Funder liable to pay substantial adverse costs in group litigation

The court’s costs judgment in Sharp v Blank [2020] EWHC 1870 (Ch) highlights the perils of complex, high-stakes group litigation for individual claimants and litigation funders alike. Having dismissed the claimants’ group action, the court made numerous costs orders, most notably including a very substantial costs order against the litigation funder, holding the funder jointly and severally liable to pay the defendants’ costs.

Background

Approximately 5,800 shareholders in Lloyds TSB had brought proceedings against five former directors under a Group Litigation Order (GLO) claiming £385m in damages in connection with Lloyds’ acquisition of HBOS plc in 2008. The group claim, which was financed by a commercial funder, ultimately failed, and the court had to decide the appropriate costs order.

The terms of the GLO provided that each claimant should be severally liable for the defendants’ costs. The court had to determine the claimants’ liability for "common costs" (essentially all costs other than those incurred solely in relation to individual claims). The defendants sought an order that the claimants pay their costs of more than £30m on the standard basis.

In order to mitigate their costs exposure, the claimants had obtained primary ATE insurance cover of £6.5m in respect of any adverse costs order in favour of the defendants. The litigation funder also supplied a deed of indemnity to meet the claimants’ excess costs exposure over the £6.5m primary cover under the ATE policy. The funder had excess layer insurance in respect of its liability under the deed of indemnity. The total amount of the excess layer insurance was £14.95m. Accordingly, the combined insurance coverage and ATE cover for the claimants and the funder (£21.45m) fell short of the defendants’ total costs claim.

The litigation funder was joined to the proceedings as an additional party for the purposes of deciding costs. Although the funder accepted in principle that it was liable to pay the costs awarded against the claimants, it argued that its liability should be limited in two respects: first, it should only be liable to the extent that the claimants did not satisfy the adverse order against them; and second, to the extent of the amount of funding provided to the claimants. Limitation of liability to the amount of funding is known as the “Arkin cap”, based on the Court of Appeal’s decision in Arkin v Borchard Lines Ltd [2005] 1 WLR 3055.

In Arkin, the funder had financed part of the unsuccessful claimant’s costs – the cost of expert evidence – and was ordered to pay the defendants’ costs up to the amount of funding provided. For some time, the Arkin cap was thought to represent a general principle which limits a commercial funder’s adverse costs liability to the amount of funding provided to the claimant. However, that proposition has been the subject of further judicial scrutiny of late in the form of the Court of Appeal’s recent decision in Davey v Money [2020] 1 WLR 1751 which was considered in the present case, as is described below.

Decision

The court ordered that the claimants and the funder should pay the defendants’ costs subject to detailed assessment on the standard basis. The liability of each individual claimant would be several, and quantum was to be assessed in accordance with the terms of the GLO. As for the funder, its liability would be joint and several with the claimants, not secondary as the funder had contended.

The question as to whether the funder’s liability would be limited by the Arkin cap was adjourned for further consideration. The judge cited the Court of Appeal’s decision in Davey v Money, which held that the Arkin cap is not a binding rule, but simply guidance for judges, who retain complete discretion in making non-party costs orders. Therefore, when exercising its discretion, the extent of the funder’s investment is one of a number of potential factors to be considered by the court. Another factor might be the funder’s return on its investment if the claim had been successful. However, the judge decided that he did not have enough information about the details of the funding arrangements between the claimants and the funder to exercise his discretion on whether or not the Arkin cap should apply in this case, and so the issue was adjourned.

The judge also explained his approach to making an interim costs order. The claimants and the funder were ordered to pay £17m on account of the defendants’ costs. That amount represented 50% of the defendants’ claimed incurred costs, 90% of their budgeted costs and irrecoverable VAT. The judge noted that the funder had financed the claimants’ costs of £17m together with the premiums on the excess layer insurance. Thus, he felt comfortable making the funder liable for the interim costs order of £17m even though application of the Arkin cap remained to be decided.

In addition, the claimants and the funder were ordered to pay pre-judgment interest on the defendants’ costs. The claimants had argued that no interest should be awarded. They relied on the fact that the defendants had not indicated any intention in their costs budget to claim pre-judgment interest on costs, and that a claim for interest had not been factored into the level of ATE insurance cover. Although the judge accepted that the defendants had a commercial interest in the level of ATE cover secured by the claimants in order to aid their costs recovery under the GLO, it was ultimately for the claimants to decide what risks to insure themselves against.

Comment

At a time when many expect litigation funding to play a greater role in financing all manner of claims likely to arise as a consequence of the Covid-19 pandemic, the outcome in this case is likely to attract attention among the many stakeholders in the litigation process – especially given the magnitude of the sums at stake.

The result is a reminder that funders may face very substantial adverse costs liabilities (in this case, on a joint and several basis) if a funded claim is unsuccessful.

The judgment should also be noted by potential claimants in funded claims, which are often presented as “no win, no fee” recovery opportunities with no downside risks. These claims can incur very significant legal costs, and whilst ATE insurance and a deed of indemnity from the funder can be comforting, the potential claimants need to carefully consider both the level of the cover provided and also its terms. As this ruling pithily commented, “It may well be that many of the 5800 Claimants… thought that they were litigating risk-free. But most unfortunately that is not the case.”