Uncapped Adverse Costs Orders Against Litigation Funders

The English Court of Appeal has held that the “Arkin Cap” (taken from the decision in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055) should not automatically be applied to restrict litigation funders’ liability for adverse costs orders to the extent of their funding only. In ChapelGate Credit Opportunity Master Fund Ltd v Money [2020] EWCA Civ 246, the Court of Appeal upheld the trial judge’s decision ordering a litigation funder to pay the successful party’s costs on the indemnity basis without any cap.

Background

In December 2015, ChapelGate Credit Opportunity Master Fund Ltd (ChapelGate) agreed to provide third party funding to D, the former director and shareholder of a company, who was involved in litigation against the company’s administrators. The funding agreement provided for ChapelGate to provide total funding of £2.5 million, subject to various conditions precedent including D’s obtaining after the event insurance (ATEI) to cover any adverse costs award ultimately made against D. The funding agreement also set out the order of priority in which any monies received by D from the litigation were to be applied: first, ChapelGate would be repaid the funding provided including any ATEI premium; secondly, ChapelGate would be paid its profit share; thirdly, legal and expert fees and disbursements; and, finally, the residue was to be paid to D. If the case were won or settled after the trial had begun, ChapelGate’s profit share would be the greater of 250% of £2.5 million or 25% of the case proceeds less £2.5 million.

No ATEI was obtained by D and the funding agreement was amended in 2016. Under the amended agreement, D’s obligation to obtain ATEI was waived and the amount of funding to be provided by ChapelGate was reduced to £1.25 million.  However, ChapelGate’s profit share was preserved at the level set by the original agreement.  Subsequently, ChapelGate procured ATEI to limit its exposure to adverse costs.

D lost at trial and the trial judge ordered D to pay costs on the indemnity basis. Applications were then made for costs orders to be made against ChapelGate. ChapelGate did not resist that a costs order should be made against it and did not dispute that the order should be made on the indemnity basis (in light of the decision in Excalibur Ventures LLC v Texas Keystone Inc (No 2) [2017] 1 WLR 2221). However, ChapelGate submitted that (a) its liability should be limited to costs incurred after the date of the original funding agreement (December 2015) and (b) its costs liability should be capped at the overall total of the funding it had provided, by applying the Arkin Cap.  The trial judge, Snowden J, accepted the first submission but rejected the second submission, ordering ChapelGate to pay costs incurred by the successful parties from December 2015 on the indemnity basis and without any cap.

ChapelGate appealed the decision not to apply the Arkin Cap.

The Court of Appeal’s Decision

The appeal was dismissed and the Court of Appeal upheld Snowden J both on the law and on his exercise of discretion.

First, as to the legal position vis-à-vis costs orders against litigation funders, the Court reached the following conclusions:

1. The Arkin Cap is not a binding rule to be applied automatically in all cases involving litigation funders, irrespective of the facts and regardless of where the justice of the case lies.
2. When making third party costs orders against litigation funders, the court has an overriding discretion to exercise justly its jurisdiction to make costs awards. That overriding discretion is not fettered by the Arkin Cap.
3. The approach in Arkin has not become entirely redundant. Applying the Arkin Cap may or may not be the just response to the facts and circumstances of a given case when all relevant factors are considered.
4. In addition to considering whether a discrete part of the case/costs only was funded, the court can also take into account the funder’s potential return, such that they might be considered the “real party” to the litigation. Thus, the court may take into account what the funder has stood to gain, not just its outlay.

Newey LJ (with whom Patten and Moylan LJJ agreed) noted that Arkin had been decided about 15 years ago when third party funding for claims was slowly emerging. Conditional fee agreements and ATEI were also relatively new.  At that time, there was a concern not to deter commercial funders by creating fear of disproportionate costs consequences.  The litigation funding world has, however, moved on since Arkin. In particular, Newey LJ noted that a funder can protect itself from an adverse costs award thanks to ATEI.

Secondly, the Court of Appeal upheld Snowden J’s exercise of his discretion.  Whilst recognizing that a different judge may have come to a different conclusion, Snowden J had reached a decision that was reasonably open to him on the facts of this case. The main factors relevant to the exercise of discretion not to apply the Arkin Cap were:

1. ChapelGate’s funding was not restricted to a discrete part of the case.
2. ChapelGate viewed its funding of the litigation as a commercial investment and its potential gains were significantly greater than its outlay. Had D been successful, ChapelGate stood to receive much more than the amount it had spent on funding; whereas D had to recover more than 5 times ChapelGate’s expenditure to be able to keep any of the litigation proceeds for herself. As a consequence, ChapelGate would have benefited much more than D, even if she had recovered £10 million as had been anticipated in her leading counsel’s opinion.
3. Even though it did not direct the way in which the case was conducted, ChapelGate had had the opportunity to investigate the allegations made by D, and form a view about them and about the nature of the litigation. It should have foreseen that an adverse costs award, if made against D, would be substantial.
4. ChapelGate must have appreciated that D was unlikely to be able to meet an adverse costs order made against her. After the waiver of D’s ATEI obligation, the successful parties’ exposure to the risk of unpaid costs had increased. Applying the Arkin Cap would have left the successful parties out of pocket and they had incurred legal fees in excess of the funding that ChapelGate had provided to D.

Comment

There has been a developing trend in English case law to make commercial litigation funders liable for adverse costs awards, putting greater emphasis on the need to procure ATEI.  This decision falls in line with that trend.  Funders can expect increased scrutiny of funding agreements and the potential gains which they stood to make if the litigation had been successful.

The position in Australia is not “substantively different” from the position in England: see the Federal Court of Australia’s decision in Turner v Tesa Mining (NSW) Pty Limited [2019] FCA 1644 (at [33]; a decision which considered Snowden J’s first instance decision in ChapelGate). Unlike in England, however, the Arkin Cap has not been applied. Rather, the Australian courts have long been prepared to exercise their power to make an uncapped order compelling non-parties to pay adverse cost awards, including litigation funders, by exercising their discretion in accordance with the justice of the case. The decision in ChapelGate underscores the similarity in the over-arching principles to be applied in English and Australian litigation when adverse costs orders against litigation funders are sought.

In Hong Kong, the general position is that litigation funding for most court proceedings is not permitted.  There are some exceptions (which include insolvency proceedings).  However, if litigation funding does become more widespread in the future, Hong Kong will have a wealth of existing jurisprudence on this topic to draw on from both sides of the globe.