We've previously written about Davey v Money and Ors [2019] EWHC 997 (Ch) (the 2019 Case), which demonstrated that the so-called 'Arkin cap' may not always apply and shouldn't be counted on to serve as an absolute limit on potential costs liability for those in the business of providing funding for third-party litigation.

A recently published costs order relating to another court decision further demonstrates the limited reliability of the Arkin cap in certain circumstances.

What is the Arkin cap?

The Arkin cap is named after the decision in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055 where the defendants were unable to recover their costs from the (unsuccessful) claimant, and instead sought a third party costs order against that claimant's funder. Following appeal, a third party costs order was granted, but was limited in amount to the extent of the funding provided.

The principle that a third-party funder's liability for adverse costs following an unsuccessful claim funded by them is capped at the level of their investment is commonly referred to as the 'Arkin cap'. The same approach has been followed several times since, albeit not without controversy, and many litigation funders had come to rely on the Arkin cap as part of their pricing model and strategic approach, including the funder in the 2019 Case.

This turned out to be a foolhardy decision in this instance, as the court determined that the Arkin cap was not a golden rule which would bind it in all scenarios. Instead, the court ruled that the cap was an option to be considered by the court in exercising its broad discretion regarding costs, with the overall aim of achieving a just result in the circumstances.

The latest challenge

The Arkin cap approach was considered by the court again in a costs decision relating to CFL Finance Ltd v Laser Trust and Moises Gertner [2021] EWCA Civ 228 (the 2021 Case). Similar to the 2019 case the claimant, CFL Finance Ltd, was unsuccessful and the defendant, Laser Trust, had only limited success in enforcing the costs orders awarded in its favour against the claimant. The defendant therefore asked the court to make a third-party costs order against Colosseum Consulting Limited (Colosseum) which had funded the claimant's participation in the litigation.

Mr Justice Marcus Smith reiterated in his judgment that third party costs orders are exceptional, and any decision to award one would be highly fact dependent. He also stated that in his view it was very unlikely that such an award would be made against a "pure funder". Instructive here were the terms of the relevant funding agreement, which gave Colosseum the ability to exercise "massive" control over the litigation between the parties.

Smith J couldn't form a view on how far that control had actually been exercised in practice due to lack of information from either the claimant or Colosseum and was led to infer from the same that it had indeed exercised such control. Accordingly, he considered it appropriate to grant the requested third-party costs order. Further, the apparent control exercised by Colosseum was so great that he decided that the Arkin cap should not apply to that order.

Key takeaways

Litigation funders will be watching decisions in this arena with a keen interest, for obvious reasons. It is clear from both the 2019 Case and the 2021 Case that the Arkin cap will not always fit their facts and we cannot say with certainty that there is a closed list of scenarios where it will not be applied. 

Our advice remains that litigation funders should take a comprehensive approach to risk management – including thorough due diligence, ATE insurance and ongoing monitoring – both of the cases they are actively funding but also wider developments in the market, taking a proactive approach to the lessons learnt. Litigation funders commonly operate from in-house template litigation funding agreements, and this decision is a handy prompt to assess if their terms purport to give the funder such a degree of control over the relevant litigation that it could be vulnerable to uncapped adverse costs orders.

Find out more

To discuss the issues raised in this article in more detail, please reach out to a member of our Banking & Finance team.