In its recent judgment in proceedings between Laser Trust and CFL Finance, the High Court has again departed from the previously established principle that commercial litigation funders should have their exposure to adverse costs limited to their financial contribution.
James Boissier and Francesca Berry consider the decision in Laser Trust v CFL Finance Ltd  EWHC 1404 (Ch) and ask whether this spells the end for the “Arkin Cap”.
Background to the Arkin Cap
In English litigation, the court has a wide discretion to determine whether, by whom and to what extent costs should be paid. The general rule (Civil Procedure Rule (CPR) 44.2(2)(a)) is that the losing party will be ordered to pay the winning party’s costs. However, section 51 of the Senior Courts Act 1981 and CPR 46.2 give the court the power to make a costs order against third parties to the proceedings, including litigation funders. The court has generally only exercised these powers in exceptional circumstances, and the amount of costs a funder will be ordered to pay has been limited.
The ‘Arkin Cap” is named after the decision in Arkin v Borchard Lines Ltd and others  EWCA Civ 655, in which the defendants were unable to recover costs from the claimant so instead sought a third-party costs order against the claimant’s funder. The Court of Appeal granted a costs order against the funder, but this was limited to the amount it had invested in funding the claim. Fundamental to the Court of Appeal’s decision was a wish to strike a balance between access to justice (the claimant did not have the means to pursue the claim without funding) and the losing party’s ability to recover costs should an action fail. The Arkin Cap was a compromise solution. It was considered by many to set a principle limiting a funder’s exposure to adverse costs and was applied by the court in subsequent commercially funded cases.
Challenges to the Arkin Cap
The first departure from the principle came in Davey v Money and others  EWHC 997 (Ch), in which the successful defendants applied for a costs order under Section 51 of the Senior Courts Act against the funder Chapelgate Credit Opportunity Masterfund Limited (“Chapelgate”). Mr Justice Snowden held that the decision in Arkin was not an established rule that automatically applied in cases involving a commercial litigation funder; it was important to consider whether applying the cap would lead to a “just result in all the circumstances of the case”. Mr Justice Snowden concluded that in this case it would not, and Chapelgate was ordered to pay costs to the defendant well in excess of its initial investment.
Mr Justice Snowden considered several relevant factors in reaching his decision, including the following:
- Chapelgate had funded the whole claim (unlike in Arkin, in which funding was limited to a specific element of the costs),
- Chapelgate stood to take a significant share of the award (more than the claimant) had the claim succeeded,
- application of the Arkin Cap would insulate Chapelgate from the indemnity costs order, which had arisen from how the claim was pursued (in which the funder may have been perceived as being complicit), and
- Chapelgate had been closely focused on its own self-interest in funding the litigation, with no correlation between the amount of its investment and the claimant’s exposure to costs.
Chapelgate appealed, but the Court of Appeal upheld the decision in Chapelgate Credit Opportunity Master Fund Ltd v Money and others  EWCA Civ 246, which agreed with Mr Justice Snowden’s analysis of Arkin. It was confirmed that while Arkin was by no means redundant, it was not a “binding rule”. Ultimately, the decision as to what costs order (if any) should be made against a third-party funder is in the court’s discretion. Our earlier article on the subject provides a detailed overview of both cases.
Laser Trust v CFL Finance Ltd
The Arkin Cap has been considered by the court most recently in an application for a third-party costs order in Laser Trust v CFL Finance Ltd (“CFL”). In prior litigation between the parties, Laser Trust had been awarded three costs orders against the unsuccessful claimant, CFL Finance Limited. More than £330,000 in costs remained outstanding as CFL lacked the necessary funds to satisfy the balance. Laser Trust applied under CPR 46.2 for a third-party costs order against the funder of CFL’s participation in the litigation, Colosseum Consulting Limited (“Colosseum”). The applicant maintained that Colosseum had “absolute control” over the conduct of the litigation by CFL and, as such, should have to pay the outstanding costs, as they sought to benefit hugely from the proceedings.
Mr Justice Marcus Smith noted that costs orders against non-parties are exceptional, and any decision to award one would be dependent on the specific facts in each case. Furthermore, he made it clear that in his view, “the discretion to order a non-party to pay costs will not be exercised against pure funders. However, the jurisdiction can, and will, be exercised against those persons who go beyond the mere funding of litigation.”
Mr Justice Smith held that the test had “absolutely been met in this case”, and a costs order was made against Colosseum. The reasons behind his decision were:
- The terms of the funding agreement were such that Colosseum was able to exercise a significant degree of control over the litigation between Laser Trust and CFL (and it was inferred that such control had been exercised), and
- Colosseum was clearly not a “pure funder”, but rather one that sought to benefit substantially from the proceedings.
Crucially, Mr Justice Smith refused to apply the Arkin Cap to the third-party costs order because the “nature of the interest of Colosseum in… [the] proceedings was so great that the… cap should not apply”. Colosseum was ordered to pay the outstanding costs in full, as had already been assessed.
The decision in Laser Trust is of interest not only because it provides another example of the courts resisting the application of the Arkin Cap. It is also due to the importance placed on the degree of control exercised over proceedings by litigation funders and the significant bearing this may have in relation to their potential costs liability.
The distinction between the different types of litigation funder made by Mr Justice Smith is not new. In Hamilton v Al Fayed (2)  EWCA Civ 665, the court made a distinction between a “pure funder” and a “professional funder”. A pure funder was defined as a party that “had no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course”. The definition of a professional funder was set out in the case of Dymocks Franchise Systems (NSW) Pty Ltd v Todd and others  UKPC 39. It was defined as one that “not merely funds the proceedings but substantially also controls or at any rate is to benefit from them”. Colosseum was deemed to be a professional funder and one with substantial control.
Following the cases of Laser Trust, Chapelgate and Davey, funders and parties to litigation can be under no illusion that the application of the Arkin Cap is discretionary rather than a binding rule. It seems likely that the cap will be limited to cases with similar facts to Arkin (ie those in which only a discrete element of the costs of a claim are funded and/or where the degree of control by the funder was limited). The decision in Laser Trust indicates that in cases in which all or most of a party’s costs are funded by a professional funder who exerts significant control over the claim and has a significant financial interest in the outcome of the litigation, then the court’s robust approach to funder liability will continue.
Funders are already seeking to manage this risk through thorough due diligence into prospective cases and their insistence on adequate ATE insurance being taken out by claimants early in the proceedings. Given the decision in Laser Trust, it may also be advisable for funders to assess litigation funding agreements and the level of their involvement in a matter to consider whether the control they can or do exert over a case is appropriate.
Stewarts has launched a ground-breaking after the event (ATE) insurance facility with Arthur J. Gallagher Insurance Brokers Limited. ‘Stewarts Litigate‘ is designed to work alongside our alternative funding agreements. The facility provides our commercial disputes clients with rapid access to comprehensive ATE insurance at pre-agreed market leading rates. The facility can provide coverage of up to £4 million in three business days and up to £18 million within ten business days.
Find out more about Stewarts Litigate here.
This communication has been authorised by Arthur J Gallagher Insurance Brokers Limited for the purpose of s21 of the Financial Services and Markets Act 2000
If you require assistance from our team, please contact us.
Subscribe – In order to receive our news straight to your inbox, subscribe here. Our newsletters are sent no more than once a month.