The so called “Arkin cap” is a term derived from the decision of the Court of Appeal in Arkin v Borchard Lines [2005] 1 WLR 3055 which limits the liability of a third-party funder for adverse costs to an amount equivalent to the funding provided.  The Arkin cap has received criticism from Sir Rupert Jackson in his Review of Civil Litigation Funding: Final Report and in Cook on Costs (2017). Sir Rupert stated in his report “in my view, it is wrong in principle that a litigation funder, which stands to recover a share of damages in the event of success, should be able to escape part of the liability for costs in the event of defeat.

For the first time, in Sandra Bailey & Others v GlaxoSmithKline UK Limited [2017] EWHC 3195 (QB), the High Court has considered the extent to which the Arkin cap should be applied to limit the sum a funder can be ordered to give by way of security for costs whereas Arkin concerned the appropriate costs order at the end of a trial

In a Judgment handed down on 8 December 2017, the Court awarded the defendant security for costs against the litigation funder in a sum greater than the amount committed by the funder to fund the litigation, therefore in excess of the Arkin cap

In this case, the Claimants had support of third party funding and the benefit of ATE insurance in respect of adverse costs.  However, one of the important factors the Court took into account in the exercise of its discretion was that the litigation funder, MLS, was balance sheet insolvent and reliant upon its sole shareholder for its liquidity. In addition, MLS had no capital and would need to borrow to provide any security ordered. The key issue was therefore the appropriate amount of any security to be ordered and whether security should could be awarded in excess of the Arkin cap.

The Court found that whether the Arkin cap should ultimately be applied is properly to be determined at the conclusion of the case. At the security for costs stage, the Arkin cap is only one of the factors to be taken into account in the exercise of the court’s broad discretion.  The Court also accepted, on the facts of the case, that the Arkin cap may not ultimately be applied and was willing to order security in a sum in excess of that figure to do justice in the circumstances. The Court said that in any event, no injustice will be done if ultimately the cap is applied as the additional money will have been paid into court in the meantime and can be repaid to MLS in the event that it is not required following the decision of the trial judge

There are a number of features of this particular case which caused the Court to order security in excess of the Arkin cap, one of which related to the COA’s proviso in Arkin that its approach would apply where funding had been provided “in a manner which… is not otherwise objectionable”. In the present case, there was clearly more of a concern about the funder’s position.

The recent Court of Appeal decision in Premier Motorauctions v PwC LLP & another [2017] EWCA Civ 1872 was directly relevant to the role that insurance plays in such a situation. In Bailey, MLS, supported by the Claimants, argued that the ATE cover was sufficient security but the COA in Premier Motorauctions held that, on the facts, the defendants could not receive the required reassurance and that the prospect of avoidance was not “illusory”. Taking the Premier Motorauctions decision into account, in the circumstances of the case, and upon the terms of the relevant ATE policy, the Court did not consider it possible to discount as illusory the prospect of avoidance.

This decision will have potentially wide-ranging impacts on litigation funders, their clients and their opponents. Funders need to be aware that even if the Arkin cap may ultimately apply at the conclusion of the case, they may be ordered to pay security for costs in excess of the Arkin cap during the course of the litigation. This has particular implications for funders investing in modest value claims where the amount committed under the Litigation Funding Agreement is capped at a level that is considered proportionate to the realistic claim value. Funders may be forced to apply a greater margin of error within their case criteria for the costs:damages ratio.

In addition, comments by the Court suggested that there is scope for the Arkin cap to be disregarded in certain circumstances, even at trial stage, as the Court of Appeal in Arkin suggested that it’s approach would not apply in cases where funding arrangements were found to be “objectionable”.