A guest post by Tim Shepherd, partner at Mayer Brown
In a wake-up call for commercial litigation funders, the Court of Appeal has held that a funder’s exposure to adverse costs will not be limited by the Arkin cap in every case.
The cap stems from the 2005 decision in Arkin v Borchard Lines Ltd (Nos 2 and 3). In that case, the litigation funder was ordered to pay costs incurred by the successful defendant, but only up to the amount of funding it had provided to the claimant.
This has since been viewed by some as a general approach that should apply in every case, with funders taking comfort that even their ‘worst case’ exposure to adverse costs will be no more than the amount of funding they have provided to the claimant.
In the recent case of ChapelGate Credit Opportunity Master Fund Ltd v Money & Others, the Court of Appeal has confirmed that this is not the case. There is no such automatic cap. Rather, the nature and amount of any costs order to be made against a commercial funder is entirely within the discretion of the court.
A commercial litigation funder (ChapelGate) had supported an unsuccessful claim against two administrators of a company. The losing claimant could not discharge the costs orders made against her. The administrators therefore sought, and obtained, a non-party costs order against ChapelGate.
At first instance, it was held that ChapelGate should pay the administrators’ costs without any Arkin cap being applied. This decision was upheld by the Court of Appeal.
The Court of Appeal made reference to the following factors:
- Since Arkin was decided almost 15 years ago, commercial litigation funding, conditional fee agreements and after-the-event (ATE) insurance have all become much more prevalent and established. Consequently, courts no longer need to be so concerned that the risk of an uncapped exposure to adverse costs might dissuade commercial funders from supporting good claims;
- In Arkin, the litigation funder had only provided funding for a distinct, limited part of the claimant’s costs. By contrast, ChapelGate appeared to have funded the entirety of the claimant’s costs;
- If the claim against the administrators had been successful, ChapelGate stood to receive a substantial profit, amounting to a multiple of the funding it had invested. Indeed, in order to enjoy a return for herself, the claimant would have had to achieve an award of damages equating to approximately five times the amount of ChapelGate’s funding;
- ChapelGate had waived any requirement for the claimant to put in place ATE insurance cover to meet adverse costs; and
- The litigation, which ChapelGate facilitated, was always going to cause the administrators to incur substantial costs, which would greatly exceed the level of funding provided by ChapelGate to the claimant.
In circumstances where ChapelGate had played a major part in facilitating the claim against the administrators, therefore, the Court of Appeal found that, when making a non-party costs order, it was appropriate for the court to look at all the circumstances of the case and not just focus upon ChapelGate’s funding outlay.
There is an increasing trend of commercial litigation funders supporting a range of different claims against professional defendants, including claims of a complex and expensive nature.
Where these claims fail, and where claimants cannot meet their obligations to pay costs, funders will be a prime target for non-party costs orders. The level of such costs exposure will not be automatically capped – rather, it is entirely within the discretion of the court.
Successful defendants can be expected to seize upon any opportunity to persuade a court that, on the facts of a given case, the funder’s exposure to costs should not be limited by an Arkin approach. In exercising its discretion, the court can be expected to focus upon:
- The extent and amount of funding provided by the funder;
- The return that the funder would have made had the claim been successful;
- The extent to which an Arkin cap would leave the defendant out of pocket; and
- The reasons why there is an insufficient level of ATE cover in place.
Facilitating high-value, speculative claims can now carry serious costs consequences. Funders must ensure that the merits of a claim are carefully analysed, and kept under close review as new evidence emerges during the course of proceedings.
Funders must ensure that an adequate level of ATE cover is put in place, which also requires a clear understanding of the estimated amount of the defendant’s costs.
On the other side of the fence, a defendant can view an opponent’s litigation funder as a potential, uncapped source of costs recovery. At an early stage in proceedings, the defendant should look for opportunities to develop an understanding of how its opponent’s costs are being funded, and to test the adequacy of any ATE cover that is put in place.