If The Cap Fits . When One Size Does Not Fit All

The Court of Appeal has today handed down its judgment in ChapelGate Credit Opportunity Master Fund Ltd -v- Money & others. The Court of Appeal has upheld the decision of the High Court not to limit a commercial funder's liability for payment of the costs of the successful BDO administrators to the extent of the funding provided. The judgment provides welcome clarity on the status and application of the so-called "Arkin cap", and is of significant interest to commercial funders of litigation and to any professional services firm defending a claim which is, at least in part, backed by a commercial funder.

Our view is that the decision helpfully clarifies that the Arkin cap is only guidance and not a rigid rule. Whilst the Court of Appeal has said that the cap might still be appropriate on the facts of some cases, it is nevertheless clear that the Court considered that the litigation funding market had moved on from the early days when Arkin itself was decided, such that there was a less obvious case for protecting successful funders by means of a special cap not otherwise available in litigation.

In a more evolved and sophisticated market, other techniques, particularly ATE protection, are frequently utilised by prudent and careful funders in order to limit their downside exposures in ways that do not burden successful defendants.

Background facts - Davey v Money & Others

The Joint Administrators of Angel House Developments Limited, who were partners of BDO and Dunbar Assets Plc (together "the Applicants") had successfully defended a claim made against them by Ms Davey (the "Claimant"). The Applicants then applied for a non-party costs order against ChapelGate Credit Opportunity Master Fund Limited ("ChapelGate"), who was the commercial funder of Ms Davey in the underlying litigation.

The Court had characterised the conduct of the underlying litigation as significantly outside the norm and had ordered costs on an indemnity basis. The Claimant had been ordered to contribute £3.9 million towards the Applicants' costs and whilst ChapelGate did not resist a non-party costs order, it sought to rely on the Arkin cap to contend that their total liability should be limited to the overall maximum of the funding that it had provided to the Claimant, which was some £1.2 million.

The power to order a non-party to pay costs is derived from section 51 of the Senior Courts Act 1981. The so-called Arkin cap takes its name from the decision of the Court of Appeal in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055. In Arkin, a company which had provided funding on a commercial basis for an unsuccessful claim was ordered to pay the winners' costs only to the extent of that funding. The Arkin cap has been considered in a...