Chapelgate Credit Opportunity Master Fund Ltd v Money & Ors

This appeal was not about whether the original claim should have succeeded. That had already been decided against Ms Davey. The Court of Appeal was asked a narrower but commercially important question: when a commercial funder backs failed litigation, must its liability for the winning side’s costs be capped at the amount it invested?

The underlying proceedings were serious and expensive. Ms Davey alleged that administrators had breached duties in the administration of Angel House Developments Limited and that Dunbar had interfered with the administration and conspired in relation to the sale of the company’s main asset. The trial judge later rejected those allegations and made indemnity costs orders against Ms Davey.

ChapelGate had funded the case as a commercial investment. It expected a significant return if the claim succeeded. After the claim failed, the successful parties sought costs orders against ChapelGate as a non-party funder. ChapelGate accepted that some costs order could be made against it, but argued that its liability should be capped by reference to the amount it had funded.

ChapelGate relied on the well-known decision in Arkin. In that earlier case, a commercial funder that had financed part of an unsuccessful claim was ordered to pay the winners’ costs only up to the amount it had funded. ChapelGate argued that the same approach should apply here and that the judge should have limited its liability to the total funding it had provided.

The successful respondents argued that Arkin did not create a rigid rule. They said the court still had a broad discretion under section 51 of the Senior Courts Act 1981 to decide what was just in the circumstances. On their case, this was not a simple part-funding arrangement of the kind seen in Arkin. ChapelGate had funded the litigation as a commercial venture, stood to make a substantial return, and had structured the arrangement so that it would be paid ahead of the claimant from any proceeds.

That meant the court had to decide whether Arkin was a mandatory cap or just one possible approach within a wider discretion.

The legal issue was whether the Court of Appeal’s earlier decision in Arkin laid down a binding rule that a commercial litigation funder’s liability for adverse costs must be capped at the amount of its funding whenever the relevant criteria are met. If not, the question became whether the judge had been entitled, in the exercise of discretion under section 51 of the Senior Courts Act 1981, to refuse a cap on the particular facts of this case.

That issue matters because non-party costs orders sit at the intersection of access to justice and fairness to successful defendants. Courts recognise that funding can help claims proceed, but they also recognise that a successful party should not necessarily be left unable to recover costs where a commercial funder backed the failed case for profit.

The Court of Appeal dismissed ChapelGate’s appeal. It held that the Arkin approach does not operate as a binding rule in every case involving a commercial funder. Judges retain a discretion and may, depending on the facts, decide not to limit the funder’s liability to the amount funded.

The court accepted that Arkin still has continuing relevance, especially where the facts are close to that case, such as where a funder only covers a distinct part of the claimant’s costs. But it rejected the idea that Arkin created an automatic cap. The court emphasised that section 51 gives the court a broad discretion and that the only immutable principle is that the discretion must be exercised justly.

On the facts here, the trial judge had been entitled to refuse the cap. This was not a narrow expert-evidence funding arrangement. ChapelGate funded the litigation as a commercial investment, funded all payments in respect of Ms Davey’s costs from the funding date, and stood to receive a multiple of its outlay if the claim succeeded.

The Court of Appeal backed the judge’s reasoning that several features made this case different from Arkin. First, ChapelGate was not simply helping with one limited cost item. From the date of the funding agreement, all payments in respect of Ms Davey’s costs appear to have been made with ChapelGate’s money.

Second, ChapelGate stood to gain a substantial commercial return. The funding structure gave it priority in recoveries and a profit share that could amount to a multiple of its investment. The court said it was legitimate to look at those prospective gains as well as the amount spent.

Third, the litigation exposed the respondents to very large defence costs. There were multiple defendants, serious allegations and no realistic expectation of shared representation. The judge was entitled to consider the unfairness of leaving successful parties heavily out of pocket because of funding arrangements they had no control over.

Fourth, the ATE position mattered. The requirement for Ms Davey to obtain ATE insurance was waived, which removed a layer of protection for the respondents. Although ChapelGate may have viewed its own exposure as commercially unchanged, the court accepted that the respondents’ exposure had materially increased.

For business owners, the main point is that litigation funding is not just about getting cash to run a claim. It is also about who carries the downside if the case fails. This decision shows that courts may look beyond the headline funding amount and examine the real economics of the arrangement.

If your business is the claimant, a funding agreement with a steep waterfall and a large funder return may affect how a court views the funder’s role. If your business is defending a funded claim, this case supports arguments that a commercial funder should not always be protected by a simple cap, especially where the claim is broad, expensive and aggressively pursued.

The judgment also highlights the importance of adverse costs planning. ATE insurance, security for costs strategy, realistic pleadings and disciplined case management all matter. Serious allegations that are not properly supported can increase costs risk dramatically, including the risk of indemnity costs.

Before entering a funded dispute, treat the funding package as a risk allocation document, not just a finance document. The court in this case paid close attention to the structure of the deal, the expected return and the absence of claimant-side ATE protection for opponents.

A practical review at the start can reduce the chance of a nasty costs surprise later. Businesses should also revisit the position as the case develops, especially if allegations become wider, costs rise or insurance assumptions change.