Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors

The Court of Appeal considered whether the so-called "Arkin cap" limiting a commercial funder’s costs liability to the amount of its funding should have been applied to an order made by Snowden J requiring the funder, ChapelGate, to pay the respondents’ costs on the indemnity basis. The court held that Arkin does not create an immutable rule; rather it sets out an approach to be considered and applied where just. On the facts Snowden J was entitled to refuse the Arkin cap because ChapelGate had funded the lion’s share of the claimant’s costs, stood to receive a substantial priority return under the Funding Agreement (the Waterfall and Funder’s Profit Share), had waived the claimant’s obligation to obtain ATE insurance (increasing defendants’ exposure), and the litigation was pursued in a manner that justified indemnity costs.

Accordingly the Court of Appeal dismissed the appeal, concluding Snowden J acted within his discretion under section 51 of the Senior Courts Act 1981 and took relevant considerations into account when refusing to limit ChapelGate’s liability to the amount it had funded.

This appeal arises from complex litigation pursued by Ms Davey (on behalf of AHDL) against the administrators of a company and its secured creditor. The proceedings were funded by ChapelGate under a Funding Agreement and a later amendment (the A&W Agreement). ChapelGate provided funding (initially contemplated as £2.5m, later reduced to a £1.25m commitment) and negotiated a "Waterfall" giving it priority repayment and a substantial Funder’s Profit Share; ChapelGate also waived the claimant’s obligation to obtain after-the-event insurance.

At first instance Snowden J dismissed the substantive claims and ordered Ms Davey to pay the defendants’ costs on the indemnity basis. He joined ChapelGate as a party for costs and ordered ChapelGate to pay the defendants’ costs on the indemnity basis from the date of the Funding Agreement, without capping that liability at ChapelGate’s funding. ChapelGate appealed seeking a cap in line with Arkin v Borchard Lines Ltd (the "Arkin cap") which limits a commercial funder’s liability to the amount it funded where that approach is appropriate.

The Court of Appeal framed the issues as: (i) whether Arkin establishes a binding rule requiring a cap in all commercial-funding cases, and (ii) whether Snowden J misapplied his discretion in declining to apply the Arkin cap in this case. The court reviewed authority on costs orders against non-parties and the scope of the court’s discretion under section 51 Senior Courts Act 1981, including Dymocks and subsequent authorities.

• On the first issue the court concluded Arkin sets out an approach which may be appropriate in many cases but is not a binding rule that must be applied regardless of circumstances. Judges retain a discretion to order costs against funders on terms that justice requires in the particular case.
• On the second issue the court held Snowden J’s decision was within the generous ambit of reasonable judgment. He permissibly took into account that ChapelGate had financed most or all of the claimant’s costs after the Funding Agreement, stood to receive a large priority return under the Waterfall, waived the claimant’s ATE cover (increasing the respondents’ exposure), and that the litigation had been pursued in a way that justified indemnity costs. The court also rejected the submission that failure by the respondents to pursue security for costs required a different outcome.

The Court of Appeal therefore dismissed the appeal and affirmed that a judge may, depending on the facts, decline to apply the Arkin cap.

Appeal dismissed. The Court of Appeal held that Arkin does not lay down a mandatory rule requiring a funder’s liability to be capped at the amount funded in every commercial-funding case. Snowden J had a discretion under section 51 Senior Courts Act 1981 to determine whether limiting a funder’s liability was just. On the facts — substantial funding by ChapelGate, its priority Waterfall and large potential profit, waiver of the claimant’s ATE insurance, and the manner in which the litigation was pursued giving rise to indemnity costs — Snowden J was entitled to refuse the Arkin cap. The Court of Appeal concluded his decision fell within the reasonable ambit of judicial discretion and dismissed the appeal.

Appeal from the High Court of Justice, Chancery Division, Companies Court, Mr Justice Snowden [2019] EWHC 997 (Ch) to the Court of Appeal [2020] EWCA Civ 246.