We’re all in this together, whether we like it or not

The story of litigation funding has had many twists and turns and, whilst the majority of the new law in this area has supported third party funding as a risk management tool that gives access to justice, the funders have not had it all their own way. The recent decision of Mr Justice Snowden in Davey v James Money and others [2019] EWHC 997 (Ch) is a stark reminder to funders that the downside of an investment may be much more than they bargained for if it turns sour.

Third party funders have sought to protect themselves by relying upon the principle that a funder’s liability for adverse costs is limited to the amount it has invested, set down in Arkin v Borchard Lines Ltd (Costs Order) [2005] EWCA Civ 655. This has been described as the ‘Arkin cap‘.  However, the Court has the discretion to deviate from this automated way of deciding adverse consequences for a funder and, in this case, the funder was ordered to pay millions more than it had invested and to share the pain of the loss fully.

The decision in Davey followed an application by the successful defendant to a multi-million pound claim for a non-party costs order against the claimant’s commercial litigation funder. The claimant faced paying £3.9 million towards the defendant’s legal costs following criticism by the court of the way in which the litigation had been conducted. A costs order was made for a recovery on the indemnity basis, which results in an enhanced recovery for the receiving party and a punitive result for the paying party. This is within the court’s discretion, which is very wide when it comes to costs.

Mr Justice Snowden decided that the principle in Arkin was not a one-size-fits-all solution but rather a guide for the court in future cases. It was an approach that could be taken by a judge depending upon the circumstances of a case and in light of the behaviour of the paying party: the application of a ‘cap’ in funded cases is not set in stone.

It is interesting to note that the Judge justified the extension of the funder’s liability for adverse costs beyond its investment because the funder had become involved in the case after disclosure and after witness evidence had been exchanged, by which time it would have been clear on any review of the case that the claimant’s conduct was open to criticism by the court and could sound in costs. The funder could not blame the claimant and plead ignorance to this behaviour. Further, the court noted that the funder knew that the defendant’s costs were likely to be a sum far greater than the claimant could afford to pay if the claim failed and decided that the funder’s return was of far greater importance to the funder than the claimant’s access to justice. For these reasons, the Judge held that funder and claimant really were in it together and the protection of Arkin was not available.

In the circumstances of the case, Snowden J concluded that the funder should be on the hook for a sum far greater than its investment and that Arkin should not apply. The claimant’s funder had invested around £1.2million in the case and expected its liability for adverse costs to be capped at this sum in accordance with Arkin. However, the result was a threefold increase to £3.9million. This will ring alarm bells for funders who will not doubt revisit their due diligence procedures and pricing models.

There does seem to be a deliberate policy basis for this decision. Snowden J quoted Sir Rupert Jackson in the Judgment and his comments in relation to the decision in Arkin (made in the Final Report of the Review of Civil Litigation Funding in December 2009), where he said;

“In my view, 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 not only to the opposing party (who may be left with unrecovered costs) but also to the client (who may be exposed to costs liabilities which it cannot meet).”

The Judge followed this line of thinking and rejected the funder’s policy argument that his decision could lead to a general, unlimited liability for adverse costs for funders, which would create a significant chilling effect (those who have deployed policy arguments in the final throes of a case may not be surprised at this result). There may be some substance to this argument, say the funders. At the very least, the decision creates increased tension for a funder seeking to avoid a heavy costs bill on losing a case by exerting influence upon how the case is run whilst avoiding a finding of champerty as a result of those very actions.

Ultimately, this decision confirms that funders cannot count on the absolute protection of Arkin; but is that too outrageous? It is worth bearing in mind that the funder in Arkinhad only stumped up money for the claimant’s expert evidence and the cost of organising the documents and it is therefore hardly surprising that the court has been keen to qualify the principle of the ‘cap’ that has flowed from the case and redress the balance of power between successful litigants and opposing funders. Sir Rupert would certainly approve.