Legal briefing | Corporate & Commercial Disputes |

Court of Appeal confirms "Arkin Cap" on litigation funders' liability can be lifted

Overview

In the recent decision of ChapelGate Credit v Money & Ors the Court of Appeal upheld a first instance judge's decision not to apply the so-called "Arkin Cap" to an order for costs made against ChapelGate, a litigation funder.

The Arkin Cap takes its name from the 2005 Court of Appeal decision in Arkin v Borchard, where the Court decided that a commercial litigation funder's liability to pay a losing party's costs was limited to the amount that it had invested in funding the claim. The Arkin Cap has been applied in a number of cases since.

In this case, ChapelGate had been ordered by Snowden J to pay some £4.33 million of the defendants' costs, even though its funding of the claim has been limited to £1.25 million.  Snowden J made this order on the basis that the Court of Appeal had intended the Arkin Cap to be one approach that might be applied in similar cases, but not a prescribed rule to be applied automatically in all cases involving commercial funders. ChapelGate appealed the judge's decision.

The Court of Appeal declined to interfere with Snowden J's judgment and agreed with his assessment that the court in Arkin had not intended to lay down a binding rule. In giving its reasons, the Court noted that Arkin had been decided at a time when third-party litigation funding was still "nascent", but that today commercial funding (along with conditional fee agreements and ATE insurance) is well established.

Arkin could also be distinguished on its particular facts. In that case the funder had only funded a discrete part of the proceedings - the payment of expert witnesses. Arkin may still therefore be applicable in future cases with similar facts, where a funder's role is limited to a small and distinct part of the litigation.

The Court stated that in approaching what order to make against a third-party funder, a material consideration is what the funder stands to gain from the arrangement, not just its expenditure. The more a funder stands to gain, the closer the funder is to being considered "the real party" who would ordinarily be ordered to pay a successful party's costs following a judgment being made against them. As the Court put it:

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… 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 the whether the funder's outlay on the claimant's costs had been a lesser figure.

In this case, ChapelGate stood to receive a return of up to the greater of 250% of their investment or 25% of the damages awarded which, depending on the size of any award, could greatly eclipse the claimant's own recovery. The Court of Appeal held that, in the circumstances, it was entirely legitimate for the judge to attach importance to the funder's prospective gains as well as its outlay when making any order against them.

Conclusion

The protection offered by the Arkin Cap is no longer the safe haven for litigation funders that it was once thought to be. Whilst the Cap may still apply in some cases, funders who are in line for big returns under funding agreements should expect to be on the hook for a much larger proportion of the other side's costs in unsuccessful claims than they have been previously.

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