Davey v Money & Anor [2019] EWHC 997
As had been expected for a number of years, a full-blown challenge was always going to be made to the Arkin cap. This case presented the golden opportunity since it was a case where the defendants, professional office-holders, were successful in defending substantial claims brought against them by Ms Davey who had been funded in her litigation. Since these claims included serious allegations of breach of duty, tantamount to dishonesty, and since the Court ordered the £7.5m of costs to be assessed on the indemnity basis, the fact pattern did not look good from a funder’s perspective. If the cap was to be removed, this looked like a case where it would be taken off sharpish. To make matters worse, Ms Davey had not paid the interim payment on account of costs which was ordered to be £3.9m.
As was inevitable, the defendant joined the commercial funder, ChapelGate, under s51 Senior Courts Act so as to seek a non-party costs order. To its credit, ChapelGate accepted that a non-party costs order should be made, on the indemnity basis, but it contended that its total liability should only be £1,275,166.34 which was the amount of funding that it provided to the claimant. It relied on the Arkin cap.
Ms Davey commenced her claim on 18 July 2014. She did not have funding at that stage. Her claims were issued, making various allegations of breach of fiduciary duty. It was not until September 2015 that the claimant approached the funding market and the funding agreement for a total of £2.5m was entered into on 23 December 2015. By this stage, the defendants had already incurred substantial costs of the order of £3.15m. £1m of the costs advanced by the funding agreement were for the obtaining of ATE insurance. In the event, the claimant did not obtain that insurance. It was evident that this was because the costs of the ATE (both its upfront and its deferred premium) made the case economically unattractive to the claimant and to the funder. The failure to obtain ATE insurance led to a variation of the funding agreement whereby ChapelGate reduced its commitment to £1.25m. From the internal memoranda of the funders, it was clear that it priced its investment, and indeed appetite for the case, on the basis that they woulf benefit from the Arkin cap. This seemed a very unwise assumption to have made, given the fact that Arkin was, at best, a discretionary rule. The same QC who was acting for the claimant gave an opinion to the funder in respect of the merits.
The case was comprehensively lost, the judge commenting that “this was an obvious case in which the range of allegations made against the Administrators could and should have been carefully limited and confined from the outset, and kept under constant review.”
The first issue that the Court had to determine was whether the liability for costs was for the whole case or for only the period after the date of the funding agreement. Given the authorities that set out the need for causation, the Court limited the liability to post 23 December 2015. However, by far the more contentious issue was the applicability of the Arkin cap. Since champertous funding was accepted to be outside the Arkin cap, the issue of champerty was brought into play, with the defendants suggesting that the ChapelGate control was champertous. The Court rejected this, commenting “The modern approach to the doctrine of champerty appears to be concerned with asking whether an agreement with a non-party as regards the conduct of litigation would tend to undermine or corrupt the process of justice; and in that context, the crucial issue appears to be whether the non-party can exercise excessive control or influence over the conduct of the proceedings in such a way as, for example, to suppress evidence, influence witnesses, or procure an improper settlement”.
In its analysis of Arkin, the Court accepted the argument of the defendants that the Court of Appeal in Arkin “should not be taken to have been intending to prescribe a rule to be followed in every subsequent case involving commercial funders". `The Court’s direction of travel was clear. The Court noted that by the time ChapelGate entered into the funding agreement, pleadings had long closed, discovery had taken place and witness statements had been exchanged. It was therefore rather too late in the day to seek to disassociate itself from the gravamen of those claims. If the cap were to be applied, it would have the effect of insulating ChapelGate from the consequences of the indemnity costs order. The Arkin cap had an element of perversity about it - it was not easy to see why the choice of the funder as to the amount of its funding should dictate the amount of costs it should pay to the litigant's opponent if the litigation fails. That was because the amounts provided by a funder to a claimant may have no correlation whatever to the costs which a defendant or defendants were thereby caused to incur in defending themselves. As the Court noted “If the possibility that a funder may not be able to take advantage of the Arkin cap causes funders to keep a closer watch on the costs being incurred, both by the funded party and the opposing side, and if careful consideration is given to employing the mechanisms in the CPR to limit exposure to adverse costs in an appropriate case, I do not see that as contrary to access to justice or any other public policy.” In consequence, this was not a case where it would be just to apply the Arkin cap and so the funders were ordered to pay the costs of the defendants incurred after the date of the funding agreement on the indemnity basis.
This was a disastrous outcome for the funder, but one that was to be expected given the nature of the claims and the wholesale failure of them. A key lesson for a funder is when to associate itself with claims that allege dishonesty – the funder in this case commenced funding after the key work was done. In itself, this is an attractive entry point apart from the fact that a funder has very little influence when a case is so far advanced. Court orders have been made and the course of the litigation is set. The costs and budgeting in general seemed very optimistic in this case, and the assumption that Arkin could assist here was always somewhat unrealistic. An obvious point of concern for funders is when claims are brought against separately represented defendants. The potential adverse costs do really double. Funders were very much on notice after this case that their ability to insulate themselves from costs orders was limited, and was likely to have to be met by appropriate insurance.