The Arkin cap determined by the Court of Appeal in Arkin v Borchard Lines (2005) limits the liability of third-party funders to the amount that they have contributed in funding the claim. The Court’s decision on this potentially increases the liability of litigation funders which could potentially increase the cost for funded parties. It also provides an extra pressure point for those defending funded claims.

The recent decision made on 8 December 2017, Sandra Bailey & Others v Glaxo Smith Kline UK Limited, examines the exposure of third-party funders to security for cost applications and considers whether the so-called Arkin cap, is of any application in limiting a funder’s liability to provide security.

The High Court Judge awarded security for costs against the third-party litigation funder, Managed Legal Solution Limited, in excess of the Arkin cap.

Managed Legal Solution Limited provided £1.2 million of funding towards the litigation in return for a share in the proceeds of any recovery. Notwithstanding that, the Judge ordered that they provide £1.75 million by way of security for costs which was £550,000 more than the sum Managed Legal Solution Limited would have paid had the Arkin cap been upheld.

The court’s decision therefore opens the door to increased orders for security for costs, thereby increasing the potential exposure of litigation funders. The Court relied on the following factors in its judgment:-

1. The Claimant’s After-the Event (ATE) insurance was given limited weight as there was not an adequate assurance that the Claimants’ ATE insurance would not be avoided;

2. Arkin should not be followed and was not binding upon the Court as it was not a case concerning the quantum of security to be ordered pursuant to CPR 25.14; and

3. Applying Arkin would give rise to a substantial injustice in this case.

The specific facts of the case which led the Court to make an order for costs in excess of

the Arkin cap were:-

Managed Legal Solution Limited was not a member of the Association of Litigation Funders (ALF);
Managed Legal Solution Limited was balance sheet insolvent and reliant upon a shareholder for its liquidity. As the judge put it, Managed Legal Solution Limited was “an almost inevitable target for a security for costs application”;

There was no contractual requirement for the shareholder to continue providing Managed Legal Solution Limited with access to funds; and
Managed Legal Solution Limited had no capital and would need to borrow to provide security.

Therefore, parties who are contemplating accepting third-party funding and consider that there may be a risk of a security for costs application, should ensure that they have adequate funding arrangements in place to meet any security ordered. In particular, parties should undertake proper due diligence in relation to potential funders and be wary of engaging funders who are not members of the ALF.

ATE (After the Event Insurance)

You will recall us reporting to you last month, the issues raised by the court on inadequate security of costs cover, on the Premier Motor Auctions v PWC LLP case. The court Judge on the Bailey matter, made reference to whether the policy had sufficient protection and whether the policy could be avoided for nondisclosure or misrepresentation. Again, weaknesses arose by not having a stand alone indemnity or non-voidable endorsement in place.

Maxima are specialist brokers in the Funding and ATE market place, who have the requisite knowledge to ensure you are as best protected as possible, when considering funding or ATE options for you or your clients.

Vanessa Andrews