Davey v Money & Anor

Factual and Procedural Background

This judgment concerns the application of the "Arkin cap" to limit non-party costs orders against a commercial litigation funder. The Plaintiff initiated substantial claims and counterclaims against the Defendants, consisting of two Administrators and Company B. The Plaintiff alleged breach of duty by the Administrators and improper conduct tantamount to dishonesty by officers of Company B. The Plaintiff's claims failed, resulting in an order to pay the Defendants' costs on an indemnity basis. The Defendants' total claimed costs approached £7.5 million, with £3.9 million ordered as payments on account, none of which have been paid.

The Defendants sought non-party costs orders under Section 51 of the Senior Courts Act 1981 against the Plaintiff's commercial litigation funder, Company A. Company A accepted liability for costs on the same indemnity basis but contended its liability should be capped at the amount it funded, invoking the "Arkin cap" established by the Court of Appeal in Arkin v Borchard Lines Ltd.

Briefly, Company B appointed the Administrators to the Plaintiff's company, Company C, whose main asset was a commercial property sold for £17.05 million, leaving no surplus for Company C or the Plaintiff. Company B obtained summary judgment against the Plaintiff on a personal guarantee and pursued further costs recovery. The Plaintiff commenced proceedings alleging breaches of fiduciary duty and conspiracy, which were case-managed and tried together with Company B's enforcement proceedings.

The Plaintiff entered into a funding agreement with Company A in December 2015, which was subsequently amended to reduce funding commitment and waive the requirement for after-the-event insurance, with Company A obtaining its own insurance. The litigation proceeded to trial, resulting in judgment rejecting all material allegations against the Defendants and ordering costs on an indemnity basis.

Legal Issues Presented

1. Whether the non-party costs order against Company A should be limited to costs incurred after the date of the funding agreement.
2. Whether the "Arkin cap" limiting Company A's liability to the amount funded should apply in this case.
3. Whether Company A's funding agreement and conduct amounted to champerty, thereby affecting the application of the Arkin cap.
4. The appropriate exercise of the court's discretion under Section 51 of the Senior Courts Act 1981 in ordering costs against a commercial litigation funder.

Arguments of the Parties

Defendants' Arguments

• The Arkin cap is not a mandatory rule and should not override the court's discretion under Section 51.
• The serious and unfounded allegations made by the Plaintiff caused the Defendants to incur substantial costs, justifying indemnity costs orders.
• Company A knew of the serious allegations and had the opportunity to investigate before funding the litigation.
• Company A funded the entire litigation, not merely a part, and bargained for a substantial profit share, effectively making it the primary party interested in the claim.
• The amendment to the funding agreement halved Company A's commitment while maintaining profit entitlement and removed the Plaintiff's obligation to obtain insurance, but Company A obtained insurance for itself.
• Applying the Arkin cap would negate the indemnity costs order and reduce the Defendants' recovery to a fraction of their costs.
• Company A exercised no actual control over the litigation; the Plaintiff retained conduct.
• Company A's involvement was not champertous under modern legal principles.

Company A's Arguments

• The Arkin cap serves a legitimate purpose by limiting litigation funders' exposure to adverse costs, enabling sustainable funding models and facilitating access to justice.
• The principle established in Arkin is binding and applicable, including where the funder finances the entire claim.
• Company A's funding agreement was commercially standard, provided access to justice, and did not grant disproportionate profit share.
• Company A had no obligation to ensure the Plaintiff obtained after-the-event insurance for the Defendants' costs.
• Allegations of champerty are unfounded; the Plaintiff retained control over the litigation, and there was no undue influence or interference.
• Rejecting the Arkin cap would expose funders to open-ended liabilities, potentially deterring litigation funding.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began by affirming that Company A does not dispute liability for costs on an indemnity basis under Section 51, consistent with the Court of Appeal's decision in Excalibur. However, the Court considered whether Company A's liability should be limited to costs incurred after the funding agreement date, concluding that causation principles require such limitation, as the funder cannot be liable for costs it did not cause.

Turning to the Arkin cap, the Court reviewed the facts and principles from Arkin, noting that the Court of Appeal there intended the cap as an approach to balance justice and access to funding, not as a rigid rule. The Court emphasized that subsequent authority, including Excalibur and Bailey, demonstrates that the cap is not mandatory and may be disapplied in appropriate cases.

The Court rejected the Defendants' argument that Company A's involvement was champertous, finding the Plaintiff retained control and there was no evidence of undue influence or improper conduct by Company A.

Analyzing the facts, the Court found Company A approached funding as a commercial investment, with substantial profit expectations and priority over the Plaintiff in recoveries. The Plaintiff's litigation conduct was significantly out of the norm, involving serious and unfounded allegations increasing Defendants' costs. Company A had ample opportunity to investigate before funding and was aware the Plaintiff could not pay substantial costs awards.

The amendment to the funding agreement halved Company A's funding commitment but maintained profit entitlement and removed the Plaintiff's obligation to obtain insurance, with Company A insuring itself. This demonstrated Company A's commercial focus and lack of correlation between investment and Defendants' costs exposure.

The Court acknowledged the policy considerations underlying Arkin but found no evidence that full liability would deter funding. It noted that litigation funding has evolved, and funders can protect their interests through monitoring and other mechanisms without being accused of champerty.

In conclusion, the Court held that applying the Arkin cap in this case would be unjust and inconsistent with the particular circumstances, including the serious nature of the allegations, the commercial nature of funding, and the indemnity costs order.

Holding and Implications

DISPOSED OF: The Court ordered that Company A pay the Defendants' costs incurred after 23 December 2015, to be assessed on an indemnity basis if not agreed, without applying the Arkin cap to limit liability.

The decision directly affects the parties by imposing full indemnity costs liability on the litigation funder beyond the amount funded, reflecting the funder's commercial interest and the Plaintiff's conduct. The Court clarified that the Arkin cap is not an automatic rule but an approach subject to judicial discretion and the circumstances of each case. No new precedent was established; rather, the judgment reinforces the discretionary nature of non-party costs orders against commercial funders and signals that the Arkin cap may be disapplied where justice requires.