The beginning of unlimited costs liability for litigation funders?

Litigation funders may be feeling uneasy after the recent High Court decision of Bailey v Glaxosmithkline[1]. Until this decision, funders could justifiably have assumed that they would only be ordered to pay security for costs up to the level of their funding, an application of the so called “Arkin cap”[2]. Foskett J has shown this assumption to be wrong, ordering the claimants’ funder to pay £1.75 million into court as security for the defendant’s costs, a sum well in excess of their £1.2 million funding.

The rationale behind Foskett J’s decision was fourfold:

1. The Arkin cap has been the subject of mounting criticism, particularly by Jackson LJ in his report on litigation funding. In particular, Foskett J felt that: “the unquestioned imposition of the cap as formulated in Arkin would of itself fetter the general discretion that the court would have concerning costs at the conclusion of a trial”.
2. If the cap is not applied, security for costs limited to the sums underwritten by the funder may be insufficient to cover the final costs award, frustrating the purpose of the security for costs application.
3. The Court of Appeal in the Arkin decision was only addressing the situation where a professional funder has contributed to a part of the litigant’s costs, not where a funder has underwritten the whole of the costs, as was the case in this instance.
4. The Arkin decision did not involve an application for security for costs. It was a case concerning the appropriate costs order at the end of a trial. The Arkin cap was therefore only one factor to consider in exercising the court’s wide discretion in relation to security for costs.

Foskett J acknowledged that a wholesale reversal of the Arkin cap principle would require a definitive decision from the Court of Appeal or a change in legislation, however he refused to approach his decision from the starting point that the Arkin cap would always apply at the end of the case. This echoes the Court of Appeal’s acknowledgement in the Excalibur decision[3] that what it called the “Arkin compromise” is considered by some as unduly generous to funders.

This decision may foreshadow an increasingly limited application of the Arkin cap, however funders should take note that Foskett J nevertheless endeavoured to strike a fair balance between the parties. The £6.8 million claimed as security by the defendant was reduced to £1.75 million through an analysis of the defendant’s likely reasonable costs recovery and credit for the protection provided to it by the claimants’ ATE policy.

Litigation funders may have lost their ability to rely on the Arkin cap in security for costs applications, but they should take comfort that the courts have no intention of damaging the litigation funding market.

[1]Sandra Bailey & Others v Glaxosmithkline UK Limited v Managed Legal Solutions Limited [2017] EWHC 3195 (QB)

[2]Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055

[3]Excalibur Ventures LLC v Texas Keystone Inc [2016] EWCA Civ 1144