IF THE CAP DON’T FIT A JUDGE DOESN’T HAVE TO ACQUIT: THE ARKIN CAP IN THE COURT OF APPEAL

In the judgment today in Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors [2020] EWCA Civ 24 the Court of Appeal upheld a decision not to apply the “Arkin cap” to a party that had been funding litigation.   It was made clear that the Arkin cap is a principle to be considered by the courts and not an immutable binding rule.

“… I do not consider that the Arkin approach represents a binding rule. 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“

THE CASE

The original claimant in an action brought proceedings against administrators.  The claimant obtained litigation funding from Chapelgate, a commercial funder.  The claimant was unsuccessful at trial. The defendants obtained an order joining Chapelgate into the action for the purpose of costs.  Chapelgate agreed it was liable to pay some costs, the issue was whether its liability for such costs was limited by the “Arkin cap”.

THE ARKIN CAP

This is explained in the judgment.

“The Arkin cap takes its name from the decision of the Court of Appeal in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655, [2005] 1 WLR 3055 (“Arkin“). In that case, a company which had provided funding on a commercial basis for an unsuccessful claim was ordered to pay the winners’ costs only to the extent of that funding”

THE DECISION AT FIRST INSTANCE: NO APPLICATION OF THE ARKIN CAP

At first instance the judge, Snowden J, ordered that Chapelgate was liability only to pay costs after 23rd December 2015. However, he declined to apply the “Arkin cap” to the limit of the costs funding given to the claimant.   The defendants had incurred costs liability of some £4.33 million after 23rd December 2015.

THE COURT OF APPEAL : CONSIDERATION OF THE ARKIN PRINCIPLE

The court of Appeal considered Chapelgate’s arguments.

1. Mr Robert Marven QC, who appeared for ChapelGate, took issue with Snowden J’s approach to Arkin. Contrary to the judge’s view, Mr Marven submitted, the Court of Appeal was not merely setting out an approach which “might commend itself” to other judges or “be considered for application” in similar cases. Arkin, Mr Marven argued, is binding authority establishing the correct “solution” to be applied in respect of commercial funders where the criteria set out in the decision are met. While, moreover, Sir Rupert Jackson may have criticised the Arkin cap, he envisaged either a rule change or legislation and, ten years on, there has been neither. It is not for this (or any) Court to seek to undo what has been settled since Arkin, the more so when there is next to no evidence before the Court about the funding market. Departing from Arkin would both be wrong in principle and, self-evidently, tend to deter commercial funders and so inhibit access to justice.

2. In support of his submissions, Mr Marven pointed out that in Arkin the Court of Appeal spoke of the need to devise a “just solution” and considered that it had found it in the principle expounded in the first sentence of paragraph 41 of its judgment, viz. that “a professional funder, who finances part of a claimant’s costs of litigation, should be potentially liable for the costs of the opposing party to the extent of the funding provided”. Mr Marven also drew attention to the fact that in paragraph 43 of its judgment the Court of Appeal could “see no reason in principle” why its “solution” should not be applicable where the funder has contributed the greater part, or all, of the expenses of the litigation. That passage, Mr Marven argued, showed that, as regards a case in which a funder has contributed only part of the costs, the Court was intending to expound something definitive and also suggested that the Court’s approach should be applied more generally, in situations where funders have financed litigation either largely or entirely.

3. As, however, was submitted by Mr Justin Fenwick QC, who appeared for the Administrators with Mr Ben Smiley, and Mr Nicholas Bacon QC, who appeared for Dunbar with Mr Joseph Curl, there are also indications in the Court of Appeal’s judgment in Arkin that it was not attempting to lay down a binding rule. The Court spoke in paragraph 40 of “commend[ing]” an “approach” and in paragraph 43 of “suggest[ing]” and “propos[ing]” a “solution”. More than that, in paragraph 42 it foresaw certain consequences “[i]f the course we have proposed becomes generally accepted”. Those words seem to imply that the Court was proceeding on the basis that judges dealing with similar situations in the future would not strictly be obliged to adopt its approach, albeit that that course might become “generally accepted”.

4. 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, as can be seen from paragraph 20 above, is framed in entirely general terms. Mr Marven stressed that in Aiden Shipping Co Ltd v Interbulk Ltd Lord Goff referred to the possibility of appellate Courts “establish[ing] principles upon which the discretionary power may … be exercised” (see paragraph 21 above), but, as Moore-Bick LJ noted in Deutsche Bank AG v Sebastian Holdings Inc, “the only immutable principle is that the discretion must be exercised justly” (see paragraph 30 above).

5. 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. Suppose, for example, that the total costs of pursuing a claim for £10 million had been £300,000 and that £100,000 of this had come from a funder who would have taken 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. The course favoured by the Court of Appeal in Arkin, however, focuses exclusively on “the extent of the funding provided”.

6. It is also relevant that Arkin was decided when third party funding of litigation was still “nascent” and conditional fee agreements and ATE insurance relatively new. Such matters will have highlighted the desirability of ensuring that commercial funders were “not deterred by the fear of disproportionate costs consequences if the litigation they are supporting does not succeed” (to quote from the judgment in Arkin). Nowadays, however, commercial funders, conditional fee agreements and ATE insurance are all much more established. The risk of someone with a claim which has good prospects of achieving success without disproportionate cost being unable to pursue it unless the extent to which a funder could be ordered to meet the other side’s costs is curtailed will have diminished in consequence. 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.

7. That is by no means to say that the approach put forward by the Court of Appeal in Arkin has become redundant. 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).

8. On the other hand, I do not consider that the Arkin approach represents a binding rule. 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 accordance with the guidance given in paragraph 25(3) of the Dymocks judgment (for which, see paragraph 22 above). 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.

9. In short, it seems to me that Snowden J was right to conclude that judges do not necessarily have to adopt the Arkin approach when determining the extent of a commercial funder’s liability for costs.

THE COURT OF APPEAL DECLINED TO INTERFERE WITH THE JUDGE’S DISCRETION IN THE CURRENT CASE

Having found that the judge had a discretion in the matter the Court of Appeal upheld the exercise of that discretion.

1. Mr Marven submitted that, even if (contrary to his primary contention) Snowden J had a discretion as to whether to apply the Arkin cap, he was wrong not to do so. The various factors which the judge mentioned did not provide a sufficient basis for departing from the approach which the Court of Appeal took in Arkin. On top of that, the judge failed to take into account the respondents’ failure to apply for security for costs, something which, Mr Marven suggested, pointed strongly against imposing unlimited liability on ChapelGate.

2. In contrast, Mr Fenwick and Mr Bacon each maintained that there was no basis for interfering with the judge’s exercise of discretion. In this connection, Mr Bacon referred us to G v G [1985] 1 WLR 647 to remind us that an appellate Court “should only interfere when they consider that the judge of first instance has not merely preferred an imperfect solution which is different from an alternative imperfect solution which the Court of Appeal might or would have adopted, but has exceeded the generous ambit within which a reasonable disagreement is possible” (to quote Lord Fraser, at 652).

3. I have summarised in paragraph 19 above the factors which the judge identified as leading him to conclude that the Arkin cap should not apply. Mr Marven said of factor (i) that a commercial funder’s motivation will always be commercial and so the fact that that was the case with ChapelGate could not be a reason not to follow Arkin. With regard to factor (ii), Mr Marven pointed out that ChapelGate became liable for indemnity costs only on a derivative basis and that the judge made no finding that it had itself either departed from the norm or failed to carry out due diligence. In fact, Mr Marven observed, ChapelGate had the benefit of very strong advice from leading counsel. Coming on to factor (iii), Mr Marven submitted that it would typically be the case where there was a question as to whether to apply the Arkin cap that it had been apparent that the funded party might not be able to meet a costs award and that the opponent’s costs might be in excess of the funder’s funding. Such matters could not, accordingly, warrant departure from the Arkin approach. Further, to proceed on the basis that a funder should ensure that, through ATE insurance or otherwise, money would be available fully to discharge any adverse costs order would inhibit access to justice for those most in need of help. With regard to factor (iv), Mr Marven argued that the judge was wrong to say that the A&W Agreement meant that ChapelGate “effectively halved its commitment to the funding of the litigation”. From ChapelGate’s point of view, its intended exposure remained £2.5 million because, absent the ATE cover which it had originally been anticipated that Ms Davey would obtain with money from ChapelGate, it was vulnerable to an order requiring it to pay costs up to the limit of the Arkin cap. ChapelGate’s total exposure and potential rewards were thus unchanged. So far as the factor (v) is concerned, Mr Marven said that, had Ms Davey’s claims proved to be worth as much as had been hoped, she would have retained the majority of the recoveries from the respondents. The Funder’s Profit Share under the Funding Agreement as amended by the A&W Agreement was to be the greater of five times the Commitment Amount or 25% of Net Winnings. If, therefore, Ms Davey had been awarded, say, the £49 million which had been said to have been lost as a result of the Administrators’ failure to proceed with a funded rescue, ChapelGate would have been entitled to some £12.25 million, but Ms Davey would have kept upwards of £36 million. Ms Davey remained, moreover, in control of the litigation. As for factor (vi), Mr Marven argued that the judge ought to have recognised that disapplying the Arkin cap would have the effect of deterring funding.

For their part, Mr Fenwick and Mr Bacon each submitted that the significance of factor (i) was simply that ChapelGate was a commercial funder rather than a “pure” one and so within Lord Brown’s third category in Dymocks (a non-party who “not merely funds the proceedings but substantially also controls or at any rate is to benefit from them”) and hence a person whom justice would “ordinarily require” to pay the successful party’s costs (see paragraph 22 above). As for factor (ii), Mr Fenwick and Mr Bacon argued that the misconduct of the litigation that had given rise to the order for indemnity costs was relevant, particularly in the light of Snowden J’s observation that ChapelGate had had “every opportunity to investigate and form a view” on the allegations of serious misconduct which Ms Davey was making. With regard to factor (iii), it was pointed out that, given the nature of the claims being advanced by Ms Davey, the Administrators and Dunbar were bound to be separately represented and to incur very large costs with the result that limiting ChapelGate’s liability to the amount of its own funding would have unusually severe consequences for the winning parties. Moving on to factor (iv), it was said that ChapelGate had indeed halved its commitment to £1.25 million, albeit that a further £1.25 million had been held as a provision, while the respondents had lost the benefit of ATE cover. As Mr Fenwick put the contention, “ChapelGate had managed to divide its investment by half, and maintain the same potential profit, while depriving the Respondents of ATE protection”. In relation to factor (v), the Waterfall meant that Ms Davey could not possibly benefit from any award of less than £6.25 million, that she would have kept £3.75 million or less of the £10 million assumed in Mr Davies’ opinion (see paragraph 7 above) while ChapelGate would have been entitled to £6.25 million, and that recoveries would have had to exceed £25 million for ChapelGate’s share to fall below 25%. Snowden J was thus right to see ChapelGate as “the party with the primary (i.e. first) interest in the Claim” and to consider that Ms Davey’s access to justice “came a clear second to ChapelGate receiving a significant return on its commercial investment”. Turning finally to factor (vi), the judge’s approach to the “policy argument” put forward by ChapelGate was justified in the light of such matters as Sir Rupert Jackson’s “Review of Civil Litigation Costs: Final Report” and developments in relation to ATE insurance, commercial funding and costs control.

1. In my view, Snowden J’s exercise of his discretion cannot be impugned. 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. ChapelGate would, moreover, have derived far more than she would from an award of the £10 million projected in Mr Davies’ opinion. 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. The litigation which ChapelGate chose to facilitate involved very serious allegations against more than one party and, beyond that, parties who could not be expected to share legal representation. As a result, it was inevitable that the respondents would incur costs greatly in excess of the funding which ChapelGate provided to Ms Davey, yet the respondents were not to have the protection of any ATE cover. ChapelGate may not have seen the A&W Agreement as reducing its own exposure, but, with its waiver of the requirement for ATE insurance, it very much increased that of the respondents. This was also, as it seems to me, something which the judge could properly take into account.

2. In short, a different judge might or might not have arrived at the same conclusion as Snowden J, but that is not the point. The order he made was plainly one that was reasonably open to him and his decision cannot be said to have been founded on irrelevant considerations.

3. That leaves Mr Marven’s contention that the judge wrongly failed to take into account the respondents’ failure to apply for security for costs. As Mr Marven pointed out, the Administrators’ solicitors raised the question of security for costs in a letter to Ms Davey’s then solicitors of 12 June 2014 on the basis that she was resident in Israel. The Administrators’ solicitors returned to the subject in a letter to Ms Davey’s solicitors of 11 May 2015 in which they referred to the fact that Ms Davey’s solicitors had “suggested that any award of Security for Costs would be limited to the additional costs of enforcing a costs order in another jurisdiction, over and above the costs which would be incurred in this jurisdiction”, a point as to which it was said that the Administrators made “no concessions” but which would not be disputed for the purposes of the letter. Ms Davey’s solicitors replied on 28 May 2015 that Ms Davey had “once more become resident in England” and so none of the conditions in CPR 25.13 was satisfied. At trial, however, it appears to have emerged that Ms Davey had always been resident in Israel, and Mr Marven argued that that would in all probability have emerged in 2015 had the Administrators pressed the point then. In that event, Mr Marven said, Ms Davey’s claims would have been at an end.

4. In my view, however, the judge was not obliged to attach any significance to these matters. I do not see that the respondents can be criticised for failing to challenge what they had been told by the solicitors acting for the party whom ChapelGate later chose to fund. In any case, the authorities indicate that, even if they had been able to establish that Ms Davey was resident in Israel, security for costs would have been available only in respect of any additional costs of enforcing a judgment there, on which there is no evidence. It is by no means apparent that an award of security for costs on that basis would have prevented Ms Davey from pursuing the proceedings.

5. In all the circumstances, it seems to me that the judge was entitled to make the order he did.