“Ms. Davey alleged that the Administrators had breached their fiduciary duties and failed to exercise independent judgment in the administration, and had sold Angel House at a substantial undervalue in reliance upon the advice of unsuitable agents (‘APAM’) that Dunbar had selected for them to use. Ms. Davey also alleged that the Administrators had wrongly frustrated her attempt to mount a ‘funded rescue’ of AHDL which she contended would have led to all AHDL’s creditors being paid and the company being taken back out of administration.”
“We are now proposing an amendment, the effect of which would be no change to our net risk: - Waive the requirement that [Ms Davey] obtain insurance for adverse costs risk - Reduce our commitment from GBP 2.5m to 1.25m - Keep our profit entitlement the same (i.e. based on a commitment of GBP 2.5m) - [Ms Davey] gives us security over her rights in the claim (not strictly necessary but is an added bonus for us) Normally we require that the claimant obtain ATE insurance to cover adverse costs risk. This is because if a case is lost and the defendant fails to pay the other side’s costs, the funder may be liable to pay an amount of those costs up to the amount it funded i.e. ChapelGate’s maximum liability on a case without insurance is equal to 2 x the actual amount funded. This is known as Arkin liability (after the case in which the rule was established). We originally committed GBP2.5m in this case, including about 1m to pay the premium on the insurance …. To ensure we can still run the case, the lawyers have agreed that their fee will be GBP 1.25m. If we fund that entirely then, together with our Arkin risk, we end up back at£2.5m of total risk (i.e. no change). Therefore our fee is still calculated on 2.5m.”
“782. … I conclude that there was no conspiracy between Dunbar and APAM, and that the Administrators acted independently and generally in accordance with the statutory objectives for the administration. 783. I have also found that the Administrators acted with appropriate care to obtain the best price reasonably obtainable in the circumstances for Angel House and that they were reasonably entitled to rely upon APAM’s advice in that regard. 784. Further, far from seeking to frustrate Ms Davey’s attempts to mount a funded rescue of AHDL, the Administrators did all that could reasonably have been expected of them to facilitate such an outcome without risking loss of the sale of Angel House. 785. I have also found that Angel House was in fact sold for its true market value in December 2013, and that accordingly AHDL suffered no loss for which the Administrators or Dunbar could in any event be liable.”
“Dunbar’s costs … 8. An order for costs on the indemnity basis will be appropriate where the conduct of a party has taken the situation away from the norm, see Excelsior Commercial and Industrial Holdings Ltd v Salisbury Ham Johnson[2002] EWCA Civ 879 . For conduct to be out of the norm, it is not necessary to show deliberate misconduct. In some cases, unreasonable conduct to a higher degree will suffice. An award of indemnity costs is, however, to some extent a mark of disapproval of the way in which a case has been fought and lost. 9. As I set out in the Judgment, serious allegations were made against Dunbar by Ms Davey. Although the word ‘dishonesty’ was not used in the pleadings or by counsel at trial, in my judgment the case advanced at trial against Dunbar necessarily involved just that. The central allegation was of a deliberate conspiracy between Dunbar and APAM to cause the Administrators inadvertently to breach their duties to the company so as to harm the company and Ms Davey as its shareholder. Among the matters alleged were the production of documents designed to give a false impression of APAM’s incentives in the ultimate sale process, and the deliberate rigging of that sale process so as to result in a sale of Angel House to what was described as the ‘Preferred Bidder’ of Dunbar at an undervalue, so as to leave Ms Davey exposed to Dunbar on her personal Guarantee. 10. Moreover, after disclosure, it must have been apparent to Ms. Davey and her advisers that if their allegations against Dunbar were correct, a large number of internal documents … must also have been concocted by [the Dunbar witnesses] to create a false picture to cover up the conspiracy. 11. These were serious allegations which were wholly unfounded and I rejected them in the Judgment. Moreover, in correspondence before and during the trial as well as through counsel at the outset of the trial, Dunbar invited Ms. Davey and her advisers to withdraw those allegations. Those invitations were not taken up and the case proceeded on the basis of the pleadings alleging such misconduct. As it was, however, many of the allegations of dishonesty and conscious impropriety were not then put to Dunbar’s witnesses. 12. Allegations of dishonesty against professional persons and those who operate in regulated industries can have the most serious consequences. Parties who make allegations of this level of seriousness should only do so on the basis of clear evidence, and the appropriateness of continuing with such allegations must be kept under careful review. I simply do not think that is what happened in this case. The serious nature of the allegations made against Dunbar and the inappropriate and unreasonable manner in which they continued to be made, was well out of the norm. The Administrators’ Costs … 31. I make it clear that I do not think that the case pursued by Ms Davey was completely without merit. She did succeed in showing that the Administrators gave assistance to Dunbar to pursue her on her personal Guarantee, this being assistance that should not have been given. This aspect of the case, coupled with some of the deficiencies in the documentation to which I have referred, could have founded a straightforward case that the process for sale of Angel House was flawed and had resulted in a sale of the property at an undervalue. Whilst I would not describe that case as strong, and I do not think that the identified deficiencies in the documentation were ultimately of any great significance, it was a case that could properly have been made. ….. 33. In my judgment, this was an obvious case in which the range of allegations made against the Administrators could and should have been carefully limited and confined from the outset, and kept under constant review. Instead, Ms Davey sought to attack almost every action of the Administrators throughout the administration, even though I think many of those criticisms could, with an objective eye, have been seen to be unfounded from the contemporaneous documents, and ultimately all of the significant allegations that might have sounded in damages failed. That lack of discrimination in the allegations made significantly increased the burden of the case for the Administrators. 34. Further, for reasons that I have already outlined, if a claimant makes allegations against a professional defendant in a case in which she is also making allegations against other defendants that are tantamount to allegations of dishonesty, in my view the claimant must be assiduous in making clear whether or not they are also alleging that the professional was part of that dishonesty. That was not so with the pleadings in this case, and although some clarity was introduced at the pretrial review, a significant part of the costs had already been incurred by then, and doubts persisted even at the trial, which I was forced to take up with counsel. 35. In short, if a straightforward claim in professional negligence is accompanied, as this one was, by a welter of other allegations, some of which verged on allegations of complicity in the alleged dishonest conduct of other defendants, in my view a claimant who has lost heavily can have little complaint if at the end of the day the costs order places the burden on him or her to show that the defendant, faced with such a wide-ranging set of allegations, was acting unreasonably in spending money preparing to defend himself against those allegations and the resultant effect upon his professional reputation and livelihood. That must be the more so if those allegations are accompanied, as they were in this case, by an element of speculation and exaggeration of the claim. …. 37. [S]tanding back and for the other reasons which I have just expressed, I do think that the way in which Ms Davey formulated and pursued this case against the Administrators was out of the norm, and should result in an order for costs to be assessed on an indemnity basis ….”
“The Court of Appeal [in Arkin]obviously thought that it was unjust if a funder whose involvement was limited to providing funding for the claimant’s expert evidence was made liable for all the defendants’ costs of the action. However, I consider that there is an obvious risk of injustice in the other direction if a number of defendants are forced to incur significant costs in defending themselves, but are limited to recovering only a proportion of those costs because of entirely different funding arrangements over which they have no control between the claimant, his funder and his lawyers. The disparity between the amounts that defendants may be forced to incur, and the amount provided by the funder to the claimant, may, as in the instant case, be accentuated in a case where the claimant’s lawyers are prepared to operate on the basis of CFAs, but the defendants’ lawyers are not”; v) The judge considered there to be “force in the point that ChapelGate negotiated to receive a substantial commercial profit which would have taken priority over any compensation payable to Ms. Davey” (paragraph 99). The judge accepted a submission that “the use of the Waterfall structure and the level of ChapelGate’s Funder’s Profit Share meant that, if measured in terms of her prospects of receiving compensation, Ms. Davey’s access to justice came a clear second to ChapelGate receiving a significant return on its commercial investment” and said that, “[i]n that sense, ChapelGate plainly was the party with the primary (i.e. first) interest in the Claim” (paragraph 105). On the subject of the Waterfall, the judge said this in paragraph 101: “In the instant case, the use of the Waterfall structure in the Funding Agreement meant that ChapelGate had first priority to any recoveries from the litigation. As might be expected, the structure was that ChapelGate was always entitled to be repaid the funding which it had spent on professional fees of up to£1.25 million before any other payments could be taken from any recoveries. There cannot, I consider, be any criticism of that. In addition to recovering its outlay, however, ChapelGate was entitled to a substantial Funder’s Profit Share of any recoveries. That profit share increased with time, so that after commencement of the trial, that Funder’s Profit Share would have amounted to five times the commitment amount - i.e.£6.25 million . Only once such Funder’s Profit Share had been paid would MdeR and counsel have been entitled to receive their CFA uplifts, and only after that would Ms. Davey have been entitled to receive the balance of any compensation recovered in the Claim”; vi) The judge was “not persuaded by the policy argument made by [counsel for ChapelGate] that if [he] were not to apply the Arkin cap …, commercial litigation funders would be discouraged from providing funding in the future, essentially because [his] decision would signal that they might have an ‘openended’ exposure to adverse costs” (paragraph 106). The judge went on to observe in paragraph 110: “If the possibility that a funder may not be able to take advantage of the Arkin cap causes funders to keep a closer watch on the costs being incurred, both by the funded party and the opposing side, and if careful consideration is given to employing the mechanisms in the CPR to limit exposure to adverse costs in an appropriate case, I do not see that as contrary to access to justice or any other public policy.”
“(1) Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings in— (a) the civil division of the Court of Appeal; (b) the High Court; (ba) the family court; and (c) the county court, shall be in the discretion of the court. … (3) The court shall have full power to determine by whom and to what extent the costs are to be paid ….”
“The subsection simply provides that ‘the court shall have full power to determine by whom . . . the costs are to be paid.’ Such a provision is consistent with a policy under which jurisdiction to exercise the relevant discretionary power is expressed in wide terms, thus ensuring that the court has, so far as possible, freedom of action, leaving it to the rule-making authority to control the exercise of discretion (if it thinks it right to do so) by the making of rules of court, and to the appellate courts to a establish principles upon which the discretionary power may, within the framework of the statute and the applicable rules of court, be exercised. Such a policy appears to me, I must confess, to be entirely sensible. It comes therefore as something of a surprise to discover that it has been suggested that any limitation should be held to be implied into the statutory provision which confers the relevant jurisdiction.”
“25. A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion and their Lordships, rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position as follows. (1) Although costs orders against non-parties are to be regarded as ‘exceptional’, exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such ‘exceptional’ case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against. (2) Generally speaking the discretion will not be exercised against ‘pure funders’, described in para 40 of Hamilton v Al Fayed (No 2)[2003] QB 1175 , 1194 as ‘those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course’. In their case the court’s usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights. (3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is ‘the real party’ to the litigation, a concept repeatedly invoked throughout the jurisprudence …. (4) Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed, financially insecure companies generally) in litigation designed to advance the funder’s own financial interests. Since this particular difficulty may be thought to lie at the heart of the present case, it would be helpful to examine it in the light of a number of statements taken from the authorities …. 29. In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.”
“38. While we do not dispute the importance of helping to ensure access to justice, we consider that the judge was wrong not to give appropriate weight to the rule that costs should normally follow the event…. In our judgment the existence of this rule, and the reasons given to justify its existence, render it unjust that a funder who purchases a stake in an action for a commercial motive should be protected from all liability for the costs of the opposing party if the funded party fails in the action. Somehow or other a just solution must be devised whereby on the one hand a successful opponent is not denied all his costs while on the other hand commercial funders who provide help to those seeking access to justice which they could not otherwise afford are not deterred by the fear of disproportionate costs consequences if the litigation they are supporting does not succeed. 39. If a professional funder, who is contemplating funding a discrete part of an impecunious claimant’s expenses, such as the cost of expert evidence, is to be potentially liable for the entirety of the defendant’s costs should the claim fail, no professional funder will be likely to be prepared to provide the necessary funding. The exposure will be too great to render funding on a contingency basis of recovery a viable commercial transaction. Access to justice will be denied. We consider, however, that there is a solution that is practicable, just and that caters for some of the policy considerations that we have considered above. 40. The approach that we are about to commend will not be appropriate in the case of a funding agreement that falls foul of the policy considerations that render an agreement champertous. A funder who enters into such an agreement will be likely to render himself liable for the opposing party’s costs without limit should the claim fail. The present case has not been shown to fall into that category. Our approach is designed to cater for the commercial funder who is financing part of the costs of the litigation in a manner which facilitates access to justice and which is not otherwise objectionable. Such funding will leave the claimant as the party primarily interested in the result of the litigation and the party in control of the conduct of the litigation. 41. We consider that a professional funder, who finances part of a claimant’s costs of litigation, should be potentially liable for the costs of the opposing party to the extent of the funding provided. The effect of this will, of course, be that, if the funding is provided on a contingency basis of recovery, the funder will require, as the price of the funding, a greater share of the recovery should the claim succeed. In the individual case, the net recovery of a successful claimant will be diminished. While this is unfortunate, it seems to us that it is a cost that the impecunious claimant can reasonably be expected to bear. Overall justice will be better served than leaving defendants in a position where they have no right to recover any costs from a professional funder whose intervention has permitted the continuation of a claim which has ultimately proved to be without merit. 42. If the course which we have proposed becomes generally accepted, it is likely to have the following consequences. Professional funders are likely to cap the funds that they provide in order to limit their exposure to a reasonable amount. This should have a salutary effect in keeping costs proportionate. In the present case there was no such cap, and it is at least possible that the costs that MPC had agreed to fund grew to an extent where they ceased to be proportionate. Professional funders will also have to consider with even greater care whether the prospects of the litigation are sufficiently good to justify the support that they are asked to give. This also will be in the public interest. 43. In the present appeal we are concerned only with a professional funder who has contributed a part of a litigant’s expenses through a non-champertous agreement in the expectation of reward if the litigant succeeds. We can see no reason in principle, however, why the solution we suggest should not also be applicable where the funder has similarly contributed the greater part, or all, of the expenses of the action. We have not, however, had to explore the ramifications of an extension of the solution we propose beyond the facts of the present case, where the funder merely covered the costs incurred by the claimant in instructing expert witnesses.”
“72. It seems to me that it is appropriate to apply the Arkin cap in the present case. The position might be different if a funder had behaved dishonestly or improperly or if, as the court put it in Arkin, ‘the funding agreement falls foul of the policy considerations which render an agreement champertous’ e.g. if the funder has taken complete control over the litigation. In such a case it may be that there should be no cap at all. 73. On the facts of the present case the Arkin cap is not relevant in respect of Psari/Lemos since the likely shortfall (£4.8 million ) is less than their contribution to costs of£9.75 million . The same is so in the case of the Platinum funders, taken as a whole, where their contribution to costs of one form or another is£14 million (or£8 million if you exclude the costs ultimately borne by Huron). But the position is different if you take Hamilton and JH separately, or if you distinguish between contributions towards security for the defendants’ costs and towards Excalibur’s costs. In the case of Blackrobe (contribution£4 million ) the effect of the cap is relatively small.”
“For all these reasons I can discern no principle whether of fairness, justice or otherwise pursuant to which the Platinum funders’ investments earmarked for the provision of security should be treated any differently from their or Psari’s and Mr Lemos’ investment earmarked for the payment of [the claimant’s] own costs. To do so would subvert the funding model which appears to be accepted by the [Association of Litigation Funders of England and Wales] in consequence of the Arkin compromise. No doubt that acceptance is informed in part by recognition that there are, as I have already remarked, those who consider that the Arkin cap is unduly generous to funders who, some think, should not have their exposure capped but rather left at large, or perhaps in the discretion of the court.”