Factual and Procedural Background
This appeal arose from protracted and acrimonious litigation concerning the breakdown in the working relationship among members of a limited liability partnership (LLP) managing a fund of hedge funds. The LLP was composed of Company A (holding 60%) and two individual members, the Respondents, each holding 20%. The partnership was governed by a detailed written agreement dated 3rd December 2004, which included put option provisions allowing the Respondents to require Company A to purchase their interests under certain breach scenarios.
Following significant financial losses and discord among members during the 2007-2009 period, tensions escalated, leading to the appellants (Company A and related entities) ceasing payments to the Respondents, which was found to be a breach of the Agreement. The Respondents validly exercised put options in February and May 2009, triggering litigation.
The litigation comprised three interlinked proceedings: Part 7 claim by the appellants challenging the validity of the put options, a petition by the Respondents under sections 994-996 of the Companies Act 2006, and a cross-petition by the appellants. The trial lasted approximately 95 days over an extended period, resulting in a detailed 303-page judgment delivered on 14th July 2011, favoring the Respondents overall.
Subsequent hearings addressed consequential issues of costs and interest. On 4th October 2011, the appellants were ordered to pay nearly £4 million each to the Respondents. On 28th October 2011, the trial judge issued a detailed order setting out the payment of interest on the judgment sums and costs, including indemnity costs from 16th January 2010 and varying interest rates on both principal and costs.
The appeal before this court is confined to the judge’s decisions regarding the award of indemnity costs from 16th January 2010 and the interest rates applied thereafter. The Respondents cross-appealed seeking increased costs and interest awards. Permission to appeal and cross-appeal was granted, and the parties were represented by senior counsel.
Legal Issues Presented
- Whether the trial judge erred in awarding indemnity costs from 16th January 2010 based on an analogy with CPR Part 36 when the relevant settlement offer was not a Part 36 offer.
- Whether the interest rates awarded on the judgment sum and on costs, particularly the increase from 3% over base rate to 10% over base rate and higher rates on costs post-16th January 2010, were properly awarded.
- Whether the disallowance of 30% of the Respondents’ costs relating to unsuccessful issues was appropriate.
- Whether the Respondents were entitled to 100% of their costs from 16th January 2010, contrary to the judge’s award of 70%.
Arguments of the Parties
Appellant's Arguments
- The judge was not entitled to award indemnity costs on the basis of analogy with CPR Part 36 since the Respondents’ settlement offer expressly was not a Part 36 offer and did not comply with its procedural requirements.
- Indemnity costs require a finding of improper or unreasonable conduct, which the judge did not make; the appellants pursued their claims reasonably and in good faith.
- The increased interest rates on principal and costs from 16th January 2010 were based on the flawed analogy with Part 36 and thus were not justified.
- The appellants argued that standard costs and interest at 3% over base rate were appropriate for the entire period.
Respondent's Arguments
- The judge was justified in drawing an analogy with Part 36 to award indemnity costs and increased interest rates due to the nature of the offers and conduct of the appellants.
- The Respondents’ settlement offers were reasonable and the appellants’ refusal to accept them justified indemnity costs.
- The Respondents sought to increase the costs award from 70% to 100% from 16th January 2010 and to increase the interest rate on the judgment sum before that date.
- The economic circumstances at the relevant times justified a higher interest rate than 3% over base rate.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 |
Indemnity costs and assumption of litigation risk by parties acting unreasonably |
Referenced to illustrate the principle that indemnity costs carry a penal element and are linked to unreasonable conduct. |
| 4Eng Ltd v Harper and Smith [2009] EWHC 2633 (Ch) |
Linking indemnity costs with special approaches to interest on costs |
Used to support the reasoning that indemnity costs may justify higher interest awards on costs. |
| Summit Property Limited v Pitmans [2001] EWCA Civ 2020 |
Issues-based approach to costs awards |
Considered regarding the judge’s discretion to disallow costs on unsuccessful issues and to require a successful party to pay costs on those issues. |
| Johnsey Estates (1990) Ltd v Secretary of State for the Environment [2001] EWCA Civ 635 |
Principles governing issues-based costs orders |
Supported the view that no exceptionality is required to disallow costs on particular issues. |
| Aspin v Metric Group Ltd [2007] EWCA Civ 922 |
Costs orders on an issues basis including costs payable to unsuccessful parties on certain issues |
Confirmed that a successful party may be deprived of costs on issues lost without exceptional circumstances. |
| Carver v BAA Plc [2008] EWCA Civ 412 |
Interpretation of "more advantageous" in Part 36 offers |
Distinguished as not dealing with costs discretion under Part 44.3 or analogy with Part 36. |
| Huntley v Simmonds [2009] EWHC 406 (QB) |
Discretion under Part 44.3 to give effect to non-compliant Part 36 offers |
Recognized limited circumstances where non-compliant offers may be given effect, but not a general rule. |
| Fitzroy Robinson Ltd v Mentmore Towers Ltd [2010] EWHC 98 (TCC) |
Indemnity costs and consideration of non-Part 36 offers |
Confirmed that non-Part 36 offers may be relevant but cannot be treated as if they were Part 36 offers for automatic indemnity costs. |
| Gibbon v Manchester CC [2010] EWCA Civ 726 |
Requirement for strict compliance with Part 36 for costs consequences |
Emphasized Part 36 as self-contained and prescriptive, limiting extension by analogy. |
| Kiam v MGN Ltd [2002] EWCA Civ 66 |
Threshold for unreasonableness to justify indemnity costs |
Held indemnity costs require conduct unreasonable to a high degree; mere refusal of reasonable offers is insufficient. |
| Epsom College v Pierse Contracting Southern Ltd [2011] EWCA Civ 1449 |
Refusal of reasonable settlement offers and indemnity costs |
Confirmed that refusal must be unreasonable to justify indemnity costs. |
| Kastor Navigation Co. Ltd v Axa Global Risks (UK) Ltd [2004] EWCA Civ 277 |
Interpretation of costs entitlement under Part 36.14(3)(b) |
Discussed but not determinative in this appeal; judge’s discretion upheld. |
| Jaura v Ahmed [2002] EWCA Civ 210 |
Appropriate uplift on base rate for interest awards |
Applied as a "rule of thumb" for small businessmen, endorsing 3% over base rate. |
| Fiona Trust & Holding Corporation v Privalov [2011] EWHC 664 (Comm) |
Discretion in awarding interest rates |
Referenced regarding general principles of interest awards balancing fairness to both parties. |
| French v Groupama Insurance Ltd [2011] EWCA Civ 1119 |
Distinction between Part 36 offers and other settlement offers |
Highlighted the availability of discretion under Part 44.3 for non-Part 36 offers. |
Court's Reasoning and Analysis
The court carefully analyzed the judge’s reasoning on costs and interest, focusing on the appropriateness of applying the CPR Part 36 regime by analogy to a settlement offer that was expressly not a Part 36 offer. The court found that the letter of 24th December 2009 from the Respondents’ solicitors was a deliberate unilateral construct, not compliant with Part 36 procedural requirements, including the reservation of the right to withdraw without court permission, thereby precluding it from being a Part 36 offer.
The court emphasized that Part 36 is a self-contained code with strict requirements and that extending its costs consequences by analogy is impermissible. The judge’s reliance on a “glitch” or “infelicity” in Part 36.10 was rejected as a basis for awarding indemnity costs. The court held that indemnity costs require a finding of unreasonable or improper conduct, which was absent here. The appellants’ conduct in pursuing the litigation was found to be reasonable and in good faith, with no finding of unreasonableness or irresponsibility.
Regarding disallowance of 30% of the Respondents’ costs relating to unsuccessful issues (the mis-selling and liquidation claims), the court found no error in principle or discretion. The judge’s global evaluative approach and apportionment were within his discretion and consistent with established authority allowing costs awards on an issues basis without requiring exceptional circumstances.
On interest rates, the court held that the judge’s increased interest rate of 10% over base rate on the principal sum from 16th January 2010 was unjustified absent the flawed Part 36 analogy. The appropriate rate for the entire period should be 3% over base rate, consistent with the judge’s initial assessment and established practice for small businessmen.
The award of high interest rates on costs from 16th January 2010 onwards (up to 40% per annum) was also overturned. The court found the judge erred by relying heavily on the indemnity costs award as a justification and by focusing narrowly on the Respondents’ actual borrowing rates without adequate evidential or procedural basis. The court underscored the need for proportionality and fairness between parties in interest awards.
The court noted that the Respondents’ offers and negotiation efforts were reasonable but the appellants’ rejection was not shown to be unreasonable to a degree warranting indemnity costs or punitive interest rates. The court emphasized that refusing a reasonable offer does not automatically justify indemnity costs absent unreasonableness of a high order.
Holding and Implications
The court ALLOWED THE APPEAL on all grounds raised by the appellants and DISMISSED THE CROSS-APPEAL by the Respondents.
The court substituted the judge’s award of indemnity costs from 16th January 2010 with an award of standard costs for that period. It also substituted the interest rates on both the judgment sum and costs from 16th January 2010 onwards with a uniform rate of 3% per annum above base rate.
The direct effect of this decision is to reduce the financial burden on the appellants by eliminating the indemnity costs award and lowering the interest rates applied post-16th January 2010. No new precedent was set beyond clarifying the limits of applying Part 36 costs consequences by analogy and reinforcing the high threshold for indemnity costs awards outside Part 36. The decision underscores the importance of strict compliance with procedural rules for settlement offers and the discretionary nature of costs and interest awards based on the conduct and circumstances of the parties.