought to cover the adverse costs and so there should be no need for the successful party to seek to recover them from the funder.

By contrast the decision will be welcomed by entities regularly facing litigation (including group claims) from commercially funded parties. In particular, it may mean that a commercial funder will need to give greater consideration to (i) the likely costs being incurred by the defendant(s) to the funded claim; and (ii) ensuring that, if its funded claim is unsuccessful, there is sufficient ATE insurance or cash within the funded party to cover the adverse costs liability. Otherwise it risks being liable for the costs shortfall, even if it exceeds the amount of their funding.

Neil Golding, Nick Stern, Holly Samuel and Michael Willett from Freshfields have acted for one of the parties that succeeded in both the original underlying litigation and in overturning the ‘Arkin Cap’.