The Arkin cap is not a binding rule and judges have the discretion to order commercial funders to pay more than they have spent on a case, the Court of Appeal has held in a landmark decision.
But while the extent of the funder’s investment was not the only factor to take into account, it stressed that the Arkin cap was not redundant and could be the right approach in appropriate cases.
In Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors  EWCA Civ 246 , the claimant faced a costs bill of £7.5m and her funder tried to limit its liability to the £1.3m it contributed.
But the Court of Appeal upheld the finding of Mr Justice Snowden  that the Arkin cap was a means of achieving a just result in that case, but there was no subsequent authority to indicate it was a cast-iron rule.
Lord Justice Newey said there were indications in its ruling that the Arkin court was not attempting to lay down a binding rule.
“The terms in which the Court of Appeal expressed itself may well reflect its perception that a decision as to what, if any, costs order to make against a commercial funder is in the end discretionary. That would accord with section 51 of the Senior Courts Act 1981, which… is framed in entirely general terms…
“It is, moreover, possible to envisage circumstances in which application of the Arkin cap might not be felt ‘just’ and that even though, as in Arkin, a funder had met only a discrete part of the total costs.”
Newey J gave the example of a £10m claim where a funder provided a third of the £300,000 costs but was entitled to take 90% of the net proceeds had the claim succeeded.
“On that doubtless unlikely set of facts, a judge might very well consider it ‘just’ for the funder to bear more than £100,000 of the defendant’s costs. In such a case, a judge might wish to have regard to what the funder had stood to gain, not just to its outlay.”
He said it was also relevant that, when Arkin was decided in 2005, third-party funding was still nascent and needed encouraging.
“Apart from anything else, a funder should now be able to protect its position by ensuring that either it or the claimant has ATE cover.”
This did not mean Arkin has become redundant, the judge stressed: “There will, I am sure, continue to be cases in which judges decide that it is right to follow the course espoused in Arkin, as Zacaroli J did  in Burnden Holdings (UK) Ltd v Fielding.
“The Arkin ‘solution’ is particularly likely to be relevant on facts closely comparable to those in Arkin, where the funder had ‘merely covered the costs incurred by the claimant in instructing expert witnesses’ (to quote from paragraph 43 of the Court of Appeal’s judgment).”
But equally the Arkin approach was not a binding rule, he said. “Judges, as it seems to me, retain a discretion and, depending on the facts, may consider it appropriate to take into account matters other than the extent of the funder’s funding and not to limit the funder’s liability to the amount of that funding.
“In the case of a funder who funded only a distinct part of a claimant’s costs, a judge might well decide that it should pay no larger sum towards the defendant’s costs.
“A judge could also, however, consider the funder’s potential return significant. The more a funder had stood to gain, the closer he might be thought to be to the ‘real party’ ordinarily ordered to pay the successful party’s costs…
“In the case of a funder who had 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 winners’ costs, regardless of whether the funder’s outlay on the claimant’s costs had been a lesser figure.”
The court went on to uphold Snowden J’s ruling in the case that the funder should cover all of the costs the claimant had to pay.
“This was not a case, as Arkin was, of a funder funding only a distinct part of a claimant’s costs. From the date of the funding agreement, all payments in respect of Ms Davey’s costs appear to have been made with money provided by ChapelGate.
“Further, ChapelGate stood to receive in return a profit amounting to a multiple of what it had spent. In fact, Ms Davey had to recover from the respondents more than five times ChapelGate’s expenditure to have any prospect of keeping anything for herself…
“In the circumstances, this was a case in which it was legitimate for a judge to attach importance to the funder’s prospective gains as well as to its outlay.
“The judge was entitled, too, to have regard to the extent to which the Arkin cap would leave the respondents out of pocket.”