Litigation funders’ liability: is the “Arkin cap” dead?

​The High Court has refused to limit a litigation funder's liability to defendants in costs to the amount of funding it provided.

In 2005, in Arkin v Borchard Lines, the Court of Appeal held that a third party funder could be liable for the other side’s costs from the point it funded the claim, but imposed a cap on the funder’s liability equal to the amount of funding it had provided. This cap was criticised in Sir Rupert Jackson’s seminal 2009 Report on Civil Litigation Funding. Sir Rupert took the view that it was wrong in principle that a litigation funder which stands to profit from success should be able to escape part of the liability should the claim it funds fail, potentially leaving the successful defendant out of pocket. He was unpersuaded that removing the cap would limit the number of cases funders would support. Nonetheless, the “Arkin cap” has been observed in cases ever since.

A major shift

Now, for the first time, the High Court has disapplied the cap, making a costs order against a litigation funder for the full amount of the defendants’ costs. Following on from Excalibur Ventures LLC v Texas Keystone Inc, in which it was held that indemnity costs can be ordered against funders, this decision marks an increase in the financial exposure for funders, but good news for those on the receiving end of third party funded claims.

In Davey v Money, the claimant made numerous allegations against administrators who had managed her insolvent business, the central claim being that they had conspired to sell its main asset, a property, at an undervalue. The claim was brought with £1.25m from a litigation funder, reduced from an original commitment after ATE insurance could not be secured and so no premium for that was needed. The claim failed entirely and indemnity costs were awarded against Ms Davey, who was unable to pay. The defendants then applied for an order for costs against the funder.

The funder conceded that it was liable for costs and on the indemnity basis, but argued that these should be limited to the period after it funded the claim and to an amount equal to the funding it provided to Ms Davey. On the first point it succeeded, Snowden J holding that costs incurred before the funder became involved would have been incurred without its involvement, even if it could have benefited from that work should the claim have succeeded.

Relevant factors

The defendants successfully resisted the application of the Arkin cap, however. The judge reviewed Arkin and decided it was not an approach that had to be applied mechanistically in all cases. The court has a discretion as to who should pay any costs and in what amount and the Court of Appeal had not fettered that. In this case, a number of factors led the judge to decide against applying the Arkin cap:

  • the funder’s involvement was purely for profit, without any motivation of providing access to justice
  • unlike in Arkin, where the funder paid for only a limited part of the costs (for experts who could not work under a CFA), the funder in Davey had paid for all litigation costs from the time it became involved
  • the “waterfall” of payment provisions in the funding agreement gave it a right over any recoveries in priority to Ms Davey
  • it had chosen to support a case that made wide-ranging allegations that led to indemnity costs being awarded
  • the application of the Arkin cap would undermine the order for indemnity costs as the defendants would not receive the full value of the costs award
  • the funder must have appreciated that the defendants would incur greater costs than Ms Davey, which she would be unable to meet, and
  • it did not ensure ATE cover was obtained to protect the defendants.

Snowden J echoed Sir Rupert Jackson’s 2009 criticisms when he said “it is not easy to see why the choice of the funder as to the amount of its funding should dictate the amount of costs it should pay to the litigant’s opponent if the litigation fails”.

Does this spell the end of the Arkin cap?

It is unlikely that judges will any longer feel that they must apply the Arkin cap in all cases where a funder has financed an unsuccessful claim. Funders will continue to argue that it should apply in their case and judges will need to justify decisions not to apply it, but it is notable that many of the factors cited by Snowden J in favour of disapplying it will be present in most cases financed by litigation funders in today’s market.

Perhaps the two that will least often apply are the lack of ATE insurance for the defendants’ benefit and the order for indemnity costs. Many funders require the party they fund to purchase ATE cover with part of the funding, as the funder here did originally. The indemnity costs order in Davey also exacerbated the potential shortfall for the defendants if the Arkin cap was applied. In many cases there will also be no obvious disparity between claimant and defendant costs.

However, with funders standing to make huge profits when they succeed, there is a logic that they should not be allowed to leave defendants out of pocket when the claims they support fail. Funders will be examining their funding models and calculations of risk and return in the light of this judgment to accommodate the risk that Snowden J’s approach will be followed in some, though not all, cases. We expect that at least some judges will follow his lead.

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