Some fairy tales have princesses that have to be rescued, dragons to be slayed and knights in shining armour that will save the day.
The court room drama that unfolded in Davey v Money and Ors  EWHC 997 (Ch) (the Davey Case) (a recent first instance decision) is no fairy tale but (as lawyers are such creative creatures) we imagined who would take the lead roles in our fictitious fairy tale based on the Davey Case...
The claimant would be the princess requiring saving (and in need of access to justice) and the litigation funder would be the knight, providing funding to the princess to pursue her case against the dragons, the defendants.
But where does the Arkin-cap fit into this fairy tale? The Arkin-cap is the knight's shining armour. Obviously this is fiction and there were no fairy tale princesses, knights or dragons in Snowden J's courtroom but it was nevertheless a very interesting judgement for litigation funders where, we think, the so-called 'Arkin-cap' stole the show.
In this note we tell you the true story of the Davey Case and we also introduce you to the Arkin-cap (whereby a third party funder's liability for adverse costs following an unsuccessful claim is thought to be capped at the level of their investment). To our litigation funder clients, the Arkin-cap requires no introduction as it has ever since the decision in Arkin v Borchard Lines Ltd (Nos 2 and 3)  1 WLR 3055 (the Arkin Case) formed part of their body of armour.
In December 2012, administrators were appointed to Angel House Developments Limited by its lender, Dunbar Assets plc (Dunbar). The principal asset posted as security, a commercial property in Docklands, was sold the following year.
The proceeds of the sale, after paying the expenses of the administration, were insufficient to satisfy the full amount owing to Dunbar and as such nothing was left for the company or for its shareholder, Ms Julie Anne Davey.
Ms Davey subsequently brought wide-ranging claims against the administrators, including that the property had been sold at a significant undervalue and that the administrators had frustrated her attempts at a funded rescue.
Ms Davey also brought claims against Dunbar, with allegations including that the lender had conspired to procure that the property be sold at an undervalue and to thwart the rescue in order to cause Ms Davey harm.
As the litigation continued, Ms Davey sought funding and in December 2015 entered into a funding agreement with ChapelGate Credit Opportunity Master Fund Limited (the Funder), the principal terms of which were:
The Funder's profit share was to be the greater of 250% of the Original Commitment or 25% of Ms Davey's net recovery.
Ms Davey failed to procure ATE insurance. The Funder was, however, willing to waive this requirement, in exchange for a reduction in the amount funded to £1.25 million (the Revised Commitment).
The provisions relating to the calculation of the Funder's profit share were amended to refer to the Revised Commitment as being multiplied by two, so the Funder's recovery was still in line with its Original Commitment.
From contemporaneous internal emails, it appears the Funder was relatively relaxed about Ms Davey's failure to obtain ATE insurance in reliance on the Arkin-cap.
The Arkin-cap derives from the Arkin Case. The facts of this case are outside the scope of this note, but in essence Mr Arkin brought a competition claim in relation to which the expert fees were financed by a third party specialist litigation funder.
When Mr Arkin lost at trial and the defendants were unable to recover their costs, they sought a non-party costs order against the funder. The court initially declined to grant such an order, but on appeal a non-party costs order was granted, limited in amount to the extent of the funding provided. This principle is commonly referred to as the 'Arkin-cap'.
The rationale for the Funder was that, if they funded Ms Davey in the amount of the Revised Commitment and the case was unsuccessful, this would be a 'sunk cost'.
The maximum adverse costs liability they could be asked to bear, following the Arkin Case, would be an amount equal to the amount funded, so the total exposure for the Funder would equal the Original Commitment, and the profit share should thus remain referable to this higher amount.
Mr Justice Snowden rejected Ms Davey's claims against the administrators and Dunbar in a judgment peppered with phrases such as "wholly unfounded" and "speculation and exaggeration".
Snowden J was particularly sympathetic to the defendants on the basis they had acted in their professional capacity in this matter and the allegations against them included allegations of dishonesty which could be hugely damaging to their professional reputation and livelihood.
Snowden J suggested it would be a stretch to suggest that a "faced with such a wide-ranging set of allegations, [the defendants were] acting unreasonably in spending money preparing to defend them".
The defendants' costs came to just short of £7.5 million, of which Ms Davey was ordered to pay £3.9 million on an indemnity basis, largely on account of her conduct in the litigation. Ms Davey did not make these payments, and so the defendants sought a non-party costs order against the Funder under Section 51 Senior Courts Act 1951 (Section 51).
The Funder conceded that such an order should be made against it, but argued that the Arkin-cap would apply in these circumstances, reducing its liability to the amount of its Revised Commitment.
No doubt to the shock of the Funder (and many others in the market) Snowden J declined to apply the Arkin-cap and blew a devastating hole through the Funder's shining armour.
The Arkin Case has long been criticised, not least by Sir Rupert Jackson in his Final Report of the Review of Civil Litigation Funding in 2009.
Section 51 gives the court a broad discretion as to whether and how a non-party costs order should apply in order to achieve justice, and many feel that circumscribing this discretion in the manner seemingly prescribed by the Arkin Case tips the balance too far in favour of a commercial funder (who has the option to pick and choose which cases they fund) as against the defendant (who cannot choose whether or not they become the subject of litigation, but must rack up costs in defending themselves).
Despite these criticisms (including in obiter comments by the judiciary) it has broadly been applied.
Snowden J agreed with submissions from the defendants' counsel that the Arkin Case was never meant to create a rule which would apply in all cases involving a third party funder. The Arkin Case could be distinguished from this case given that, in the Arkin Case, the funder was funding a discrete element of the costs (being the experts' fees) as opposed to the entire claim.
Snowden J rejected Ms Davey's submissions that for a funder's exposure to be so open-ended would deter the offer of third party litigation funding, restricting access to justice.
He noted that litigation funding and its participants have come a long way since 2005, when the Arkin Case was determined with one eye towards the development of this nascent industry. Evidence from other jurisdictions suggests that adverse costs risks do not significantly deter potential funders, who are more than capable of developing business models which account for such risks.
Also instructive was that the Funder's approach was clearly that of a commercial investor, with access to justice, if a factor at all, not a primary factor in deciding whether or not to fund the case.
This was demonstrated by the size of the profit share the Funder hoped to obtain, and that the payment waterfall all but obliterated Ms Davey's chances of actually receiving any of the proceeds: the Funder in fact was the party which stood to gain most from a successful outcome, rather than the claimant herself.
A lot was made of Ms Davey's conduct in the litigation and the severity of the allegations raised, which turned out to be largely unfounded.
It was not suggested that the Funder was responsible for, or had encouraged, such conduct, but it did have the opportunity to investigate and form a view on the claim and whether the allegations were supported before choosing to fund it such that it would be disingenuous for the Funder to be insulated from the claim once it failed.
Similarly, weight was given to the fact the Funder should have been aware that Ms Davey would be unable to pay an adverse costs order and that, given the nature of the claim, those costs would be substantial and well in excess of the Revised Commitment.
It can hardly promote 'access to justice' if a defendant is forced to incur such costs and is then hampered from recovering them on the basis of a funding arrangement made between others and over which it has no influence.
Overall, Snowden J suggested that the 'Arkin-cap' was instead more of an 'Arkin approach': an option to be considered by the court in exercising its Section 51 discretion in order to achieve a just result in the circumstances, but by no means its only option.
He declined to apply it here, instead ordering the Funder to pay costs incurred by each defendant since the date of the funding agreement, on an indemnity basis if not agreed.
As a parting shot he suggested that his decision may well cause funders to keep a closer eye on the costs being incurred in their matters, developing mechanisms to limit them where possible, progress which could indeed be positive in the litigation sphere.
There has been a great deal of chatter about the Davey Case and the implications it may have for a UK litigation funding market which is otherwise booming.
From our perspective, the key take away point for litigation funders is that they should not rely on only one line of defence in the Arkin-cap. The Arkin-cap can be defeated, and unless they continue to protect themselves against the customary risks associated with their businesses (through, among other things, comprehensive due diligence before determining whether to fund a claim and ATE insurance), they will be entering the courtroom with a chink in their armour.