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When there is no Arkin Cap, Temple fills the gap – Part 1

By Jacob White, Underwriter.

It has long been thought that whilst a litigation funder can be liable for the other side’s costs in litigation, its liability for such costs would be limited to the level of funding it gave its client in the case. Such was the principle that was said to have been established in Arkin v Borchard Lines Ltd [2005] EWCA Civ 655 (“Arkin”).

Question:
Since Arkin, the funding market has operated on the basis that a funder is only liable for the price of its bet. Was this the correct approach?

Enter Davey v Money & Ors [2019] EWHC 997 (Ch).

Facts
Ms Davey owned a business which ran aground and administrators were appointed by Dunbar Assets plc (“Dunbar”) in December 2012. The business’ main asset was a property which the administrators sought to sell in order to satisfy debt owed to creditors. The property was charged to Dunbar. Prior to the sale, Dunbar commenced proceedings against Ms Davey to enforce a personal guarantee she had provided for her business’ borrowings.

The property was then sold for over £17m, which left nothing to Ms Davey as the main shareholder.

Ms Davey brought a claim against the administrators for breach of fiduciary duties, on the basis that they had sold the property at a substantial undervalue and that Dunbar had frustrated her attempt to rescue the business which, it was alleged, would satisfy all creditors.

Ms Davey also served a defence and counterclaim on the same grounds in the proceedings brought by Dunbar. In February 2015, it was ordered that the cases be tried together.

Funding agreement
Acting via a broker, Ms Davey obtained funding from Orchard Global Asset Management, the investment manager of ChapelGate, in December 2015.

The funding agreement stated that:

  • £2.5m would be the amount funded.
  • The funding was conditional on Ms Davey obtaining £1m of ATE insurance. This would be purchased with the funded sum.
  • The ‘order of priority’ provided that if the case were successful, the funder would firstly receive the sum it had invested, followed by its profit share; lawyers’ fees excluding uplift costs followed, before the residual amount being paid to Ms Davey.
  • The profit share increased by reference to the stage of the case and would be 30% of the funded sum if settlement occurred before January 2016; if the case won or settled thereafter the profit share would be 250% of the funded sum or 25% of the net winnings.
  • Ms Davey had ultimate control over the conduct of the case, but was obliged to provide material information to the funder and would defer to the funder on matters of settlement. Ms Davey’s solicitor was to monitor costs.

An issue that arose at this stage was that Ms Davey did not obtain ATE insurance. Snowden J states that ‘ChapelGate has adduced very limited evidence as to why this was’ [23]. Snowden J refers to a contemporaneous email from Orchard that lay blame at the broker; the broker since stated that there was an issue with the cost of an upfront premium.

The amended funding agreement
The funding agreement was then amended to remove the requirement for ATE insurance to be in place for Ms Davey. In doing so, the funded sum was revised to £1.25m but the funder’s financial return remained the same, based on a commitment of £2.5m.

The reasoning at the time for maintaining the level of remuneration was that, in reliance on Arkin, the funder was also theoretically liable for that sum to the other side if the case were ultimately unsuccessful.

After amending the agreement, ChapelGate then obtained ATE insurance for itself in the sum of £650,000 with a premium payable of £487,000 if the case settled before trial, or £1.3m thereafter.

Trial
After a 2 month trial, Ms Davey’s case was unsuccessful. The expert that Ms Davey relied on in asserting that the business’ key property asset had been worth between £31-43m, did not convince the trial judge and it was found that he ‘was an unsatisfactory expert witness, whose evidence was often simply unsupported assertion’ [31].

Ms Davey was ordered to pay costs to be assessed on an indemnity basis. The aggregate bill amounted to £7.5m and Ms Davey was ordered to make a payment on account of £3.9m. She made no payment.

The successful parties in turn issued an application for a non-party costs order under s.51 Senior Courts Act 1981. Whilst the funder did not oppose the application, it submitted that its liability was capped by the sum it invested in Ms Davey’s case.

Decision
In determining the period of time that the funder would be liable for costs, Snowden J was steadfast in ruling that liability only ran under s.51 SCA from the date of the funding agreement.

On the question of the extent of that liability, Snowden J sitting in the High Court had to determine whether the funder was only on the hook for the sum it had advanced. In other words, was the Court of Appeal ratio in Arkin really a cap on a funder’s costs liability in all cases?

In short, the answer was no.

In Arkin, the unsuccessful claimant had the costs of an expert forensic accountant funded by a third party company. It had been agreed that if the case were to be successful, the funder would receive a proportion of the damages. The agreement between them stated that the claimant retained full control of the conduct of the case, but would require the funder’s consent to settle the case.

At first instance in Arkin, it had been held that a non-party costs order could not be made against a funder. But Snowden J considered that this had been before the Privy Council had ruled in the case of Dymocks Franchise System (NSW) Pty V Todd [2004] 1 WLR 2807 (“Dymocks”). Dymocks was key to how the Court of Appeal would consider Arkin and in particular it had the following observation from Lord Brown in mind:

‘Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes’ [59].

Snowden J then observed the following paragraphs from the Court of Appeal judgment in Arkin, which had the benefit of the judgment in Dymocks:

38 While we do not dispute the importance of helping to ensure access to justice, we consider that the judge was wrong not to give appropriate weight to the rule that costs should normally follow the event…
In our judgment the existence of this rule, and the reasons given to justify its existence, render it unjust that a funder who purchases a stake in an action for a commercial motive should be protected from all liability for the costs of the opposing party if the funded party fails in the action. Somehow or other a just solution must be devised whereby on the one hand a successful opponent is not denied all his costs while on the other hand commercial funders who provide help to those seeking access to justice which they could not otherwise afford are not deterred by the fear of disproportionate costs consequences if the litigation they are supporting does not succeed.

39 If a professional funder, who is contemplating funding a discrete part of an impecunious claimant’s expenses, such as the cost of expert evidence, is to be potentially liable for the entirety of the defendant’s costs should the claim fail, no professional funder will be likely to be prepared to provide the necessary funding. The exposure will be too great to render funding on a contingency basis of recovery a viable commercial transaction. Access to justice will be denied. We consider, however, that there is a solution that is practicable, just and that caters for some of the policy considerations that we have considered above.

40 The approach that we are about to commend will not be appropriate in the case of a funding agreement that falls foul of the policy considerations that render an agreement champertous. A funder who enters into such an agreement will be likely to render himself liable for the opposing party’s costs without limit should the claim fail. The present case has not been shown to fall into that category. Our approach is designed to cater for the commercial funder who is financing part of the costs of the litigation in a manner which facilitates access to justice and which is not otherwise objectionable. Such funding will leave the claimant as the party primarily interested in the result of the litigation and the party in control of the conduct of the litigation.

41 We consider 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. The effect of this will, of course, be that, if the funding is provided on a contingency basis of recovery, the funder will require, as the price of the funding, a greater share of the recovery should the claim succeed. In the individual case, the net recovery of a successful claimant will be diminished. While this is unfortunate, it seems to us that it is a cost that the impecunious claimant can reasonably be expected to bear. Overall justice will be better served than leaving defendants in a position where they have no right to recover any costs from a professional funder whose intervention has permitted the continuation of a claim which has ultimately proved to be without merit.

42 If the course which we have proposed becomes generally accepted, it is likely to have the following consequences. Professional funders are likely to cap the funds that they provide in order to limit their exposure to a reasonable amount. This should have a salutary effect in keeping costs proportionate. In the present case there was no such cap, and it is at least possible that the costs that MPC had agreed to fund grew to an extent where they ceased to be proportionate. Professional funders will also have to consider with even greater care whether the prospects of the litigation are sufficiently good to justify the support that they are asked to give. This also will be in the public interest.

43 In the present appeal we are concerned only with a professional funder who has contributed a part of a litigant’s expenses through a non-champertous agreement in the expectation of reward if the litigant succeeds. We can see no reason in principle, however, why the solution we suggest should not also be applicable where the funder has similarly contributed the greater part, or all, of the expenses of the action. We have not, however, had to explore the ramifications of an extension of the solution we propose beyond the facts of the present case, where the funder merely covered the costs incurred by the claimant in instructing expert witnesses.

In consideration of the Arkin judgment and the facts of the case before him, Snowden J found that:

  • The Court of Appeal in Arkin did not intend to prescribe a rule to be followed in every case. Paragraph 40 of Arkin had only commended an “approach” and paragraph 42 showed that the Court of Appeal had not created an absolute rule [82].
  • The Court of Appeal in Arkin was assessing the question of a funder’s liability in light of Dymocks, which had stated that the essential question to answer in a case where s.51 SCA is in play is what would be just in all the circumstances. Arkin therefore only set out an approach that may be followed when judges are required to exercise their discretion [82].
  • From paragraph 43 of Arkin, it is clear that the Court of Appeal were dealing with a case where the funder in question had only contributed a limited part of funds [83].
  • There is no authority subsequent to Arkin which has found that it is an automatic principle applied to every case [84].
  • Excalibur Ventures LLC v Texas Keystone Inc (No.2) [2017] 1 WLR 2221 (“Excalibur”) did not expressly deal with the question of whether Arkin created a principle to apply to all cases [86].
  • The approach taken in Arkin could be applied in a case in order to achieve an equitable result. But it does not apply to every case, no matter how unjust a decision may be [89].
  • ChapelGate could not disassociate itself from Ms Davey and her conduct during the case. If an Arkin Cap applied, ChapelGate would automatically be insulated from paying costs on an indemnity basis [94].
  • In Dymocks Lord Brown established the point that a costs order can be made against a funder, if it is “the real party”, but it need not be the only real party. Once a funder acquires the status of “real party” it is in theory able to be found liable for costs, and the extent of the profit it seeks to recover shall be taken into account in determining the extent of that liability [100].

Snowden J concluded by stating:

‘If the possibility that a funder may not be able to take advantage of the Arkin cap causes funders to keep a closer watch on the costs being incurred, both by the funded party and the opposing side, and if careful consideration is given to employing the mechanisms in the CPR to limit exposure to adverse costs in an appropriate case, I do not see that as contrary to access to justice or any other public policy.’ [110].

ChapelGate were ordered to pay costs incurred after the date of the funding agreement, with costs to be assessed on an indemnity basis if not agreed.

Implications for solicitors – our perspective
It is clear that a funder can be liable for costs in excess of the amount funded in a case. The Court of Appeal in Arkin did not create an absolute rule. Funders could therefore find themselves in the position of losing the amount funded and also having to pay adverse costs.

The following are immediate questions that practitioners and funders must consider for funded cases:

  • Does your client have ATE insurance? ATE is available for individuals as well as publicly listed companies. No matter what financial means your client has, are you advising them to take the whole risk of paying an adverse costs order?
  • Is the amount of that cover sufficient for the risk or does it need increasing? In Davey, the funder obtained its own insurance cover. However, the cover it obtained was not for the whole risk. Will insurers now be urged to increase cover across a range of funded cases?
  • Is the insurance from an A-rated insurer? In litigation your client should only expect the best. Have you secured insurance from a reliable and respected provider with a proven track record
  • Do you have a valuable relationship with an insurer? In Davey, ATE insurance could not be obtained. The reason for the client not obtaining insurance cover is largely lost between blame being apportioned to the broker and the broker blaming the price of upfront premiums. Are upfront premiums in the best interests of your client in litigation? Temple Legal Protection offers premiums that are deferred until the conclusion of the case and only payable if the case is successful. If you are told that your client must pay an upfront premium, have you considered approaching another provider?
  • Have you chosen the funder with care? Whilst some funders adhere to a code of conduct, others do not and the market is not fully regulated by Parliament. ATE insurance from Temple Legal Protection is a prerequisite for obtaining funding with Temple Funding. Temple Funding is a subsidiary of Temple Legal Protection; both are regulated by the FCA.

Temple’s development of litigation/ATE insurance for commercial disputes is long established; we have produced market-leading litigation insurance and funding options used by many leading commercial litigation firms. To find out about using litigation insurance for commercial dispute resolution please call our commercial team on 01483 577877 or email jacob.white@temple-legal.co.uk

Jacob White

Underwriter
Read articles by Jacob White

Jacob White

Jacob joined Temple in 2014 after graduating from the University of Chichester. He has recently completed the Graduate Diploma in Law at The University of Law. Jacob supports the senior commercial underwriters with reviewing a wide range of cases involving all types of commercial and business litigation. This involves providing costs solutions to SMEs, large corporates, private individuals and insolvency practitioners.

As an underwriter, Jacob frequently corresponds with leading lawyers and brokers to discuss current cases. He also assists with the development of Temple’s ATE commercial business and supports the team with audits.

Jacob is currently studying the BPTC part-time.

 

Read articles by Jacob White

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