The Arkin cap should not be applied automatically in all cases involving commercial litigation funders, the High Court has ruled in deciding that a funder should be fully liable for a successful party’s indemnity costs.
Mr Justice Snowden said the Court of Appeal’s decision in Arkin to cap the funder’s liability to the extent of the money it was providing was a means of achieving a just result but there was no subsequent authority to indicate it was a cast-iron rule.
Davey v Money & Anor  EWHC 997 (Ch)  followed Snowden J’s ruling last year that rejected Julie Ann Davey’s claim against the administrators of her company and the finance firm that had appointed them.
Ms Davey was ordered to pay each of the defendants’ costs – claimed at £7.5m – on the indemnity basis. She was ordered to make payments on account totalling £3.9m, but has not paid anything.
The defendants sought non-party costs orders against her commercial funder, ChapelGate Credit Opportunity Master Fund, which accepted that they should be made, but only to the limit of the funding it provided, £1.3m, due to the Arkin cap.
Snowden J said he accepted the defendants’ submission that the Court of Appeal in Arkin “should not be taken to have been intending to prescribe a rule to be followed in every subsequent case involving commercial funders”.
He decided that the comments of the Court of Appeal indicated that it “was simply setting out an approach that it envisaged might commend itself to other judges exercising their discretion in similar cases in the future”.
He continued: “That conclusion is further reinforced by the express acknowledgment by the Court of Appeal that it was only concerned with a case in which the funder had contributed a limited part of the litigant’s expenses, and that it had not ‘had to explore the ramifications of an extension of the solution we propose beyond the facts of the present case’.
“I also consider it to be significant that there is no subsequent authority in which the Arkin cap has been treated as a principle to be applied automatically in any case involving a commercial funder.”
This all meant the Arkin approach should be considered, “but I do not think that it is a rule to be applied automatically in all cases involving commercial funders, whatever the facts, and however unjust the result of doing so might be”.
The judge went on to find that ChapelGate should be liable for all of the costs awarded against Ms Davey.
While ChapelGate was not responsible for the way she conducted the case, such that he ordered indemnity costs, the funder had every opportunity to investigate the claim before deciding to back it and could then not disassociate itself from the way the case was handled – which the Arkin cap would allow it to do.
The facts of the case, Snowden J continued, showed that ChapelGate was “closely focused on its own self-interest in funding the litigation as a commercial venture, and that there was no correlation between the amount that it chose to invest in the litigation and the costs to which the defendants were exposed”.
While in Arkin, there was likely to be some comparability between the costs incurred by both sides in relation to experts – which was all the funder there was financing – “I consider that there is an obvious risk of injustice in the other direction if a number of defendants are forced to incur significant costs in defending themselves, but are limited to recovering only a proportion of those costs because of entirely different funding arrangements over which they have no control between the claimant, his funder and his lawyers.”
Snowden J also saw “force” in the point that ChapelGate negotiated to receive a substantial commercial profit which would have taken priority over any compensation payable to Ms Davey, showing that her access to justice “came a clear second to ChapelGate receiving a significant return on its commercial investment”.
In that sense, he said, ChapelGate “plainly was the party with the primary (i.e. first) interest in the claim”.
The judge also rejected the suggestion that failing to apply the Arkin cap could discourage funders from backing litigation in the future.
He noted the questions that have been raised about the cap – including in the Jackson report – and said: “I am not inclined to accept the proposition that, 14 years after Arkin and 10 years on from Sir Rupert Jackson’s report, the commercial litigation industry would be unable to factor into its operations the possibility that, in an appropriate case – especially one involving an award of indemnity costs – the Arkin cap might not be applied.”
He concluded: “Taken together, the factors that I have identified lead me to conclude that, on the facts of the instant case, the balance between the principle that the successful party should have its costs, and enabling commercial funders to continue to provide the finance to facilitate access to justice, should be struck differently than it was in Arkin. In my judgment, this is not a case in which it would be just to apply the Arkin cap.”