Re-evaluating the Arkin Cap: ChapelGate v Money [2020] EWCA Civ 246

Introduction

Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors ([2020] EWCA Civ 246) is a landmark decision by the England and Wales Court of Appeal (Civil Division) that scrutinizes the application of the "Arkin cap" in the context of commercial litigation funding. The case revolves around whether ChapelGate, a commercial funder, should have its liability for costs incurred in litigation capped at the amount it funded, as previously established in the Court of Appeal's decision in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655. The primary parties involved are ChapelGate Credit Opportunity Master Fund Limited (“ChapelGate”), Ms. Julie Davey (the claimant), Dunbar Assets plc, and the Administrators of Angel House Developments Limited (“AHDL”).

Summary of the Judgment

The core issue in this appeal was whether the lower court should have applied the Arkin cap to limit ChapelGate's liability for costs incurred by the administrators and Dunbar. ChapelGate argued that its liability should be confined to the sum it provided under the funding agreement. However, the Court of Appeal held that the Arkin cap should not be automatically applied in all cases involving commercial funders. Instead, it should be considered as an approach conducive to achieving just outcomes based on the specific circumstances of each case. In this instance, the judge determined that applying the Arkin cap would result in injustice, given ChapelGate's substantial commercial interest in the litigation and the nature of the allegations against Dunbar and the administrators.

Analysis

Precedents Cited

The judgment extensively references the landmark case Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] EWCA Civ 655. In Arkin, the Court of Appeal established that commercial funders could have their liability for costs capped at the amount they invested in the litigation. This principle was intended to balance the funder's commercial interests with the court's overarching goal of fairness in cost allocations. Additionally, the judgment cites Excalibur Ventures LLC v Texas Keystone Inc (No 2) [2016] EWCA Civ 1144 and other cases like Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39 and Burnden Holdings (UK) Ltd v Fielding [2019] EWHC 2995 (Ch), which further explore the discretionary power of courts in imposing costs orders on non-parties, particularly commercial funders.

Legal Reasoning

The court's legal reasoning centered on the discretionary nature of costs orders under section 51 of the Senior Courts Act 1981. While the Arkin cap provides a useful framework, it is not an inviolable rule but rather an approach that courts may adopt based on case-specific factors. In evaluating whether to apply the Arkin cap, the judge considered several factors:

Commercial Motivation: ChapelGate approached its involvement as a commercial investment, seeking significant returns, which influenced the decision against applying the Arkin cap.
Conduct of Litigation: The litigation was marked by serious but unfounded allegations against Dunbar and the administrators, leading to high costs. The funder's engagement in a case characterized by such conduct warranted indemnity costs.
Potential Costs versus Funding: The costs incurred by the respondents vastly exceeded the funding provided by ChapelGate, creating a disparity that made applying the Arkin cap unjust.
Funding Agreement Terms: The amended funding agreement allowed ChapelGate to retain a substantial profit share, further entrenching its primary interest in the litigation.
Policy Considerations: The judge was not persuaded by arguments that deviating from the Arkin cap would deter future commercial litigation funding, especially given the evolved landscape of third-party funding and insurance.

The court ultimately determined that applying the Arkin cap in this context would lead to an imbalance where defendants could incur significant costs beyond the funder's financial commitment, thereby contravening the principles of fairness and justice.

Impact

This judgment has significant implications for the landscape of commercial litigation funding. It reinforces the idea that the application of the Arkin cap is not mandatory and must be evaluated based on the specific circumstances of each case. Factors such as the funder's level of involvement, the nature of the litigation, and the proportionality of costs all play a crucial role in determining liability for costs. This decision may lead to a more nuanced approach in future cases, where courts balance the funder's commercial interests against the necessity of ensuring that defendants are not unduly burdened by costs.

Additionally, the judgment underscores the importance of thorough due diligence by funders when assessing the viability and conduct of the litigation they choose to finance. It also highlights the evolving judicial attitudes towards third-party funding, moving away from rigid frameworks towards more flexible, justice-oriented assessments.

Complex Concepts Simplified

The Arkin Cap

The "Arkin cap" refers to a legal principle established in Arkin v Borchard Lines Ltd, which limits a commercial funder's liability for adverse costs to the amount they invested in the litigation. This means that if the funded party loses the case, the funder is not responsible for costs exceeding their initial investment.

Indemnity Costs

Indemnity costs are a higher standard of costs awarded to a winning party. Unlike standard costs, which are typically assessed on a "party and party" basis, indemnity costs cover all reasonably incurred litigation expenses, giving a more comprehensive reimbursement.

Funding Agreement and Waterfall Structure

In this case, the funding agreement between ChapelGate and Ms. Davey included a "Waterfall" structure. This dictates the priority in which any recovered funds are distributed. First, the funder's principal investment is repaid, followed by their profit share, legal fees, and finally, any residual amount is allocated to the claimant.

Conclusion

ChapelGate Credit Opportunity Master Fund Ltd v Money & Ors serves as a pivotal case in understanding the judicial approach towards commercial litigation funding and the application of the Arkin cap. The Court of Appeal's decision underscores the lack of an absolute rule governing the funder's liability for costs, emphasizing that discretion is paramount and must be exercised in the context of each case's unique circumstances. This judgment provides a blueprint for future assessments, balancing the funder's commercial interests with the fundamental principles of justice and fairness in litigation cost allocations. Legal practitioners and commercial funders alike must take heed of this nuanced approach, ensuring meticulous evaluation of funding agreements and the conduct of litigation to navigate the complexities of cost liability effectively.