It is a truism known to all investors that higher rewards are almost always linked to higher risks. Until recently, that appeared not always to be the case for professional litigation funders (ie those investing in claims in exchange for a share of the damages). However, following the Court of Appeal’s decision in Chapelgate Credit Master Fund Opportunity Ltd v Money & Others, the ability of professional litigation funders to obtain the lucrative rewards from backing claims against banks and other financial institutions is now significantly more risky. In this briefing note, Jolyon Connell and Iain Stewart explain the Court of Appeal’s decision and consider what it might mean for claimants and financial services firms alike.
The position until now – the ‘Arkin cap’
Prior to this case, many considered that a binding rule regarding costs liability for funded cases had emerged in English law, namely that a third party that had provided funding on a commercial basis for a claim which ultimately failed could only be ordered to pay the winners’ legal costs up to an amount equivalent to the sum the funder had paid towards the losing party’s costs. This was known as the ‘Arkin cap’. One effect of the Arkin cap is that impecunious claimants could find it easier to bring claims against banks and other financial institutions, relying on funding from professional funders whose liability was capped. This led to situations in which, upon successfully defending a claim, the defendant bank was faced with recovering its substantial legal costs from (i) a commercial funder whose liability was capped (below the actual costs incurred by the bank) or (ii) a claimant without any money.
The Chapelgate decision
In the immediate case, upon the failure of the claim at trial, the High Court ordered that the claimant’s litigation funder (Chapelgate) ought to pay the defendant’s legal costs (£4.3m) in an amount in excess of the monies that Chapelgate had contributed towards the claimant’s cost (£1.3m), ie in excess of the Arkin cap. The Court of Appeal upheld that decision on the basis that the Arkin cap is not a strict rule which must be adhered to. The Court of Appeal emphasised that costs orders are discretionary, with justice in the case as the prevailing consideration. As such, the High Court had been free to exercise its discretion in favour of imposing the £4.3m costs liability on Chapelgate.
The effect of this judgment
For those funding claims against banks and other financial institutions, the investment landscape has become considerably riskier following this judgment. While the Arkin cap may still be applied by the Court in other cases depending on the facts, funders who stand to gain a large proportion of any damages are now far more likely to bear the risk of adverse costs orders. How funders respond to this development is open to conjecture. Obtaining ‘After The Event’ (ATE) insurance is an obvious way of negating the increased risk for funders. However, the possibility of increased costs of ATE premiums and funders seeking to pass those additional ATE costs onto claimants – and/or increase their share of the claimants’ damages – may mean that some claims become commercially unviable for prospective claimants. Some may (rightly) decry the impact of this on access to justice for wronged claimants. However, banks and other financial institutions, who are often the defendants in funded claims, are unlikely to be among those critics. Further cases may determine whether Chapelgate is an anomaly or the new norm. In the meantime, the business of professional litigation funding is now riskier than before.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2020