The Court of Appeal in Chapelgate Credit Opportunity Master Fund Ltd v Money and others [2020] EWCA Civ 246 confirmed last month that the Arkin rule (which provides for a cap of the funding costs payable by a non-party) is not binding.  In this blog we consider what impact that might have on insolvency claims and those that fund them.

What is the Arkin rule?

In Arkin v Borchard Lines Ltd and others [2005] EWCA Civ 655, a commercial funder paid £1.3 million to fund expert evidence for the claimant. If the case was successful it stood to get circa 25% of the damages recovered. The claim failed, and the funder was ordered to contribute £1.3 million to the costs of the defendants.

The Court of Appeal found that the funder should only be liable for the winner’s costs to the same extent as the amount of funding it had provided.Since the “Arkin Rule” was established it has had a mixed application in the cases that followed with some judges applying it, whilst others concluding that the imposition of a third party costs order is a matter of a court’s discretion and the Arkin cap was simply something to take into account in determining a just result, as opposed to being an absolute rule.

The Court of Appeal decision in Chaplegate provides clarity on the legal position by confirming that the Arkin cap is not a binding rule.  It will still play a role when the Court considers how to exercise it’s discretion when making an award for costs, but what it does mean, is that funders cannot rely on the cap for protection on costs and may find (depending on the specific circumstances of the case) that it’s exposure for costs is much larger than the level of funds provided.

Chapelgate – the facts

In Chapelgate, the lender had originally agreed to provide £2.5m provided ATE insurance was obtained. It was not, so the lender reduced its funding by half, expecting to be protected by an Arkin cap so even if a costs order was made against it expected its total exposure to be limited.  However, not obtaining the ATE also meant that this increased the respondent’s costs exposure.  Further if the case was successful, the funder stood to recover in excess of five times the amount it had provided to fund the litigation before the litigant saw a return.  Unlike Arkin (where the funder only covered the costs of the expert) in Chaplegate all payments in the litigation were made with money provided by the funder from the point of entering into the funding agreement.

When determining costs the judge at first instance did not apply the Arkin cap, and held the funder liable on an indemnity basis for the opposing party’s costs from the point of the funding agreement. The lender appealed relying on Arkin to reduce its costs exposure arguing that this rule was binding.  In dismissing the appeal, the Court of Appeal confirmed that Arkin was not a binding rule and judges have discretion under section 51 of the Senior Courts Act 1981 (SCA 1981) when determining appropriate costs orders.

Whilst the Court of Appeal was clear that the approach put forward in Arkin had not become redundant- it would still be relevant in cases closely comparable to those in Arkin- it also concluded that a judge may want to consider other factors, such as the funder’s potential return if the litigation was successful:

“In the case of a funder who had funded the lion’s share of a claimant’s costs in return for the lion’s share of the potential fruits of litigation against multiple parties, it would not be surprising if the judge ordered the funder to bear at least the lion’s share of the winners’ costs, regardless of whether the funder’s outlay on the claimant’s costs had been a lesser figure”.

Comment

This case is important because of the clarity it brings to the Arkin rule, although from the practical perspective of funders and those who seek their services, the decision may see funders taking a more cautious approach to funding if this decision is perceived as creating a higher risk of adverse costs.

The bottom line is that a commercial funder should not assume any protection from the Arkin rule and that courts are free to look at all the circumstances of the funding in exercising discretion (including, but certainly not limited to, the principles arising out of Arkin).

Time will tell if this will lead to any decrease in appetite to take on certain cases or even increase premiums overall to hedge against potential loss and risk, but if a funder cannot protect against the risk of an adverse costs order, this is likely to impact on the availability of funding for insolvency matters.

Funders can secure protection by obtaining ATE insurance, but if, as in Chapelgate it isn’t put in place for whatever reason, a funder could face a significant costs bill at the end of a matter if the claim is unsuccessful.  Certainly, the greater the financial return from the litigation, the greater the exposure and following Chapelgate Arkin does not provide the comfort that it may have done in the past.

Funders may want to give some thought to what they finance, how they structure it, the level of their involvement and what level of costs might be imposed upon them, if the litigation is not successful.  For insolvency practitioners they should note the decision and be alive to the fact that criteria for funding claims may change as a consequence.