The High Court today hinted at the first crack in the Arkin rule that third-party litigation funders are only liable for adverse costs to the extent of their investment in a case.
Mr Justice Foskett awarded a defendant security for costs against a funder in a sum greater than the amount committed.
He found that the Arkin cap was just one factor to be taken into account at the security for costs stage, and also accepted, on the facts, that the cap may not ultimately be applied and was willing to order security in a sum in excess of that figure to do justice in the circumstances.
It is said to be the first time the court has considered the interplay between the Arkin cap and security for costs.
The decision in Bailey & Others v GSK  EWHC 3195 (QB)  is the latest ruling in the case management of the Seroxat group litigation against GlaxoSmithKline, which manufactured the allegedly defective antidepressant. GSK sought £6.8m in security for costs.
The claimants are backed by Managed Legal Solutions (MLS) to the tune of £1.2m.
MLS is not a member of the Association of Litigation Funders, is “balance sheet insolvent” and relies on a shareholder for its liquidity. MLS has no capital and would need to borrow to provide security.
Foskett J said it would not be able to meet various requirements of the association’s code anyway, such as that it has access to funds immediately within its control.
The claimants also have after-the-event (ATE) insurance from BRIT to cover adverse generic costs of £750,000.
The judge acknowledged that the issue of the Arkin cap would not arise until the conclusion of the case.
“MLS is effectively asking me to say that it will apply in this case when it is concluded and, accordingly, I must not order security that exceeds it [his emphasis].
“If there is an absolute prohibition against awarding more at the conclusion of the trial than the amount contributed by the funder to the litigation, then I could see and would accept the force of that contention.
“However, there are a number of factors that militate against such a proposition, some of which are general in nature, some of which are peculiar to this case.”
First, said Foskett J, the “unquestioned imposition of the cap as formulated in Arkin” would of itself fetter the general discretion that the court would have concerning costs at the conclusion of a trial. Rather, there were “various options” open to a party that wanted to argue that the cap was not applicable in the particular case.
For example, he said, “there would undoubtedly be an argument that, notwithstanding the way Arkin has (I am told) been applied, the reality is that the Court of Appeal was addressing only the situation where a professional funder has merely contributed a part of the litigant’s costs and not where the whole of those costs has been underwritten”.
There might also be an argument that the Court of Appeal left open the possibility of disapplying the cap in certain cases where it was inappropriate, such as where there was something “objectionable” about the funding arrangements made.
He continued: “The discretion afforded by CPR 25.14 is very wide. I approach it on the basis that a factor to be considered would be the argument that the Arkin cap applied. Equally, however, it would, in my judgment, be wrong to ignore the possibility that the cap may not be treated as applicable in the circumstances of this case…
“Unless I take into account now the possibility that the cap will not be applied, there is a risk that the security ordered will be insufficient and the ultimate intention of the court of trial (and, perhaps, the Court of Appeal on appeal) so far as the costs are concerned will be frustrated.
“At the end of the day, the applicability or otherwise of the Arkin cap is only one factor to consider on this application. But if I order that more than the present limit of the cap (£1.2m) should be provided, then, subject to one matter, no injustice will be done if ultimately the cap is applied.”
In relation to the ATE, Foskett J considered last month’s Court of Appeal ruling  in Premier Motorauctions, which said that ATE insurance which could be voided did not constitute adequate security for costs.
Here, the court did not consider it possible to discount as illusory the prospect of avoidance because of aspects of the way the claimants had pursued the case, such as having an “unrealistic appreciation of the likely level of damages, assuming liability is established”.
This and other factors “leads to a sense of unease about how watertight everything is within the claimants’ camp”, Foskett J said, while acknowledging that there has been “no hint” that BRIT has as yet felt there were grounds for avoiding the cover.
The judge said the £6.8m figure for the pre-trial costs would not be reasonably recoverable following assessment. “As an initial broad sweep”, he took take 66% of that sum – £4.5m – as being a reasonable working figure, and then ordered security for half of that amount.
He discounted two-thirds of the ATE cover (£500,000), saying: “This reflects my assessment that it is more likely that the policy will remain intact and remain available for the payment of part of the defendant’s costs if the defendant is successful, but that there is a more than minimal risk that it will not remain intact.”
He further ordered MLS to provide £1.75m by way of security for costs.
“This is £550,000 more than the sum it was prepared to offer, namely, the amount currently committed to the litigation. That balance will be protected if the end result of the proceedings is that the Arkin cap is applied.”
Nigel Jones QC of Hardwicke, instructed by the group’s lead solicitors Fortitude Law, represented the claimants. Charles Gibson QC, Malcolm Sheehan QC and Henry Warwick of Henderson Chambers, and costs specialist Nicholas Bacon QC of 4 New Square, instructed by Addleshaw Goddard, acted for the defendant. Jamie Carpenter of Hailsham Chambers acted for MLS.