Costs against a commercial funder should normally follow the event – “Arkin” cap disapplied – third party litigation funder held liable for all of the Defendants’ costs incurred after the date of the funding agreement

Davey v Money and others [2019] EWHC 997 (Ch)

The Claimant brought and lost proceedings arising out of the administration of her company, which included allegations of misfeasance, of a sale of property at an undervalue, and of conspiracy.

The Claimant was ordered to pay the Defendants’ costs on an indemnity basis. The Judge said: “if a straightforward claim … is accompanied, as this one was, by a welter of other allegations, some of which verged on allegations of complicity in the alleged dishonest conduct of other defendants, in my view a claimant who has lost heavily can have little complaint if at the end of the day the costs order places the burden on him or her to show that the defendant, faced with such a wide-ranging set of allegations, was acting unreasonably in spending money preparing to defend himself …”.

The Defendants subsequently sought non-party costs orders against the Claimant’s litigation funder.

The funding agreement

At a stage in proceedings, after the Claimant had served her expert evidence and before the service of the Defendants’ expert evidence, the Claimant and Funder entered into a funding agreement.

The Funder initially proposed to advance £2.5m in consideration for a share of the Claimant’s damages, after repayment of the advance, of £750,000 to £5.125m (depending on the stage at which the claim was settled or won). A sum of £1m from the proposed advance was ear-marked for the acquisition of insurance against any adverse costs order. When it became clear that the Claimant was unable to obtain insurance the Funder agreed to reduce the advance to £1.25m whilst maintaining the same level of prospective profit that might be made from the claim.

The Funder’s liability

Following judgment the Funder accepted that a non-party costs order should be made against it on the same indemnity basis as the order made against the Claimant, but it contended that its total liability should be limited to the “Arkin” cap.

The “Arkin” cap, from the Court of Appeal decision in Arkin v Borchard Lines Ltd [2005], provides that, if a case is lost, a litigation funder is liable to pay the other side’s costs up to the amount it funded (i.e. the funder’s maximum liability is capped at 2x the amount funded).

This has its basis in the public policy objective of facilitating access to justice (i.e. by not deterring commercial funders from helping those seeking access to justice who, otherwise, cannot afford it).

The Court’s analysis

As ‘costs follow the event’ a successful party should recover its costs from the unsuccessful opponent. The making of a third-party costs order “shall be in the discretion of the Court” “exercised on the basis of what is just in all the circumstances”.

The Court considered Dymocks Franchise System (NSW) Pty v Todd [2004] which noted the distinction between funders who stand to benefit from the litigation and those that do not. In respect of the former “justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs” on the basis that the Funder is ‘the real party’ to the litigation. In the present case, as the Funder negotiated to receive a substantial commercial profit in priority to any compensation payable to the Claimant, the Court found that the Funder was the party with the primary (i.e. first) interest in the Claim.

This Court also considered Sir Rupert Jackson’s comments on the “Arkin” cap in his Final Report of the Review of Civil Litigation Funding of 2009, whereby he cited the lack of any evidence that (full) liability for adverse costs would stifle third party funding or inhibit access to justice. Jackson LJ said: “it is wrong in principle that a litigation funder, which stands to recover a share of damages in the event of success, should be able to escape part of the liability for costs in the event of defeat. This is unjust…”.

The Court’s decision

The Court concluded that, on the facts of the 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.

The “Arkin” cap is not a rule but, rather, is to be considered, in cases involving a commercial funder, as the means of achieving a just result in all the circumstances. The court ordered the Funder to pay all of the Defendants’ costs on the indemnity basis from the date of the funding agreement.