IS THE ARKIN CAP DEAD?

Tuesday 02 July 2019

WHAT ARE THE RISKS NOW EXPOSED TO FUNDERS AND CLIENTS?

In the recent High Court case Davey v Money & Anor, the judge decided that the Arkin cap did not apply and the funder (ChapelGate) should be fully liable for the successful party’s adverse costs since the date of the funding agreement.

The Arkin Cap was historically introduced in the case of Arkin v Borchard Lines Ltd where the opponents sought an order for the adverse costs liability, which was successful but capped at the amount of the funder’s investment.

It is not surprising that this change of decision has come about, given that there have been other cases in recent times where there has been a narrowing of the application of the Arkin Cap. We have seen in Both Excalibur Ventures LLC v Texan Inc & Ors and Bailey & Ors v Glaxosmithkline UK Ltd, funders who have put up funding to meet security of costs fall into question over the Arkin cap.

Who is at risk – Funder or Client?

The answer is technically both are at risk and this depends on many factors. Has the client taken out ATE insurance independently, or via their preferred insurers? Some funders do require the client to take out ATE insurance before they will provide Third Party Funding, others may not require the client to take out ATE and look to ‘indemnify’ any third party costs liabilities themselves.

In the latter, the risk to the client is, in the event a funder ceases to trade or becomes insolvent, then the client would become liable for the adverse costs award, as it is the client not the funder bringing the claim. Most funders are not regulated by the Financial Conduct Authority or are based ‘off shore’ and thus the client will not have the benefit of any FSCS protection, where they are a consumer client.

In addition, the client needs to consider the cost levied by the funder for ‘indemnifying’ the adverse costs liability v’s stand alone ATE insurance.

ATE Insurance – Independently bought or Directly referred via Funders

Some funders do require the client to source their own ATE insurance, and do refer their clients to Maxima or independent brokers, which is the best solution for their client. This enables the client to get a market wide comparison of which is the best product for them and most competitively priced. Solicitors have an obligation under the SRA Code of Conduct to ensure that they meet the needs of their client and in order to do this, only an independent broker can fully satisfy their compliance obligations.

Implications for Directly referred ATE to preferred insurer

As mentioned earlier, most funders are not FCA regulated and therefore not authorised to pre-select an ATE insurance provider, as this falls foul of the FCA code of conduct rules and insurance mediation activities regulations. The onus is on their Solicitors to ensure that any preferred insurer is the best available option, that meets the demands and needs of their client. The penalties for non compliance can lead to a professional negligence claim and reputational damage to the firm as well as investigations by the FCA. It is surely always best to play it safe and get independent expert advice.

 

Written by Vanessa Andrews, 1st July 2019