What are Adverse Costs?

Adverse costs are the costs arising throughout legal proceedings when a claim fails, including legal fees, disbursements and expenses, and are usually made against an unsuccessful Claimant. When making an adverse costs order, the Judge will consider who has ‘won’ the proceedings, the general rule being that the loser is liable to pay the winner their costs of proceedings.  These costs may be summarily assessed, or ordered to be assessed at a later date by way of detailed assessment.

Legal proceedings can result in large sums of costs being incurred which often dissuades a party from pursuing legal proceedings in the first instance, reducing access to justice.

Litigation funding can be used to protect against adverse costs, and even if a party is made the subject of an adverse costs order, the amount claimed in a Bill of Costs is not necessarily the amount that should be paid.  Points of Dispute can be used to challenge the level of adverse costs against a party.

Litigation Funding to Protect Against Adverse Costs

One way to fund legal proceedings and to protect yourself from cost in the event an adverse costs order is made, is by obtaining legal expenses insurance. There are two types of insurance policies:

1. Before The Event (BTE) insurance which acts like a typical insurance policy and insures a party prior to any incident up to a pre-set indemnity limit.  The indemnity limit often covers the total of the incurred legal fees and disbursements, as well as adverse legal fees in the event the case fails.

2. After the Event (ATE) insurance which generally covers own disbursements and adverse legal fees only.

Litigation funders are third parties who agree to finance all or part of the legal costs in return for a fee, payable by monies recovered from the proceedings. After the event insurance will substantially reduce the risk of an adverse costs order being financially detrimental, should the covered party not succeed in their case.

A law firm can enter into funding arrangements with a third party to fund litigation by purchasing the insurance on behalf of their clients and will cover the client’s liability for their own legal fees including disbursements and expense of the other party if the party is unsuccessful in the claim (ATE usually requires the funded Solicitor to act on a CFA however).

Some insurers insist on estimated settlement and costs risk figures from the outset, and so a party must obtain permission from the litigation funder if they wanted to accept an offer below the intended settlement figure, or if a party wished to discontinue proceedings. This can limit a party’s control over their claim.

Litigation funding and ATE insurance premiums are generally very expensive (between 20-30% of the amount of cover purchased) and are not recoverable from the paying party in most cases. Therefore, the insured party must pay the premium upfront or upon the recovery of damages in favour of the insured party.

Some funders will only fund Claimants. However, some may consider the funding of Defendants who meet the following criteria:

• A substantial counterclaim with high prospects of success – usually prospects of 60% chance of success
• The Defendant business has numerous legal cases
• The Defendant agrees to give the litigation funder a stake in future assets

Such as in the case of Rowe & Others v Ingenious Media Holdings& Others [2020] EWHC 235 (Ch), the funder of adverse costs insurance can be ordered to pay security for costs in the event that an adverse costs order is made.

ATE Funding and The Arkin Cap

In the case of Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055, the Claimant owned a shipping business and brought a claim against the Defendants alleging anti-competitive pricing. The Claimant’s legal representatives acted on a conditional fee agreement and turned to a litigation funder to meet the cost of expert evidence, to the sum of £1.3 million. The claim subsequently failed, and the Claimant had to pay £6million in adverse costs. As the Claimant did not have this money, the Defendant pursued the funder.

The Court limited the costs recoverable to £1.3 million, which was the amount invested by the insurer. This limit became known as the Arkin cap which applies where a funder only funds a part of the claim and is used to protect the funder from being ordered to pay vast sums in adverse costs.

In the case of ChapelGate Credit Opportunity Master Fund Ltd -v- Money & others [2020]EWCA Civ 246 however,  the Judge held that the Arkin cap was not a binding rule and that Judges had the discretion not to limit the liability to the amount of the funding. 

Adverse Costs and Points of Dispute

Even when a litigation funding policy is in place to cover all or some adverse costs, Points of Dispute may be used to reduce the level of adverse costs against the paying party if a Notice of Commencement has been served. Points of Dispute may be used to contest a Bill of Costs, and to challenge each item contained therein. If an agreement cannot be reached using Points of Dispute, and subsequent Points of Reply, the receiving party must apply for a Court assessment of their legal costs within six months of service of the bill.  

How Can ARC Costs Assist?

ARC Costs are a team of specialist Costs Draftsmen and Costs Lawyers that deal with legal costs claims registered in England and Wales, who have extensive experience in assisting paying parties to dispute legal costs claims.  If you require advice on contesting a Bill of Costs, require representation on detailed assessment or need Points of Dispute drafting, please contact us on 01204 397302, or send an email to one of our costs experts at info@arccosts.co.uk.

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