Should the Arkin cap apply in every case? (Davey v Money)

Should the Arkin cap apply in every case? (Davey v Money)

In Davey v Money & Anor [2019] EWHC 997 (Ch) (17 April 2019)  Mr Justice Snowden did not apply the Arkin cap in circumstances where the litigation funder had invested £1,275,166.34 but the adverse costs stood at about £4.33m. The judgment demonstrates that, in appropriate cases, especially those involving an award of costs on the indemnity basis, the Arkin cap (derived from the Court of Appeal decision in Arkin v Borchard Lines Ltd [2005] EWCA Civ 655, may not be applied. The judge had regard to the fact that costs were awarded on the indemnity basis and did not accept that this decision would discourage litigation funders. The judge distinguished this case from that of Arkin, but also indicated that the approach taken by the Court of Appeal in that decision was not the only approach. However, the litigation funder’s liability for adverse costs was confined to the costs incurred from the date of the funding arrangement. The funder, whose profit took priority over any compensation, was said to be the party with the primary interest in the claim.

Nicholas Lee, Managing Director and Costs Lawyer at Paragon Costs Solutions considers the decision and its practical implications.

What are the practical implications of this case?

This decision confirms that the Arkin cap was not intended to be applied in every case involving a litigation funder, it was simply an approach applied in that case by the Court of Appeal. 

A significant amount of weight was placed on the fact that the costs were awarded on the indemnity basis, so it remains to be seen whether the same result would have been achieved if the costs had been awarded on the standard basis.

The decision, and growing uncertainty, will undoubtedly be of concern for commercial litigation funders. Funders are less likely to take any comfort in the Arkin cap and should, if they do not already do so, factor in to their business models the possibility of a full liability for adverse costs. Funders are more likely to require after the event (ATE) insurance which will adequately cover all adverse costs and they are more likely to pay even greater attention to the merits of the claim so as to protect its interest and minimise the likelihood of being exposed to the risk of significant adverse costs orders.

What was the background?

Dunbar appointed the defendants, Mr Money and another (the Administrators), to Ms Davey’s company, Angel House Developments Limited. The company’s main asset, Angel House, was sold by the Administrators. After payment of expenses and part satisfaction of Dunbar’s secured claim, this left nothing over for the company (or for Ms Davey as its shareholder). Dunbar obtained summary judgment for £1.6m plus interest and costs against Ms Davey on a limited personal guarantee which she had given in relation to the company's borrowings. Dunbar commenced further proceedings to recover against the guarantee the further substantial costs of enforcing the guarantee and the judgment against her which had not been recovered (the Dunbar Proceedings).

Having paid the outstanding judgment debt to Dunbar, Ms Davey issued proceedings against the Administrators alleging that they had breached their fiduciary duties, failed to exercise independent judgment in the administration, and sold the property at a substantial undervalue in reliance upon the advice of unsuitable agents (APAM) who had been selected by Dunbar. Furthermore she alleged that the Administrators had wrongly frustrated her attempt to mount a funded rescue of the company which she contended would have led to all the creditors being paid and the company being taken back out of administration.

In the Dunbar Proceedings, Ms Davey filed a defence and counterclaim alleging that Dunbar had so interfered with the conduct of the administration as to be vicariously liable for the breaches of duty by the Administrators. She also alleged that Dunbar has conspired with APAM to cause her harm by procuring that Angel House should be sold at an undervalue and by the rejection of her funded rescue in order to preserve Dunbar's claim against her under her personal guarantee.

The claims by Ms Davey were said to be valued in excess of £10m and potentially up to £49m.

All of the material allegations of breach of duty and misconduct against the Administrators, and the allegations of improper interference in the administration and conspiracy against Dunbar, were rejected. Ms Davey was ordered to pay each of the defendants’ costs to be assessed on the indemnity basis. The defendants’ total costs were just shy of £7.5m.

This current judgment concerned the application of the so-called Arkin cap to limit the extent of non-party costs orders against a commercial litigation funder.

The defendants each sought non-party costs orders under section 51 of the Senior Courts Act 1981 (SCA 1981) against Ms Davey’s commercial funder, namely ChapelGate Credit Opportunity Master Fund Limited (ChapelGate). Ms Davey and ChapelGate had entered into a funding arrangement on 23 December 2015. ChapelGate contended that its total liability should be limited to the overall maximum of the funding that it provided, namely £1,275,166.34, because of the Arkin cap-see Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055. The total costs that the defendants had incurred since the date of the funding arrangement was about £4.33m. Following an amendment to the funding agreement, the commitment was halved from £2.5m to £1.25m to reflect the fact that Ms Davey had not and would not be obtaining ATE insurance. ChapelGate proceeded to obtain its own ATE insurance for indemnity up to £650,000.

What did the High Court decide?

The first issue was whether the liability of ChapelGate to the defendants should be for all of the costs or only those incurred after the date of the funding agreement. The judge had regard to Excalibur Ventures LLC v Texas Keystone Inc & others (Rev 2) [2014] EWHC 3436 (Comm) and the fact that the defendants’ costs prior to 23 December 2015 had been incurred without the involvement of ChapelGate. The judge concluded that the costs order against ChapelGate under SCA 1981, s 51 would be confined to the costs incurred after 23 December 2015.

The second issue concerned whether the Arkin cap should be applied. The judge acknowledged that the cap itself was controversial and referred to the Final Report of the Review of Civil Litigation Funding in December 2009 by Sir Rupert Jackson which essentially recommended that no cap should apply. He also referred to other cases where doubts about the Arkin cap had been raised. The judge accepted the defendants' submission that the Court of Appeal decision in Arkin should not be taken to have been intended to prescribe a rule to be followed in every subsequent case involving commercial funders. Furthermore the Court of Appeal had expressly acknowledged that it was only concerned with a case in which the funder had contributed a limited part of the litigant’s expenses. What had become known as the Arkin cap was simply an approach which the Court of Appeal intended should be considered as a means of achieving a just result in all the circumstances of the particular case.

The judge had regard to the conduct of the litigation by and on behalf of Ms Davey which had been found to be significantly out of the norm, and which had warranted an order for costs to be assessed on the indemnity basis. While ChapelGate may not have directed the way that the case was conducted, it had every opportunity to investigate and form a view as to the nature of the claim and the support for the allegations which were being made before choosing to fund it. There was no principled basis upon which the funder could disassociate itself from the conduct of those whom it had enabled to conduct the litigation and upon whom it relied to make a return on its investment. If the Arkin cap were applied it would have the effect that ChapelGate would be insulated from the decision that costs should be awarded on the indemnity basis.

The judge had regard to the fact that ChapelGate must have known that Ms Davey would be unable to pay any substantial costs awarded against her and that such costs would be very substantial and well in excess of the amount which it proposed to invest in the litigation. It was also noted that ChapelGate halved its commitment to the funding of litigation from £2.5m to £1.25m while retaining the same potential share of the recoveries which highlighted the fact that ChapelGate was closely focused on its own self-interest in funding litigation as a commercial venture. There was no correlation between the amount of the investment and the costs to which the defendants were exposed. ChapelGate negotiated to receive a substantial commercial profit which would have taken priority over any compensation payable to Ms Davey and thus it was the party with the primary interest in the claim.

In returning to the principles of Arkin, the judge said that there is an obvious risk of injustice if a number of defendants are forced to incur significant costs in defending themselves, but are limited to recovering only a proportion of those costs because of an entirely different funding arrangement over which they have no control.

There was no evidence to support the submission as to the potentially adverse effect of the decision on the litigation funding industry. The proposition that, 14 years after Arkin and ten years after Sir Rupert Jackson's Report, the commercial litigation industry would be unable to factor into its operations the possibility that, in an appropriate case, the Arkin cap might not be applied.

In concluding the judge said at para [111]:

‘Taken together, the factors that I have identified lead me to conclude that, on the facts of the instant 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. In my judgment, this is not a case in which it would be just to apply the Arkin cap.’

Case details

Court: High Court, Business and Property Courts

Judge: Mr Justice Snowden

Date of judgment: 17 April 2019

This analysis was first published on LexisPSL Dispute Resolution on 24 April 2019.

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