Should professional funders who maintain litigation for profit be liable for the costs of successful defendants if the claim that has been funded fails? This was the issue that Mr Justice Colman ruled on in the recent case of Arkin v Borchard Lines & Ors (No 2).

The issue arose in the context of a dispute between the former shipping company director Yeheskel Arkin and a number of shipping lines in which Arkin claimed substantial damages – more than $160m (£86.4m) – for losses allegedly caused by the lines’ anticompetitive conduct. The claim failed.

The manner in which Arkin funded the claim was somewhat unusual. He had no funds to pay for any aspect of the litigation, so both his solicitors and counsel acted through conditional fee arrangements (CFAs). The funding of the extensive expert evidence adduced by Arkin at trial was more problematic. It was for this reason that Managers and Processors of Claims Limited (MPC), which supports, manages and finances compensation claims, became involved. MPC agreed to pay for Arkin’s expert evidence in exchange for a significant financial interest in the outcome of the case: an entitlement to 25 per cent of the first £5m recoverable as damages and 23 per cent of any excess recovered. MPC ultimately provided funding of more than £1m in respect of experts’ fees.

With little prospect of recovering any of the £6m costs incurred from Arkin, the successful main defendants brought Section 51 proceedings against MPC. Ruling that the defendants were not entitled to recover costs from MPC, Judge Colman identified three objectives of public policy that were relevant to the exercise of the discretion for such costs orders:

First, the purpose of discouraging ill-founded claims or defences and of compensating those who have been obliged successfully to protect their rights in the course of litigation, underlying the rule that, in general, a successful party is entitled to recover their costs.

Second, the purpose of facilitating access to justice, including the achievement of equality of arms for impecunious claimants in the absence of public funding.

And third, the purpose of protecting the due administration of justice, which required that the courts should discourage the interference by funders in the proper and responsible management and conduct of litigation in any manner adverse to that purpose.

Acknowledging that these three aspects of public policy might be in tension, Judge Colman was unable to accept that the mere fact of a contract for a share in the proceeds of litigation necessarily involved material prejudice to objective three. Whether it did would depend on the legal and practical relationship between the professional funder and the claimant, and in particular whether the funder was able to influence the conduct of the litigation.

In the judge’s view, had Arkin not entered into the agreement with MPC, he could not have pursued the claim to trial, or alternatively would have been obliged to fight the case without equality of arms and unable to call on expert evidence. Under the agreement in place, MPC was obliged to abide by the counsel’s advice. The funder was therefore ‘ringfenced’ out of the area of control over the conduct of the proceedings and the objective of protecting the due administration of justice was achieved.

For Judge Colman, MPC’s lack of control meant the objectives of the deterrence of weak claims and of the protection of the due administration of justice had to yield to the objective of making access to the courts available. An order for costs against MPC would therefore operate as a strong deterrent to professional funders.

The decision is undoubtedly controversial. Should those who provide litigation funding in the course of business for substantial commercial gain be immune from the risk of an adverse costs order? Is it desirable for successful defendants to be left with no means of recovering even a proportion of their costs because of the way in which the claimant has funded the litigation? While it is evident that each case will depend on its own facts, it remains to be seen whether the judge struck the right balance on the facts of this case. The decision is likely to be appealed later in the year.