The judgment handed down earlier this week by the UK’s Court of Appeal on Chapelgate Credit Opportunity Master Fund v Money et al is not big news for the business of legal finance, as heralded by some. The Court of Appeal upheld Snowden J’s previous decision in the High Court which made a litigation funder (Orchard Capital) liable for the adverse costs awarded to the defendants and did not apply the “Arkin cap”. The Arkin cap refers to Arkin v Borchard, a 2005 Court of Appeal case that has been widely interpreted as restricting the adverse costs exposure for a commercial litigation funder to the amount funded in a case. In Chapelgate, that was about £1.25 million, but the defendants claimed to have spent more than £7.3 million in legal costs.
This week’s decision will have no impact on the business of companies like Burford—which spends considerable resources on diligencing appropriate matters to fund and finances commercial disputes involving sophisticated entities with adverse costs insurance coverage (ATE).
The Arkin cap only comes into play in extremely narrow circumstances, e.g., when a funded claimant loses and is subject to an award of adverse costs but neither is able to pay those costs itself nor has adverse costs insurance in place. In such a scenario, the funder is the provider of last resort—a funding scenario that Burford would not enter. Indeed, Burford has never been the subject of a costs order in financed litigation—capped or otherwise.
Moreover, what distinguishes Chapelgate is that the decision of Snowden J not to apply the Arkin cap was based on the award for costs being “indemnity costs” against the claimant. Indemnity costs are unusual and generally only awarded when the Court is of the view that it was not reasonable to bring the case in the way it was. The Court of Appeal, in those circumstances, upheld Snowden J’s exercise of discretion in an unusual case that they held was “significantly out of the norm”.
At Burford, we diligence matters to ensure that only well-founded cases are brought and that our clients are fully able to pay a costs award and take on the obligation to do so. If we are in doubt about that position, we require that the client attain ATE insurance for all the potential costs—not just the Arkin cap amount. Further, we have set up Burford Worldwide Insurance Limited (BWIL), backed by some of the most pre-eminent reinsurers, to provide ATE coverage to legal finance clients in jurisdictions where adverse costs are an issue.
This is not to say that this week’s judgment won’t impact the world of legal finance—but it will do so for funders that don’t work as Burford does. The “end of the Arkin cap” will impact funders that do not carefully diligence matters and who don’t have the access to ATE that Burford does. While the Court of Appeal deemed this matter “significantly out of the norm”, it is nonetheless a reminder that smaller legal finance firms should always ensure they are risk proofing their business by doing their research and getting coverage.
Finally, it is worth noting the last reason this decision will not impact Burford’s business: Burford has relatively limited exposure to English litigation because it has become an unduly expensive system, particularly because of the adverse costs regime. We do think the Court of Appeal fell into error in not recognizing the impediment that the risk of large adverse costs awards poses to many justified claims. The public policy concern we have about the decision is the chilling effect it will have on many, especially small, claimants, who seek justice when they are ranged against deep-pocketed defendants. And when defendants weaponize costs, which is what is now occurring, that does not serve the interests of justice and instead creates an uneven playing field. Which is to say: Large, well-capitalized funders like Burford are needed now more than ever.