The Court of Appeal has ruled that a litigation funder can be exposed to higher costs than those they committed to backing a claim in a ruling that will send shock-waves through the sector. 

Lord Justice Newey ruled the court was not bound by the 2005 decision in Arkin, where  liability was capped, and that judges should have discretion to make higher costs orders. The case reopens uncertainty about litigation funders’ exposure to punitive orders.

In Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors, it was heard that business owner Julie Davey had entered a funding agreement with ChapelGate to support her £10m claim. The total funding commitment was set at £2.5m, conditional upon agreement of a costs budget, the conclusion of CFAs with her lawyers, and Davey obtaining after-the-event insurance against any adverse costs order.

It was agreed that any money received by Davey from the litigation would firstly repay the ChapelGate funding, then pay the funder's profit share and then pay all outstanding legal and expert fees. Davey would receive the remainder.

In the event, Davey made CFAs with counsel and solicitors Mishcon de Reya but did not obtain ATE insurance. ChapelGate then sought to halve its funding commitment while keeping its profit entitlement. The funder took out its own ATE insurance.

At trial Mr Justice Snowden dismissed Davey’s claims and ordered her to pay her opponents’ costs on an indemnity basis, with ChapelGate joined as a party. Crucially, the judge subsequently ordered the funder to pay costs on the indemnity basis without any cap. This was despite ChapelGate arguing its liability should be capped at the overall total of the funding it had provided, on the basis of the Court of Appeal decision in Arkin. 

In its submission, ChapelGate said commercial litigation funders would be discouraged from providing finance in the future if they were held to open-ended costs, but the judge ruled that funders being forced to keep a closer watch on costs was not contrary to access to justice.

In Arkin, the court had held it was appropriate to cap a commercial funder's liability to the amount of its funding. The Arkin cap was criticised by Sir Rupert Jackson in his landmark costs review in 2009 but has continued to apply in civil litigation.

In ChapelGate, lawyers for the funder argued it was not for the court to seek to undo what has been settled since Arkin, and that departing from it would be wrong in principle and deter commercial funders. But the court also heard submissions that the Arkin judgment was not attempting to lay down a binding rule – instead judges had proposed a solution that might over time become generally accepted.

Lord Justice Newey said in the current climate of litigation funding a financier should be able to protect its position by ensuring the claimant has ATE cover, without having to rely on Arkin. He stressed the previous approach of the Court of Appeal was not redundant, but should only be relevant where the facts of the case are closely comparable to Arkin.

He said Snowden had been right to conclude that judges do not necessarily have to adopt the Arkin approach when determining liability for costs.

‘Judges, as it seems to me, retain a discretion and, depending on the facts, may consider it appropriate to take into account matters other than the extent of the funder’s funding and not to limit the funder’s liability to the amount of that funding,’ said Newey.

‘A different judge might or might not have arrived at the same conclusion as Snowden J, but that is not the point. The order he made was plainly one that was reasonably open to him and his decision cannot be said to have been founded on irrelevant considerations.’