Summary

Where parties to complex litigation had been compelled to take out loans at a high rate of interest to pay for their legal costs, and where their opponent had acted in such a way as to attract an order for costs on the indemnity basis, it was appropriate that they should be paid interest on costs at the actual rate that they had had to bear.

Facts

The court was required to rule on issues of costs and interest following a judgment (F&C Alternative Investments (Holdings) Ltd v Barthelemy (Judgment) (2011) EWHC 1731 (Ch)) in favour of the defendants (B and C) against the claimant company (F). The case concerned a limited liability partnership (the LLP). The LLP had two individual members (B and C) and a corporate member (F). B and C each had a 20 per cent interest in the LLP's profits and capital and each had 20 per cent of the members' voting rights. F had a 60 per cent interest in the LLP's profits and capital and 60 per cent voting rights as a member. The LLP was constituted under an agreement which included terms under which, in certain circumstances involving a breach of contract by F, B and C could exercise a Put Option to require F to purchase their interests in the LLP at a stipulated multiple of the profits of the LLP in defined periods. B and C claimed that F had acted in such a way as to trigger their right to exercise the Put Option. They said that they had validly exercised their Put Options by notices given on February 25, 2009 or by notices given on two later dates. F denied that there had been any valid exercise of the Put Option. It issued a claim under the CPR Pt 7against B and C, seeking declaratory relief to the effect that the purported exercise of the Put Options by B and C was invalid. B and C counterclaimed for orders to give effect to what they maintained were their rights to have their respective interests in the LLP bought out by F pursuant to their exercise of the Put Options. B and C also petitioned for relief under theCompanies Act 2006 s.994, claiming that the affairs of the LLP had been, or were being, conducted in a manner unfairly prejudicial to their interests as members. F cross-petitioned, seeking an order requiring B and C to transfer their interests in the LLP to it at a price advantageous to it. The judge held that B and C had validly exercised their Put Options by the notices given in February 2009.

Held

(1) B and C had succeeded overall but not on all issues. F should be ordered to pay 70 per cent of their costs of the Pt 7 proceedings, the petition and the cross-petition (see para.27 of judgment). (2) B and C had made four offers in the course of the litigation; some were markedly more generous to F than the order eventually made in their favour. F should pay B and C's costs on the standard basis in the period up to January 15, 2010, which allowed for a reasonable period for the acceptance of the first offer. Costs should be paid on the indemnity basis for the period thereafter. The public interest in encouraging settlement on reasonable terms which underlay Pt 36 of the CPR might be found to exist in other cases in a sufficiently powerful form to suggest that the same or similar costs consequences should follow. That was the position here in relation to the offers made. The desirability of operating the costs regime in such a way as to create proper incentives to settlement was especially strong in relation to the sort of sprawling litigation which was involved here and which, notoriously, tended to arise in relation to unfair prejudice claims. Given the complexity of the dispute in a case such as this and the substantial amount of time, effort and cost on both sides (and on the part of the courts) likely to be required to resolve it, it was especially important that the costs rules should be operated in a way which made it very clear that powerful incentives existed for parties to seek to settle the dispute on reasonable terms at an early stage, and which gave clear and predictable signals about what penalties might be imposed in terms of the distribution of the financial burdens and risks of the dispute resolution process if reasonable offers were rejected (paras 50-52, 55). (3) As to interest on costs, B and C had asserted, among other things, that the costs involved in the litigation became so high that they had to borrow money from bridging-finance providers at a very high rate of interest to fund their ongoing legal bills. A departure from the conventional approach was justified in respect of interest on costs for the relevant period: B and C should be paid interest on costs at the actual rate that they had had to bear. Four factors were relevant. First, there were the very high costs which B and C as private individuals had to fund to keep their claim alive and prosecute it effectively, under circumstances of particularly complex and burdensome attritional litigation. Second, there was a very substantial difference between the interest which B and C themselves had had to pay on the monies borrowed to fund the litigation and the rate which they would recover if confined to a conventional rate of interest. Third, they had acted reasonably in taking out the loans. Fourth, costs had been ordered to be paid by F on the indemnity basis in the period in question. Where a party had acted in the course of litigation in a way that attracted an order of costs against it to be assessed on an indemnity basis, that was a good indicator that he was to be taken to have assumed to a particularly extensive degree the risk of continuing with the litigation. The court should therefore be the more ready to give greater and more precise effect to the underlying principle of compensation which an award of interest was intended to serve (paras 72, 77-79).

Judgment accordingly