The risks of litigation funding

When a litigation funder finances a claimant to take proceedings, which are unsuccessful, and the claimant is not in a position to pay the defendant’s costs, it is possible for the defendant to apply for a costs order against the funder. In general terms, a costs order is likely to be made against the funder if either the funder exercised control over the proceedings in some way, or if the funder stood to benefit financially.

Most commercial funders expect to be handsomely rewarded and appreciate the risk of exposure to an adverse costs liability.  They are in a position to control that risk by monitoring the proceedings and ensuring the claimant is in a position to pay the defendant’s costs, perhaps by arranging an adverse costs insurance policy.

Until recently, it was also generally understood that a funder’s liability for adverse costs would be limited to a sum equal to the amount of funding. This is called the “Arkin Cap” as it arose from a Court of Appeal decision in 2005 called Arkin v Borchard.

In a judgment handed down on 17 April 2019 in a case called Davey v Money, the High Court has said that the Arkin Cap is not a rule which automatically limits the funder’s liability in this way.

The Court observed that in Arkin the funder only paid for specific litigation costs (e.g. the costs of an expert) and that the Court of Appeal limited the funder’s liability for adverse costs because it was not right to make such a funder liable for the entirety of the defence costs. The High Court said that funder’s liability depends on the facts of each case. Its decision was that the funder was liable for all the defendant’s costs incurred after the date of the funding agreement being approximately £4.5 million compared with the funding commitment of £2.5 million. This was in circumstances where the claimant had conducted the claim in  a manner which led to the Court making an indemnity costs order against her and where the Court considered the potential reward to the funder  (if the proceedings had been successful) was likely to be greater than the claimant would receive.

One would expect commercial funders to be able to look after themselves. The greater risk is in respect of claims that are funded by private funders or family members or friends. The concern is that this decision may deter such people from providing limited funding (e.g. disbursement funding) that assists the claimant in bringing a claim because of the risk of adverse costs.