Does the Arkin Cap mean that the Litigation Funder may be liable for Third Party Costs if the ATE Provider fails?

The “Arkin Cap” refers to a principle from the English court case Arkin v Borchard Lines Ltd. Essentially, it dealt with the extent to which a third-party litigation funder could be held liable for the opposing party’s legal costs in an unsuccessful case.
Here’s a breakdown:

• Origin:
  • The principle stems from a 2005 Court of Appeal decision.
  • It addressed situations where a commercial funder financed a legal claim that ultimately failed.

• Core Idea:
  • Initially, it was widely interpreted that a litigation funder’s liability for the winning party’s costs would be capped at the amount they had invested in the case.
  • This “cap” aimed to balance access to justice (by encouraging funding) with the need to protect successful parties’ right to recover costs.

• Evolution:
  • More recent court decisions, notably in cases like ChapelGate Credit Opportunity Master Fund Limited v James Money & Ors, have challenged the strict application of the Arkin Cap.
  • Courts have emphasised that they retain discretion in determining costs orders against third-party funders.  
  • Therefore, the Arkin Cap is now considered a factor to be weighed, rather than a rigid rule.  
  • Essentially, the courts are moving to a more case-by-case basis when deciding who should pay the litigation costs.

In summary, the Arkin Cap was a principle that sought to limit a litigation funder’s liability for adverse costs, but its application is now subject to the court’s discretion.

Does the use of a Limited Company structure mitigate the Funder’s liability?

When considering the application of the Arkin Cap in situations where a funder operates through a limited company, it’s essential to understand that the courts are increasingly focusing on the substance of the funding arrangement rather than its form. Here’s a breakdown:

• Limited Company Structure:
  • Using a limited company as a funding vehicle is common for commercial funders.
  • This structure provides a degree of separation between the funder’s assets and the risks associated with litigation funding.

• Court’s Discretion:
  • However, the courts are not bound by the corporate veil in all circumstances. They retain the power to “pierce the corporate veil” to achieve a just outcome.  
  • This means that even if funding is provided through a limited company, the court can still hold the company liable for adverse costs.

• Factors Considered:
  • The court will consider factors such as:
    • The degree of control the funder exerts over the litigation.
    • The extent to which the funder stands to benefit from the outcome.
    • Whether the limited company was used to avoid potential costs and liabilities.
  • Essentially, the courts are moving to a position where if the limited company is used as a vehicle to conduct litigation funding, then that limited company can be held liable for costs.

• Arkin Cap’s Relevance:
  • Even if the Arkin Cap were to be considered, it would apply to the limited company’s assets, not necessarily shielding the individuals behind it in all cases, especially if there is evidence of improper conduct.
  • As stated previously the Arkin Cap is not as strictly applied as it once was.

While a limited company structure offers some protection, it does not guarantee immunity from adverse costs orders. The courts will scrutinise the funding arrangement to ensure fairness and prevent abuse.

What are the risks?
Understanding investor liability for adverse costs in litigation funded through a limited company, particularly considering the “Arkin cap,” requires careful consideration of recent legal developments. Here’s a breakdown:

The “Arkin Cap” and its Evolution:

• Arkin v Borchard Lines Ltd:
  • This 2005 Court of Appeal case established that a litigation funder’s liability for adverse costs could be limited to the funding they provided.
  • This “Arkin cap” aimed to balance access to justice with protecting successful parties’ ability to recover costs.
• Shifting Landscape:
  • However, the “Arkin cap” has faced increasing scrutiny, and recent cases have challenged its status as a strict rule.  
  • The case of Chapelgate Master Fund Opportunity Ltd v Money, has been very important in this area.  
  • The courts have emphasised that they retain a broad discretion when ordering costs against non-parties, including litigation funders.

Situations of Investor Liability:

• Beyond the “Arkin Cap”:
  • Courts are no longer bound to automatically limit a funder’s liability to the amount of their funding.  
  • Factors considered include:
    • The funder’s degree of control over the litigation.
    • The funder’s commercial interest in the outcome.
    • Whether the funded party is likely to be able to pay adverse costs.
    • Whether or not the bringing of the litigation was reasonable.
    • Whether or not indemnity costs are awarded.
• Factors Increasing Liability:
  • Significant funder involvement in directing the litigation.
  • Funding speculative or unreasonable claims.
  • The funded party’s inability to pay adverse costs.
  • The absence of adequate “after the event” (ATE) insurance.
• The nature of the costs order:
  • If the costs order against the funded party is for “indemnity costs”, this dramatically increases the likelihood that the funder will be held liable for those costs.

Key Considerations:

• The courts prioritise achieving a just outcome, and the “Arkin cap” is now viewed as a factor to consider rather than a rigid rule.
• Litigation funders face increased liability risk for adverse costs, particularly in cases where they exert significant control or fund high-risk claims.
• It is very important for funders must carry out thorough due diligence on any case they fund.

In essence, while a company’s limited liability may shield investors in many contexts, litigation funding introduces specific risks. Courts are increasingly willing to hold funders accountable for adverse costs, especially when they play a significant role in the litigation.