Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors

Factual and Procedural Background

The appeal concerns whether a judge should have applied the "Arkin cap" to a costs order made against the appellant, Company A, a commercial litigation funder. The "Arkin cap" limits a funder's liability for adverse costs to the amount of funding provided, based on the Court of Appeal decision in Arkin v Borchard Lines Ltd.

Company A funded litigation brought by an individual, Plaintiff, against two respondents: the Administrators and a secured creditor, Company B. The dispute arose following the administration and sale of a property owned by a company controlled by Plaintiff. Plaintiff alleged breaches of fiduciary duties by the Administrators and conspiracy and interference by Company B, claiming the property was sold at an undervalue and that a rescue attempt was wrongfully frustrated.

The litigation was funded by Company A pursuant to a funding agreement, which included provisions on the amount funded, conditions precedent, a priority waterfall for proceeds, and profit shares. Plaintiff did not obtain after-the-event (ATE) insurance as initially required, leading to an amended agreement reducing the funding commitment but maintaining profit entitlements. Company A also took out ATE insurance for its own exposure.

The trial judge dismissed Plaintiff's claims, finding no conspiracy and that the Administrators acted properly. Significant adverse costs orders were made against Plaintiff on an indemnity basis due to the nature and conduct of the litigation, including serious but unfounded allegations of dishonesty and conspiracy. Company A was subsequently joined for costs purposes and ordered to pay the respondents' costs on an indemnity basis from the date of the funding agreement without any cap.

Company A appeals the refusal to apply the Arkin cap limiting its liability to the amount it funded.

Legal Issues Presented

1. Whether the "Arkin cap" limiting a commercial funder's liability for adverse costs to the amount of funding provided should have been applied to Company A's liability for costs.
2. Whether the judge correctly exercised discretion in departing from the Arkin cap in light of the facts and conduct of the litigation.
3. Whether Company A's liability should be limited to costs incurred after the funding agreement date.
4. Whether failure to seek security for costs against Plaintiff affected the application of the Arkin cap.

Arguments of the Parties

Appellant's Arguments

• The Arkin cap is binding authority establishing the correct solution for commercial funders meeting its criteria and should have been applied.
• The judge erred in treating the Arkin cap as discretionary rather than mandatory.
• The judge failed to properly consider that the respondents did not apply for security for costs, which should weigh against imposing unlimited liability on Company A.
• The reduction in funding commitment under the amended agreement did not reduce Company A's exposure given the removal of ATE insurance requirements and maintained profit entitlement.
• Applying the Arkin cap is necessary to avoid deterring commercial funders and to protect access to justice.

Respondents' Arguments

• Company A is a commercial funder and thus falls within the category of non-parties who fund and benefit from litigation and should be liable for costs beyond the funding amount.
• The conduct of the litigation was significantly out of the norm, justifying indemnity costs and no cap on Company A's liability.
• Company A had full opportunity to investigate the claims before funding and was the primary beneficiary of the litigation, with profit entitlement exceeding Plaintiff’s potential recovery.
• The disparity between the costs incurred by respondents and the funding provided by Company A was substantial and unjust to limit Company A’s liability.
• Policy considerations and developments in litigation funding, ATE insurance, and costs control support the judge’s discretion to depart from Arkin.
• Failure to seek security for costs against Plaintiff was not a valid reason to limit Company A’s liability.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analysed the nature and scope of the "Arkin cap," concluding that it is not a mandatory rule but an approach to be considered in the exercise of judicial discretion under section 51 of the Senior Courts Act 1981. The cap was devised to balance enabling access to justice via commercial funding with fairness to defendants who incur costs.

The court found that the facts of this case differed significantly from Arkin. Company A fully funded the claimant’s costs from the funding agreement date and stood to gain a substantial commercial profit far exceeding its outlay. The litigation involved serious, unfounded allegations that increased defendants’ costs significantly. Company A had control over whether to fund the litigation and was the primary beneficiary, effectively the "real party" to the litigation.

The judge’s refusal to apply the Arkin cap was supported by factors including: the commercial nature of Company A’s involvement; the abnormal conduct of the litigation warranting indemnity costs; the disparity between costs incurred and funding provided; the amended funding agreement reducing funding but maintaining profit entitlement; and the policy consideration that limiting liability could leave defendants under-compensated.

The court rejected the argument that failure to seek security for costs should affect the decision, noting that respondents relied on information from Plaintiff’s solicitors and that security for costs would likely have been limited to enforcement costs abroad, unlikely to prevent litigation.

The appellate court held that the judge’s exercise of discretion was reasonable, founded on relevant considerations, and not to be disturbed.

Holding and Implications

The court DISMISSED THE APPEAL, upholding the decision that the Arkin cap should not be applied to limit Company A’s liability for costs.

The direct effect is that Company A remains liable for the respondents' costs on an indemnity basis from the date of the funding agreement without any cap. No new binding precedent was established beyond reaffirming that the Arkin cap is discretionary and may be departed from where justice so requires. The decision underscores that commercial funders with substantial involvement and profit interest in litigation may be exposed to full costs liability, particularly where litigation conduct is out of the norm and defendants incur disproportionate costs.