F&C Alternative Investments (Holdings) Ltd v Barthelemy & Anor [2011] EWHC 2807 (Ch) (28 October 2011)

(A) The Defendants claimed the contractual price for their respective interests pursuant to the Put Option Notices. Most of the focus here was on the First Put Option Notices, as the Defendants' primary case was always that those notices were valid. There were four main areas of alleged breach of the Agreement on which the Defendants sought to rely in support of that contention: (a) the non-payment of their advance drawings on 25 February 2009; (b) breach of, in particular, clause 13.6 of the Agreement, by reason of an alleged decision by F&C, acting in particular by the Execom, to take steps to liquidate the LLP (with the object, so it was said, of closing the LLP without having to buy out the Defendants' interests in it in accordance with the Agreement), leading to action said to be directed to that end, including, for example, procuring clients who had invested in the LLP's Funds to serve notices to redeem their investments, withdrawing marketing support for the LLP and blocking new business proposals for the LLP (I refer to this as "the liquidation case"); (c) breach of, in particular, clauses 13.6 and 13.7 of the Agreement, by a deliberate failure on the part of F&C to try to persuade existing clients of the LLP's Funds to remain invested in those Funds in late 2008 (in particular, by persuading them to switch into the Balanced Fund from the leveraged Select Fund pursuant to the offer contained in the 1 December 2008 letter), which was alleged to be motivated by a concern on the part of F&C that - if they tried to persuade clients to remain invested in the LLP's Funds - the clients might accuse F&C of mis-selling them the investments in the Select Fund in the first place (I refer to this as "the mis-selling case"); and (d) general repudiation by F&C of the governance provisions in respect of the LLP as set out in the Agreement by attempting to remove decisions from the ManCom and the Board to the members meeting. The Defendants succeeded at trial in relation to (a) and (d), but lost in relation to (b) and (c) (see paras. [725]-[729] of the judgment);

(B) The Defendants also claimed that breaches of the Agreement by F&C had depressed the profits of the LLP, and hence had lowered the price payable by F&C to purchase their interests in the LLP under the formula applicable upon service of a valid Put Option notice. On this basis they claimed damages for breach of the Agreement so as to put them in the position they would have been in had the Put Option formula resulted in a price payable by F&C for their interests of the order of �40 million. This claim was largely dependent upon the Defendants succeeding on their liquidation case and mis-selling case, on which, in the event, they lost. It was a claim which might also have been supported to some degree by other claims which the Defendants made, in particular by their claim that in the period after the service of the First Put Option Notices F&C improperly prevented the LLP from pursuing potentially lucrative business opportunities; but the Defendants lost on that too (see paras. [335]-[361] of the judgment);

(C) In the Petition the Defendants claimed that, if they lost their claim based on service of their Put Option Notices, nonetheless F&C was responsible for unfair prejudice to them in the management of the LLP, with the consequence that F&C should be ordered to buy out their interests in the LLP under sections 994 to 996 of the Companies Act 2006 at a price equivalent to that which would have been payable according to the contractual Put Option formula (this seemed to me to be an ambitious contention) or (more realistically) at a valuation which reflected the market value of the LLP (which, subject to (D) below, was likely to be considerably less). For their claim in the Petition, the Defendants relied on the same range of matters as they relied on in support of their Put Option claims, including steps taken by F&C after 25 February 2009 to reduce their rightful participation in the management of the LLP's business, culminating in their removal from their executive positions on the basis of the Mackay report. In relation to the basic part of their complaint in the Petition, to the effect that F&C had improperly sought to undermine the degree of control over the LLP's affairs which they ought to have had, the Defendants were successful;

(D) Also in the Petition, the Defendants relied on the same contentions as in (B) above to argue that F&C had taken unfairly prejudicial action which had depressed the value of their shares in the LLP, so as to maintain that the valuation at which F&C should be ordered to buy out their interests pursuant to sections 994 to 996 should be increased to correct for this effect. On this basis, as in relation to (B) above, the Defendants' argument again was that F&C should be ordered to pay a sum of the order of �40 million to buy out their interests in the LLP. Since the Defendants' contentions referred to in (B) above failed at trial, this claim was also fatally weakened in the same way as was their damages claim. It is important to note here what was at stake financially for the Defendants and F&C in relation to the liquidation case and the mis-selling case at the trial on liability before me (quite apart from the imputations against F&C's reputation had either of them been made out) - they represented the difference between a claim of about �8 million and a potential claim of about �40 million by the Defendants. For this reason, amongst others, these claims were the subject of bitter and intransigent dispute at trial;

(E) By the Cross-Petition, F&C sought to argue that, far from supporting the Defendants' unfair prejudice claim in the Petition, the Mackay investigation and report (and the IT matters on which they were based and the Defendants' conduct in reaction to them and other matters of complaint set out in the Cross-Petition) showed that the Defendants were at fault in relation to the management of the LLP and in such a serious way as to support relief for F&C under sections 994 to 996 which would trump any complaint made by the Defendants. F&C lost on this.

It is clear from this sketch that, in relation to the claims on which they were successful ((A) and (C)), the Defendants pleaded and sought to rely on a range of matters, on some of which they succeeded and on others of which they lost (in particular, the liquidation case and the mis-selling case). It can also be said that they relied on a wide range of matters which were common both to claims on which they succeeded ((A), (C) and (E)) and to claims on which they failed ((B) and (D)).

In exercising its discretion as to costs, a court will be cautious before concluding that an award of costs in favour of the party who has won overall should be limited in either of these cases. This is a function of the general approach that courts should avoid an unduly finely detailed division of issues and sub-issues when deciding what costs orders to make.

The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party: CPR Part 44.3(2)(a). Often it will be appropriate that the winner should get an order that the loser should pay his costs even where there have been issues on which the overall winner has lost: see e.g. Actavis v Merck [2007] EWHC 1625 (Pat), at [25]; Fleming v Chief Constable of Sussex Police Force [2004] EWCA Civ 643; [2005] 1 Costs LR 1, at [43]; HLB Kidsons v Lloyds Underwriters [2007] EWHC 2699 (Comm); [2008] 3 Costs LR 427, at [11]. In commercial litigation, the starting point in working out who the winner is for the purposes of making costs orders will usually be to look at what money has been ordered to be paid: see Fiona Trust & Holding Corporation v Privalov [2011] EWHC 664 (Comm) at [36] per Andrew Smith J ("At least in commercial litigation, the party 'who ends up receiving payment' is generally characterised as 'the overall winner of the entire action', citing Multiplex Constructions (UK) v Cleveland Bridge [2008] EWHC 2280 (TCC); [2009] 1 Costs LR 55 at [72] per Jackson J).

Parties should be afforded a reasonable degree of latitude in formulating claims, including pleading alternative bases for the same basic claim. That is a normal and reasonable way to conduct litigation (where the parties are operating under conditions of uncertainty about how the court might ultimately react to the arguments and evidence to be heard in support of the claim) and may be a good way of ensuring that the court has before it the full circumstances of the case so that it is in a position to get to the true heart of the dispute and arrive at what it regards as the just outcome. Therefore, where that is done and the party proceeding in that way has won on his claim and has acted reasonably, it will often be appropriate for a simple costs order to be made in his favour.

Similarly, where costs have been incurred on issues which are common to a claim which has succeeded and to a claim which has failed, it will often be appropriate simply to make a costs order in favour of the winning party which covers those common issues: Multiplex Constructions (UK) v Cleveland Bridge at [72(viii)]; Antonelli v Allen, unrep., Neuberger J, 29 November 2000.

In the present case, however, I consider that it is just and appropriate that the order for costs should both reflect the success of the Defendants on (A), (C) and (E) above, but also their failure on (B) and (D) above (in particular, their failure on the liquidation case and the mis-selling case), for the following reasons:

i) Miss Newman submitted that the Defendants acted unreasonably and irresponsibly in advancing the liquidation case and the mis-selling case. I do not agree with this. In my view, the Defendants had sufficient grounds to put forward both these cases (and, indeed, the rest of the contentions they advanced). As regards the liquidation case, when proceedings commenced, the Defendants genuinely believed that F&C (acting, in particular, by Mr Ribeiro) had decided on a course of action designed to damage the business of the LLP, and believed that Mr Ribeiro had said at the meeting on 17 December 2008 that the Execom had decided to close the LLP (para. [515] of the judgment) -although I found that Mr Ribeiro had not in fact said that, the Defendants' belief that he had was genuine and so there was a proper evidential basis for them to put forward such a case; moreover, I found that things were said at that meeting which gave objective grounds for suspicion on the part of the Defendants about Mr Ribeiro's intentions, and by the time proceedings commenced he had taken unjustified and highly hostile actions against them in January and February 2009, which again gave objective grounds for them to think that some decision by F&C to subvert their interests in the LLP had been taken; and when disclosure was given, a significant body of documentary material was disclosed by F&C which it could reasonably be argued further appeared to support the liquidation case - in the end, that case was only dismissed after careful analysis of the documents and oral evidence given by F&C witnesses to explain them. As regards the mis-selling case, the Defendants were aware that the clients who had invested in the Select Fund were very unhappy with its performance in late 2008; they also had grounds to contend that, in the context of the very poor investment performance of almost all asset classes at that time the Balanced Fund's performance could arguably be assessed to be relatively good, so it could be said to be unexplained why and arguably surprising that F&C did not market the Balanced Fund to its clients at all at that time. Although the position was more borderline than in relation to the liquidation case, I think that there were still sufficient grounds available to the Defendants on which the mis-selling case could properly be advanced by the Defendants;

ii) However, since the introduction of the new Civil Procedure Rules, the courts have been encouraged to give careful consideration to making costs orders which reflect more closely the outcome on particular issues raised by different parties in proceedings as a way of encouraging a degree of discipline and realism on the part of litigants about what issues they introduce into proceedings, by moving away from what was perceived to be a too rigid adherence to a "costs follow the event" approach by reference to the outcome of the case rather than by reference to the issues distinctly raised by either party, and by imposing a potential sanction if a party introduces issues into litigation on which they lose (even if they win the case overall): A.E.I. Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR 1507, 1522H-1523B per Lord Woolf MR. Reflecting that policy, a costs order may be crafted which reflects the failure of the winning party to win on particular issues in the case (particularly issues introduced into the proceedings by him), even if he has not acted unreasonably in introducing them into the proceedings: Fleming v Chief Constable of Sussex Police Force, at [36]; Summit Property Ltd v Pitmans [2001] EWCA Civ 2020, at [16]-[17];

iii) Although the fact of the withdrawal of clients' investments from the LLP's Funds (and the reasons for that) and the decisions of the Execom regarding the future of the LLP were matters which required to be investigated as part of the background to the issues resolved in the Defendants' favour in the Part 7 proceedings and the Petition, the depth of investigation into those matters and the time taken up at trial and in the proceedings generally was significantly increased by the mis-selling case and the liquidation case advanced by the Defendants. This was not a situation in which there was a simple and near complete overlap between the parts of the proceedings on which the Defendants won and these two cases on which they lost;

iv) In my view, the particular significance of the mis-selling case and the liquidation case in the context of these proceedings was as the foundation for the more substantial money claims on which the Defendants lost ((B) and (D) above). They were not necessarily required by the Defendants, nor advanced by them as their primary contention, to support their case on the validity of the Put Option Notices and their case under section 994 on which they won. They were required as a foundation for the Defendants' more substantial money claims referred to in (B) and (D). In line with the observations of Andrew Smith J and Jackson J referred to in para. [20] above, an important indicator of success or failure in a commercial case is whether a money order results from the claim or not. In this case, in relation to the mis-selling claim and the liquidation claim, judging by reference to that part of the Defendants' case for which they had particular significance (claims (B) and (D)), the Defendants failed to secure a foundation at the liability hearing for the monetary relief which they sought.

In reaching my conclusion as to the proper form of costs order, I have considered and rejected a submission of Mr Thompson for the Defendants to the effect that, since the Defendants made an offer on 24 December 2009 (and on other occasions) to settle the whole proceedings at a level which F&C should have accepted, F&C should be held responsible for the whole costs of the litigation after that, including the costs in relation to the mis-selling case and the liquidation case. In my view that is not appropriate. I think certain costs consequences should follow from F&C's failure to accept the offers made by the Defendants (see paras. [31]ff below), but since F&C did not accept the offers and the litigation continued it remained incumbent on the Defendants to consider what claims to pursue, and it was their choice to continue to pursue the mis-selling case and the liquidation case and the wider financial claims based on them referred to at (B) and (D) above. In my view, it is just and appropriate that the Defendants' failure in relation to this should be taken into account in the costs order to be made.

Having reached the conclusion that the Defendants' failure in relation to the mis-selling case and the liquidation case should be taken into account in formulating the costs order, along with their success on other parts of their claims, the question arises as to the best way to achieve that in crafting a costs order in this case. In my judgment, the best solution here is to proceed by making a costs order in favour of the Defendants, and to take account of their failure on the mis-selling case and the liquidation case by disallowing a proportion of their costs. The amount of the disallowance should be set at a level to reflect in a broadly fair manner the fact that there would have been a significant element of recovery by F&C of its own costs if, instead, a separate costs order were made in its favour in relation to these distinct issues.

In my view, the considerable merit of proceeding in the way I prefer (rather than making one costs order in favour of the Defendants and another costs order in favour of F&C, to be set off against each other) is that it will considerably simplify and shorten the argument required to arrive at the final costs outcome in these very lengthy and involved proceedings. I consider that it will produce justice between the parties, in what on any approach has to be a broad evaluative exercise. This approach is in line with the guidance given by the Court of Appeal in National Westminster Bank v Kotonou [2007] EWCA Civ 223 at [22] and by Jackson J in Multiplex Constructions (UK) v Cleveland Bridge at [72(iv)] and [72(v)] and with the frequent practice of the courts in responding to cases in which there has been partial victory and partial failure in proceedings (see e.g. Re Southern Counties Fresh Foods Ltd at [101] and [104]; Fiona Trust and Holding Corporation v Privalov at [46]).

In my assessment, the appropriate order in this case is that F&C be ordered to pay 70% of the Defendants' costs of the Part 7 proceedings, the Petition and the Cross-Petition (i.e. treating all these proceedings as a composite whole). The 30% disallowance of the Defendants' costs is arrived at on the basis of my assessment that about 15% of the proceedings were taken up with a distinct focus on the mis-selling case and the liquidation case at a level discrete from the remainder of the Defendants' claims on which they won (the larger part of that 15% being referable to the liquidation case), and on the footing that I consider that increasing that figure to 30% is appropriate to make due allowance for an element of F&C's costs referable to those issues. In my opinion, a disallowance of the Defendants' costs at this level achieves broad justice between the parties while at the same time producing a relatively simple, practical order which can in due course be applied by the parties and the costs judge with a minimum of time, effort and expense.

The costs order: standard basis or indemnity basis?

The further issue which arises in relation to the costs order is whether it should be made on the standard basis or the indemnity basis. Mr Thompson for the Defendants submitted that it should be made on the indemnity basis on the grounds that they had made repeated offers to settle the proceedings at the same level of payment by F&C in fact achieved by them in the proceedings (or at a lesser level, more generous to F&C), which F&C had declined to accept, and also on the grounds that F&C (acting in particular by Mr Ribeiro) should have appreciated that they had no good defence to the Defendants' claim for the price under the Put Option Notices nor any good case on the Cross-Petition and had therefore acted irresponsibly in continuing to contest that claim of the Defendants and in pursuing its case on the Cross-Petition.

I deal first with these latter points. I do not accept this submission by Mr Thompson. So far as concerns the Defendants' claim in relation to the First Put Option Notices, it is true that I found that Mr Ribeiro had no serious faith in the view that he was entitled to stop the payment of advance drawings to the Defendants on 25 February 2009 (paras. [705], [723] and [735] of the judgment); but in my view that still left a good deal of scope for argument by F&C about whether what was done was sufficiently grave in the overall context of the case and had sufficiently serious adverse effects to lead to the result that the First Put Option Notice was valid. I do not consider that F&C acted unreasonably or irresponsibly in contesting that issue in the course of the proceedings. Moreover, the issue overlapped with the liquidation case, on which the Defendants lost. Their case was that Mr Ribeiro acted as he did as part of the plan allegedly conceived by F&C to close the LLP. It was necessary to go into the reasons for Mr Ribeiro's actions in this regard in assessing the liquidation case and the Defendants' claims for more substantial monetary relief on which they ultimately lost ((B) and (D) above). In those circumstances, it would not be fair or appropriate to order F&C to pay the Defendants' costs on an indemnity basis by reference to this submission of Mr Thompson.

I also reject the suggestion that F&C acted unreasonably or irresponsibly in pursuing its case in the Cross-Petition. The position in relation to IT matters (and the Mackay investigation into those matters) was complex and confused, and the Defendants were open to legitimate criticism as to their conduct.

I think there is considerably more force in Mr Thompson's other submission, referring to the offers of settlement made by the Defendants. To assess this submission it is necessary to refer to relevant provisions in the Civil Procedure Rules and to set out the history of the offers of settlement made by the Defendants from time to time.

CPR Part 36 makes provision for offers of settlement to be made which can have the effect of transferring the risk (or part of the risk) of costs liability in relation to litigation from one party to another. CPR Part 36.2 provides in relevant part as follows:

"Form and content of a Part 36 offer

36.2-(1) An offer to settle which is made in accordance with this rule is called a Part 36 offer.

(2) A Part 36 offer must-

(a) be in writing;

(b) state on its face that it is intended to have the consequences of Section I of Part 36;

(c) specify a period of not less than 21 days within which the defendant will be liable for the claimant's costs in accordance with rule 36.10 if the offer is accepted;

(d) state whether it relates to the whole of the claim or to part of it or to an issue that arises in it and if so to which part or issue; and

(e) state whether it takes into account any counterclaim.

(Rule 36.7 makes provision for when a Part 36 offer is made.)

(3) Rule 36.2(2)(c) does not apply if the offer is made less than 21 days before the start of the trial..."

CPR Part 36.10 provides as follows:

"Costs consequences of acceptance of a Part 36 offer

36.10-(1) Subject to paragraph (2) and paragraph (4)(a), where a Part 36 offer is accepted within the relevant period the claimant will be entitled to the costs of the proceedings up to the date on which notice of acceptance was served on the offeror.

(2) Where-

(a) a defendant's Part 36 offer relates to part only of the claim; and

(b) at the time of serving notice of acceptance within the relevant period the claimant abandons the balance of the claim,

the claimant will be entitled to the costs of the proceedings up to the date of serving notice of acceptance unless the court orders otherwise.

(3) Costs under paragraphs (1) and (2) of this rule will be assessed on the standard basis if the amount of costs is not agreed. (Rule 44.4(2) explains the standard basis for assessment of costs.) (Rule 44.12 contains provisions about when a costs order is deemed to have been made and applying for an order under section 194(3) of the Legal Services Act 2007.)

(4) Where-

(a) a Part 36 offer that was made less than 21 days before the start of trial is accepted; or

(b) a Part 36 offer is accepted after expiry of the relevant period,

if the parties do not agree the liability for costs, the court will make an order as to costs.

(5) Where paragraph (4)(b) applies, unless the court orders otherwise-

(a) the claimant will be entitled to the costs of the proceedings up to the date on which the relevant period expired; and

(b) the offeree will be liable for the offeror's costs for the period from the date of expiry of the relevant period to the date of acceptance.

(6) The claimant's costs include any costs incurred in dealing with the defendant's counterclaim if the Part 36 offer states that it takes into account the counterclaim."

CPR Part 36.14 provides as follows:

"Costs consequences following judgment

36.14-(1) This rule applies where upon judgment being entered-

(a) a claimant fails to obtain a judgment more advantageous than a defendant's Part 36 offer; or

(b) judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a claimant's Part 36 offer.

(2) Subject to paragraph (6), where rule 36.14(1)(a) applies, the court will, unless it considers it unjust to do so, order that the defendant is entitled to-

(a) his costs from the date on which the relevant period expired; and

(b) interest on those costs.

(3) Subject to paragraph (6), where rule 36.14(1)(b) applies, the court will, unless it considers it unjust to do so, order that the claimant is entitled to-

(a) interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the relevant period expired;

(b) his costs on the indemnity basis from the date on which the relevant period expired; and

(c) interest on those costs at a rate not exceeding 10% above base rate.

(4) In considering whether it would be unjust to make the orders referred to in paragraphs (2) and (3) above, the court will take into account all the circumstances of the case including-

(a) the terms of any Part 36 offer;

(b) the stage in the proceedings when any Part 36 offer was made, including in particular how long before the trial started the offer was made;

(c) the information available to the parties at the time when the Part 36 offer was made; and

(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated.

(5) Where the court awards interest under this rule and also awards interest on the same sum and for the same period under any other power, the total rate of interest may not exceed 10% above base rate.

(6) Paragraphs (2) and (3) of this rule do not apply to a Part 36 offer-

(a) that has been withdrawn;

(b) that has been changed so that its terms are less advantageous to the offeree, and the offeree has beaten the less advantageous offer;

(c) made less than 21 days before trial, unless the court has abridged the relevant period.

(Rule 44.3 requires the court to consider an offer to settle that does not have the costs consequences set out in this Section in deciding what order to make about costs)"

CPR Part 44 sets out the general costs framework which governs litigation in the High Court. It allows a considerable degree of discretion to the court to exercise its own best judgment in light of general principles: see CPR Part 44.3. Part 44.3(4) provides as follows:

"(4) In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including-

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of his case, even if he has not been wholly successful; and

(c) any payment into court or admissible offer to settle made by a party which is drawn to the court's attention, and which is not an offer to which costs consequences under Part 36 apply. "

By a letter dated 24 December 2009, JGR for the Defendants wrote to Norton Rose for F&C on a "Without prejudice save as to costs" basis setting out an offer by the Defendants to settle the proceedings. The offer to settle was on the terms that F&C should purchase their respective interests in the LLP at a price calculated according to the Put Option formula, by reference to a multiplier of 6 times average profits in 2007 and 2008 (despite an infelicity in the way in which the letter was expressed, it was clear from its terms as a whole and the calculation appended to it that a price of �2,935,769.40 for each of the Defendants' respective 20% interests was proposed, amounting to a price of �5,871,538.80 for their total 40% interest). The use of a multiplier of 6 was more generous to F&C than the multiplier of 8 which was contained in the Put Option formula where paragraph 1.7 of the Fourth Schedule applied (i.e. in a case of serious breach of the Agreement by F&C), as in the proceedings the Defendants claimed it did. The reference to an average of the profits in 2007 and 2008 was fair, since under the Put Option formula the Defendants were entitled to use an average of the two most profitable years out of a period of four years which included 2007 and 2008.

The offer included a provision that F&C should be liable for the Defendants' costs of the Petition and the Part 7 proceedings on the standard basis. The offer at the multiplier of 6 was expressed to be available for acceptance by F&C up to 4 pm on 15 January 2010. Thereafter, the letter stated that the offer would remain open for acceptance, but at a price calculated by using a multiplier of 8 (i.e. the same multiplier as provided for by paragraph 1.7 of the Fourth Schedule), until such time as it was withdrawn by notice in writing.

In the letter, JGR explained why a formal CPR Part 36 offer was not being made, but that the offer had been fashioned to operate by analogy with a Part 36 offer, and that it would be drawn to the attention of the court on the question of costs in accordance with CPR Part 44.3, as follows:

"Unfortunately, this Offer to settle has to be made outside the terms of Part 36. It is clearly necessary that both sets of proceedings be settled in tandem, including both Claim and Counterclaim in the Part 7 proceedings. The fact that formally (although not in substance) your client is in the position of claimant in the Part 7 proceedings, would have the result, were the offer to be made under part 36, that a rigid application of CPR 36.10 would render our clients liable for the costs of the Part 7 proceedings in the event that the offer was accepted by your client. That would be a nonsensical result, given the fact that in substance our client is in the position of claimant in the Part 7 proceedings and if your client were to accept the offer, it would be making a substantial payment to our clients in respect of their Counterclaim, albeit not the full sum claimed, so that in substance the right costs consequence of that would be that your client should pay our clients' costs of the Part 7 proceedings. However, regardless of that absurdity on the facts of the present case, that seems to us to be at least arguably the effect of the rules. Consequently, for that reason and for that reason alone, this offer is made outside the scope of Part 36. However, we shall naturally be drawing this offer to the attention of the Court and relying upon it on the question of costs in both sets of proceedings in accordance with CPR 44.3."

Mr Thompson submitted that in practice, for the reasons explained in the letter, it was not fair or appropriate to expect the Defendants to frame their offer to settle as a formal CPR Part 36 offer. For them to do so would, by virtue of CPR Part 36.10, have rendered them liable for the whole of F&C's costs up to the time the offer was made, which would have been contrary to the justice of the case, where the Defendants maintained (and successfully vindicated their claim at trial) that their Put Option Notices were valid and that F&C was wrong to reject them. He submitted that there was a glitch in the wording of CPR Part 36.10 when it came to apply it to a case such as the present, in which in the Part 7 proceedings (especially when they were taken together with the Petition) the Defendants were in truth and as a matter of substance the claimants and F&C the defendant, but where formally, for essentially tactical reasons, F&C had launched the proceedings and hence was formally the claimant in respect of those proceedings. To take account of that awkwardness in the drafting of the rule, Mr Thompson said that the proper course was for the Defendants to make an offer to settle which mimicked with appropriate adjustment the operation of CPR Part 36, to explain to the other party (as they did) why such an offer outside CPR Part 36 was being made and to indicate that at the end of the proceedings the court would be invited to exercise its discretion with regard to costs in the same way as if it had been an offer made within CPR Part 36.

I accept this submission. Those advising the Defendants had properly identified a glitch in the operation of CPR Part 36, as it would have applied in the circumstances of this case had the Defendants made a formal Part 36 offer, in that that would (if accepted) have led to the unjust result that they would have to pay F&C's costs, rather than the other way round. In light of that glitch, I consider that the Defendants proceeded in a sensible and proper way in fashioning the form of offer which they put forward in this letter and in explaining why they were proceeding in that way. F&C was put on clear notice that the Defendants would contend that their offer should be given similar effect as a true Part 36 offer, had CPR Part 36 been expressed in a way which allowed for the Defendants to do that without exposing themselves to an inappropriate costs liability.

The offers contained in the letter of 24 December 2009 were not accepted by F&C. It made its own counter-proposal of settlement, but at a very much lower price which did not come anywhere near reflecting the true extent of the Defendants' rights in respect of the Put Option Notices.

The Defendants' offer of settlement at a price reflecting a multiplier of 8 contained in the letter of 24 December 2009 remained open for acceptance by F&C until, by letter dated 21 May 2010 from JGR to Norton Rose, it was withdrawn and immediately replaced by another offer. This was shortly before the commencement of the trial hearing before me, on 14 June 2010. As set out in JGR's letter of 21 May 2010, the new offer was reformulated to cover the Cross-Petition as well as the Petition and the Part 7 proceedings, but otherwise was on essentially the same terms as before (using a multiplier of 8), save that a new requirement had been added that F&C should write to the FSA "to inform the FSA that the complaints made against Mr Barthelemy and Mr Culligan were made in the context of a commercial dispute which has now been settled (the precise wording used to be approved by our clients, approval not to be unreasonably withheld)".

Miss Newman submitted that this additional requirement meant that the offer in the letter of 21 May 2010 was not truly an offer capable of acceptance. I reject that submission: although the form of the wording to be used was not specified, the offer set out in sufficiently determinate terms the gist of what was to be said and provided that the Defendants' approval could not be unreasonably withheld, so the offer was not an ineffective proposal to enter into an agreement to agree (rather than an offer capable of creating, upon acceptance, a binding contract) as Miss Newman suggested.

Miss Newman also suggested that F&C could not reasonably be expected to accept the offer containing the new requirement, because that was a matter falling outside the relief which the court could order in the proceedings and also because F&C could not properly accept an obligation to write to the FSA in these terms. I do not accept either of these points. The remedial discretion available to the court under section 996 of the Companies Act 2006 in respect of proceedings under section 994 is very wide, and could have included an order that F&C write to the FSA to undo the effect of its unfairly prejudicial behaviour in pursuing the Mackay investigation and then acting on the Mackay report (including by sending notices to the FSA). In any event, if the claims proceeded to trial and the Defendants won, they would have had the benefit of a full judgment in their favour to show to the FSA, and the proposal that the claims be settled on condition that a letter be sent to the FSA in the modest and accurate terms proposed in the letter of 21 May 2010 seems to me to be a reasonable proposal at settlement stage to achieve a similar effect. There would have been nothing improper in F&C writing to the FSA in such terms.

F&C declined to accept this offer as well. Therefore the trial commenced. It continued until mid-August 2010, at which point the hearing was adjourned to resume in late October 2010. By a further letter from JGR dated 7 September 2010, the Defendants withdrew their offer of 21 May 2010.

However, by letter from JGR dated 22 October 2010 (shortly before the trial resumed), the Defendants made a further offer of settlement. The multiplier offered this time was 6 (i.e. considerably more generous than the multiplier of 8 provided for in paragraph 1.7 of the Fourth Schedule and referred to in the letters of 24 December 2009 and 21 May 2010). In this letter there was no requirement that F&C should agree to make an approach to the FSA, although it included a different further requirement that "all data and systems of the LLP be transferred" to the Defendants. In my view, given the parlous state of the LLP at this point and the use of a multiplier of 6 rather than 8, this offer was again a fair commercial offer by the Defendants to settle the proceedings at a level at or below the level of relief which they ultimately succeeded in obtaining after trial. The offer was expressed to be open for acceptance only until 10 am on 25 October 2010, when the trial was to resume.

Again, F&C declined to accept this offer. The trial resumed and continued until the Christmas vacation, when it was adjourned until mid-January 2011. By letter from JGR dated 21 January 2011 (shortly before the expert witnesses were due to be called to give evidence), the Defendants made another offer of settlement, on terms similar to those in the letter of 22 October 2010. This offer was expressed to be open for acceptance until 4.15 pm on 28 January 2011.

Again, F&C declined to accept this offer. The trial proceeded through to its conclusion. The Defendants secured an outcome as good as or better than that referred to in their various settlement offers - i.e. an order that F&C purchase their interests in the LLP pursuant to the First Put Option Notice, at a price calculated by reference to the profits of the LLP for 2007 and 2008 and by reference to a multiplier of 8.

I accept Mr Thompson's submission that there was a good and legitimate reason why the Defendants should not have been expected to make a formal CPR Part 36 offer in the context of this case. I also accept his submission that, where that is the case and where a party makes an offer of settlement which seeks to comply with the requirements of CPR Part 36 while adjusting for the infelicity in the wording of CPR Part 36.10, while explaining why the offer is made outside CPR Part 36 and that the court will be invited to exercise its discretion on costs by analogy with CPR Part 36, it may often be appropriate for the court to do just that.

Authority supports the proposition that the court may look to CPR Part 36 for guidance as to how to exercise its general discretion as to costs contained in CPR Part 44.3 where the circumstances in which an offer of settlement has been made are sufficiently analogous to the sort of situation in which CPR Part 36 applies: Multiplex Constructions (UK) v Cleveland Bridge, at [67]-[72] (referring in this regard to Carver v BAA plc [2008] EWCA Civ 412 at [28]-[32]); Fitzroy Robinson Ltd v Mentmore Towers Ltd [2010] EWHC 98 (TCC), at [24]-[26]; and Huntley v Simmonds [2009] EWHC 406 (QB). The same public interest in encouraging settlement on reasonable terms which underlies CPR Part 36 may be found to exist in other cases in a sufficiently powerful form as to suggest that the same or similar costs consequences should follow. In my view, that is the position here in relation to the settlement offers made by the Defendants.

I would add that I think the desirability of operating the costs regime in such a way as to create proper incentives to settlement is especially strong in relation to the sort of sprawling litigation which was involved in this case and which, notoriously, tends to arise in relation to unfair prejudice claims under section 994 (since the provision is worded in a very general fashion and does not supply a clear criterion of relevance - or irrelevance - of matters which can be raised under it, areas of dispute tend to proliferate as parties seek to bring in a wide range of matters which they say bear on the fairness or otherwise of the behaviour of the other side). 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 is especially important that the costs rules should be operated in a way which makes it very clear that powerful incentives exist for parties to seek to settle the dispute on reasonable terms at an early stage, and which gives clear and predictable signals about what penalties may be imposed in terms of the distribution of the financial burdens and risks of the dispute resolution process if reasonable offers of settlement are rejected.

The offers made by the Defendants were available for acceptance by F&C over long periods in the lead up to and during the course of the trial. F&C had more than adequate time to consider its reaction to these offers. Certain of the offers were markedly more generous to F&C than the order eventually to be made in the Defendants' favour. For these reasons, I consider that it is appropriate to give considerable weight when exercising my discretion under CPR Part 44.3 (in particular under CPR Part 44.3(4)(c)) to the settlement offers made by the Defendants. I also consider, in line with Mr Thompson's submissions, that it is appropriate to have regard to CPR Part 36 as an analogy which can provide guidance as to the order to be made. The provisions of CPR Part 36 give practical expression to the degree of incentive which is regarded as being in the public interest to apply to encourage settlement.

However, each of the offers was withdrawn after a period. Therefore, even if they had formally been offers made under CPR Part 36, the presumption in Part 36.14(2) and (3) in favour of making an order for indemnity costs (unless it is unjust to do so) would not have applied. Instead, if the offers had formally been made under CPR Part 36, the general discretion as to costs in CPR Part 44.3 would have applied (as the words at the end of CPR Part 36.14(6) make clear). But in exercising that discretion in the context of a formal Part 36 offer which is withdrawn, it is open to the court in a suitable case to assess that in the particular circumstances there is a strong analogy to be drawn with the central case covered by CPR Part 36.10(2) and (3), in which case it may be appropriate to look for guidance to those provisions in framing the relevant costs order - just as the court may find that to be an appropriate approach where for some other reason an offer does not comply with Part 36, as in Fitzroy Robinson Ltd v Mentmore Towers Ltd, at [24]-[26], for example.

In this case, I consider that the analogy with the CPR Part 36 regime is strong. Sensible offers were made at a relatively early stage by the Defendants, and maintained throughout the critical period until we were deeply into the trial by mid-August 2010. They were revived at significant later points in the proceedings, with a view to avoiding further costs and on a basis generous to F&C. Whilst F&C was not obliged to accept any of these offers, in my judgment by failing to do so, failing to make any reasonable counter-proposals by reference to the Put Option case which was the Defendants' primary case and choosing instead to continue to litigate against the Defendants regarding the validity of the Put Option Notices, F&C ought fairly to be regarded as having taken upon itself the risk of bearing the considerable costs involved in litigating that and related issues if it were proved at trial the Put Option Notices were valid.

In my opinion, therefore, the appropriate basis for the assessment of the Defendants' costs in this case is the standard basis for costs incurred in the period up to 15 January 2010 (which allows for a reasonable period within which F&C could consider the Defendants' offer of 24 December 2009 and would correspond to the starting point for this - expiry of the 21 day "relevant period" from first making an offer- if CPR Part 36 had in fact applied), and the indemnity basis for costs incurred in the period from 16 January 2010.

In this regard, there are three subsidiary points which deserve mention:

i) Mr Thompson submitted that I should attach significant weight to the fact that F&C commenced proceedings without following the Pre-action Protocol and first writing a letter before claim to which the Defendants could have responded (and, indeed, issued proceedings in secret: see para. [767] of the judgment). Although there was no good excuse for F&C's failure to follow the Protocol and its conduct in commencing proceedings in the way it did is to be deprecated, I do not think significant costs consequences should be taken to flow from that in the circumstances of this case. There was no realistic prospect that in March 2009 the parties could have resolved their dispute by discussion or in correspondence. Even if it followed the Protocol, the strong probability is that F&C would still have launched the proceedings it did and there would not have been any avoidance of the costs which were in fact then incurred in the proceedings;

ii) In his reply at the hearing, Mr Thompson submitted that I should construe the reference to "his costs" (i.e. the claimant's costs) in CPR Part 36.14(3)(b) as a reference to the entire costs of the claim, so as to exclude the possibility of disallowing part of the costs of the party who is to have the benefit of that provision. In making that submission, Mr Thompson had to meet the point that in relation to the equivalent wording contained in an earlier version of CPR Part 36, the Court of Appeal had rejected such a submission in Kastor Navigation Co. Ltd v AXA Global Risks (UK) Ltd [2004] EWCA Civ 277 at paras. [133]-[138]. He submitted that there had been a significant revision of CPR Part 36 since that decision, and a change in the wording of CPR Part 44.3(4)(c). In the light of those changes, he submitted that the phrase "his costs" which now appears in CPR Part 36.14(3)(b) (formerly CPR Part 36.21.(3)(a), considered in Kastor Navigation) should now be given a different construction, and that the submission which was rejected in Kastor Navigation in relation to the previous version of CPR Part 36 should now be accepted. I reject that submission. There is no indication that the Rules Committee intended that there should be any change in the meaning of the phrase when it promulgated the new version of CPR Part 36. On the contrary, by using identical language in CPR Part 36.14(3)(b) as had appeared in the old CPR Part 36.21(3)(a) and been authoritatively interpreted by the Court of Appeal in Kastor Navigation, the strong inference is that the Rules Committee intended the provision to have the same meaning. Moreover, the reasons given by the Court of Appeal at paras. [136]-[138] continue to apply in the context of the new provision. Although there has been a change in the provision which is now CPR Part 44.3(4)(c), as emphasised by Mr Thompson, the reasons given by the Court of Appeal for their interpretation did not refer to nor depend upon CPR Part 44 in its previous form;

iii) I think it is appropriate to make the indemnity costs order for the whole period from 16 January 2010, rather than producing a more complicated order which moves between the standard basis and the indemnity basis depending on whether one of the Defendants' offers was open for acceptance at the time or not. That would be unnecessarily complicated, and would also not meet the justice of the case. F&C had a full opportunity to accept the Defendants' offers, and had it done so at a reasonably early stage the whole of the costs thereafter could have been avoided.

Interest on principal: the date interest starts to run

The Defendants claim interest on the sums payable to the Defendants pursuant to the First Put Option Notices under section 35A of the Senior Courts Act 1981. In my judgment, F&C should pay interest on those sums from 26 February 2009 until 7 October 2011 (when they were in fact paid by F&C to the Defendants). The date of 26 February 2009 is the appropriate starting point because (i) upon service of the First Put Option Notices, under paragraph 1.7 of the Fourth Schedule, the Defendants immediately became entitled to payment of the price for their respective interests in the LLP; but (ii) the notices were only served after banking hours on 25 February 2009 so there was no possibility of the Defendants earning any interest on the sums paid (or avoiding having to pay interest on any borrowings of their own which might be repaid out of the monies received) for that day. As to (i), Miss Newman submitted that a later start date should be chosen to allow for a reasonable time for F&C to arrange for payment of such a sum. However, I consider that the appropriate starting point should be the time at which the entitlement to receive the money arose.

Interest on principal: the rate of interest

The more significant issue under this heading is the rate at which interest should be paid in relation to the principal sums which have now been paid to the Defendants. In commercial litigation, at least insofar as it is between good-sized business organisations, the court usually exercises its discretion under CPR Part 44 to award interest on principal sums at the rate of 1% above base rate. Good reason has to be shown to depart from that basic approach. Miss Newman submitted that the rate of interest should be fixed at 1% above base rate in this case, and that there was no sufficient reason to depart from that.

For most of the period which would be covered by an award of interest, the Bank of England base rate has been at what is historically an exceptionally low level of 0.5%, as part of the Bank's reaction to the financial crisis in late 2008 with which the decline in the fortunes of the LLP was bound up. The Defendants adduced evidence to show that this was dramatically lower than the ordinary base rate, which before the crisis was at a level of about 5% for an extended period. Their evidence also showed, by reference to figures published by the Bank of England for interest charged by banks on sterling personal loans of �5000 to households, that the very low base rate has not converted into dramatically lower interest rates for borrowing by ordinary households (which ran at rates of about 9%-12% for the period before the crisis, and at rates of about 9%-15% since then).

The general purpose to be served in awarding interest "is fairly to compensate the recipient of interest for being deprived of money which he should have had: see Banque Keyser Ullman SA v Skandia UK Insurance Co. Ltd and ors. (unreported, 11 December 1987) per Steyn J" (see Fiona Trust & Holding Corporation v Privalov at [13] per Andrew Smith J). But the application of the compensatory principle is tempered by practical considerations, in the interest of producing a simple rule which is easy to apply. The conventional rate of 1% above base rate has been adopted for pragmatic reasons, on the basis that it provides a broadly fair result even though it may be somewhat less than what all claimants would have to pay if they were borrowers and significantly more than they could earn as lenders: Baker v Black Sea and Baltic General Insurance Company Ltd [1996] LRLR 353, 360; Fiona Trust & Holding Corporation v Privalov at [14]-[16] and [31] per Andrew Smith J. The adoption of a standard conventional approach along these lines has the very considerable merits of predictability (which is likely to assist parties in attempting to settle disputes) and simplicity (so avoiding the need for time consuming and costly investigation of and argument about the individual circumstances of particular businesses, calling for evidence about the rates of interest which might in fact have been available to them in the market and about what they might actually have done with the money had it been paid to them on time).

Obviously, any departure from the standard approach to deciding upon a rate of interest to be awarded under section 35A in order to take better account of the actual position of the claimant and the actual loss suffered by him through having been kept out of his money potentially puts in jeopardy the benefits associated with adoption of a simple standardised approach. Therefore the court should be relatively slow in commercial litigation to depart from use of the standard rate of 1% above base rate.

However, the tension inherent in adoption of the standard approach with the ability of the court to achieve proper compensation in the individual case may in some circumstances become so acute that the court feels that the balance tips in favour of a departure from the standard approach and towards adoption of a measure which more accurately reflects the true loss to the claimant. In these cases, the pressure of the disparity between the result the conventional approach leads to and the actual loss suffered by a claimant in terms of interest costs from having been kept out of his money is so great that some adjustment in favour of the claimant is required as a matter of fairness. That is to say, in such cases the departure from the general compensatory objective to be pursued is so great as to outweigh the practical considerations in favour of adopting the usual conventional approach.

The decision of the Court of Appeal in Jaura v Ahmed [2002] EWCA Civ 20 is a case in which the court was persuaded to depart from the usual conventional award of 1% above base rate, but in a way which still sought to preserve the benefits of using a relatively standardised approach. The case concerned a claimant who was a small businessman. Small businessmen cannot usually borrow at such good rates as larger businesses. At [18]-[26], Rix LJ, for the court, recognised that interest rates charged to small businessmen generally run at a significantly higher rate than interest rates for larger businesses, and ordered interest to be paid at a rate 3% above base rate to reflect this. The rate was chosen as being typical of the rate for the class of small businessmen, rather than as being the actual rate which was charged to the claimant: see [25] (see also Fiona Trust & Holding Corporation v Privalov at [16] for discussion of the adjusted, category-based approach to be applied). The general compensatory purpose of an award of damages was thus honoured more fully than would have been the case had the conventional rate of 1% over base rate been applied, but at the same time pragmatic considerations still had a role to play. In my view, the judgment shows that the courts will recognise a broad general category of small businessmen in relation to whom interest will be payable at a more or less conventional rate of about 3% above base rate. It is a relatively simple matter, which need not take up a lot of time and cost, to debate whether a claimant falls into this general category so as to get the benefit of this better rate.

In some cases, the courts may be persuaded to go further in analysing in detail the actual borrowing rates available to or in fact paid by a claimant: see Fiona Trust & Holding Corporation v Privalov at [25]. This may be appropriate where the time, cost and effort involved in investigating these matters is assessed to be proportionate and necessary to meet the justice of the particular case because of some special feature it has. The circumstances in which that should occur need to be tightly controlled, since otherwise parties will be tempted to try to introduce evidence and argument about such matters in a way that would be destructive of the very important benefits associated with adopting a standardised approach in the first place.

In the present case the Defendants put forward three reasons why I should order a rate of interest considerably higher than 1% above base rate:

i) Mr Thompson submitted that the Defendants should be regarded as falling into the category of small businessmen, whose borrowing costs are likely to be higher than 1% over base rate and in relation to whom the courts recognise that a higher interest rate under section 35A may be appropriate: see Jaura v Ahmed. He submitted on the basis of this authority that the interest rate in favour of the Defendants should be at least 3% above base rate;

ii) Mr Thompson went further. He submitted that the underlying principle to be applied is that the rate of interest should compensate a claimant for being kept out of his money, and that on the evidence before the court the real rate of interest which individuals in the same general category of borrower as the Defendants have had to pay over the relevant period to borrow money on an unsecured basis was of the order of about 12%-13% (see para. [59] above). Therefore, in fact, I should order interest to be paid at that level in preference to a rate of only about 3%;

iii) Finally, Mr Thompson submitted that I should order interest to be paid at a still higher rate, by analogy with the enhanced rate of 10% above base rate referred to in CPR Part 36.14(3)(a). Indeed, he submitted that before the financial crisis blew up in late 2008, the evidence showed that the established pattern of interest rates showed that 10% above base rate as provided for in CPR Part 36.14(3)(a) ran at a level roughly 4%-7% above the interest rate charged to households (i.e. individuals in the same general category as the Defendants) for unsecured borrowing. The purpose of the special enhanced rate of interest where a CPR Part 36 offer is made is to provide an incentive to settlement where reasonable offers to settle are made: see Montlake v Lambert Smith Hampton Group Ltd [2004] EWHC 1503 (Comm); [2004] 4 Costs LR 650, at [29]. In the light of the exceptional and unusual economic and financial situation which has applied over the relevant period during which the Defendants have been kept out of their money, when the base rate has abnormally been at a very low level, Mr Thompson submitted that to achieve the sort of incentive effect which CPR Part 36.14(3)(a) is supposed to achieve I should order interest to be paid at an enhanced rate 4%-7% above the true compensatory rate of 12%-13% - i.e. at about 16%-20%.

In my judgment, the appropriate rate of interest is 3% above base rate up to 15 January 2010, and 10% above base rate from 16 January 2010.

As regards the first period, I consider it is appropriate to apply the conventional rate of interest for small businessmen as used by the Court of Appeal in Jaura v Ahmed. I am not persuaded that sufficient grounds have been made out by the Defendants to depart from that conventional approach in the circumstances of this case. There was no evidence before me that the Defendants had in fact been borrowing money at higher rates to support any business ventures by them or had lost the opportunity to place the sums they should have received on deposit at a higher rate of interest, and no good grounds were put forward to convince me that fairness required any more elaborate investigation or generous award than that which is given by application of the adjusted standardised approach applied in Jaura v Ahmed.

As regards the second period, for the same reasons I have given at paras. [50]-[55] above for applying CPR Part 36.14(3)(b) by analogy to order costs to be assessed on the indemnity basis, I consider that it is appropriate to apply CPR Part 36.14(3)(a) by analogy so far as concerns the award of interest on principal. I also think that ordering interest to be paid at 10% above base rate would provide a suitable incentive to settlement in circumstances such as those in this case. I do not accept Mr Thompson's submission that I should award interest at a still higher rate, for two reasons: (a) CPR Part 36.14(3)(a) provides for an award of interest "at a rate not exceeding 10% above base rate", so the analogy sets a cap on the enhanced interest rate at 10% above base rate and there is no injustice involved in applying that rate; and (b) the incentive effect referred to in Montlake v Lambert Smith Hampton Group Ltd is not something to be subjected to precise calculation, and in any event operates by reference to the position of the paying party rather than the claimant (the incentive arises from the paying party facing the prospect of paying a higher rate of interest than he could derive from the money himself) - and on the evidence before me there was no sound basis for concluding that interest at 10% above base rate would not have a suitable incentive effect in a case of this kind.

Interest on principal: should it be reduced to take account of advanced drawings of profits paid to the Defendants after 25 February 2010 (the date of service of the First Put Option Notices)?

F&C submitted that any interest payable in respect of the principal sums found to be due to the Defendants should be reduced by the amounts received by the Defendants from the LLP in respect of advanced drawings payments of �12,500 to each of them per month for the period after 25 February 2009, when the First Put Option Notices were served, until October 2011, when F&C eventually purchased their respective interests in the LLP. F&C submitted that this would be appropriate, because if the Defendants' interests in the LLP had been bought out pursuant to their First Put Option Notices, as the court found they should have been, the Defendants would not have received any of these payments of advanced drawings. The Defendants would, on that scenario, have received the price under the Put Option at the time and they are to be paid interest to compensate them because that did not in fact happen. Therefore, so Miss Newman submitted, the amount of the advanced drawings received by the Defendants should be set off against or taken into account when calculating the interest payable on the principal sums paid to the Defendants.

I do not accept this submission. In my judgment, the advanced drawings paid to the Defendants are properly to be treated as distinct from the payment of principal under the First Put Option Notices and any interest thereon:

i) The primary reason why the Defendants remained as members of the LLP and hence entitled to receive monthly advanced drawings was that F&C refused to accept the validity of the First Put Option Notices; did not make the payments necessary to purchase the Defendants' interests in the LLP; and instead insisted that the Defendants did in fact remain members of the LLP, subject to all their obligations as such under the Agreement. Apart from anything else, this was intended to create doubt and uncertainty for the Defendants about their position. In view of F&C's attitude, and the risk it created, the Defendants took the reasonable decision that they could not safely walk away from the LLP and should continue to act as if they remained members. It was obvious that if they failed to abide by their obligations as members F&C would seize upon that as justification to purport to expel them as members with minimal financial recompense. In the circumstances, F&C bears the main responsibility for the situation which in fact arose, in which - despite what I have found to be the validity of the First Put Option Notices - the Defendants continued to be and to act as members of the LLP, with entitlement to receive advanced drawings each month;

ii) As a result of F&C's position, the Defendants remained subject to the obligations on them under the Agreement, particularly those in clause 13. These included obligations restricting the Defendants from working to earn their living with other businesses. The advanced drawings due to the Defendants under the Agreement were closely analogous to annual salary in return for devoting their full time to the affairs of the LLP (see para. [226(ii)] of the judgment). In the circumstances, therefore, F&C's behaviour meant that the Defendants had to treat themselves as being bound to continue to work for the LLP and as disabled from earning their living elsewhere. Accordingly, there will not be any element of undue enrichment of the Defendants if they are paid interest on the principal sums due to them without deduction of the advanced drawings received by them. According to the judgment, they should have received the principal sums in February 2009 (and are therefore to be paid interest to compensate them for not having received those sums at that time) and - if F&C had honoured the First Put Option Notices at that time as they should have done - the Defendants would have been free to earn salary elsewhere. It is highly improbable that the Defendants would have been left only with the principal sums in their hands and no salary over the succeeding period, which would be the practical effect of F&C's submission;

iii) As events transpired, essentially as requested by F&C and (as a result of F&C's influence) by the LLP, the Defendants continued to work full time for the LLP in an executive capacity until December 2009, when they were improperly excluded by the actions of F&C from being able to fulfil their executive roles. They remained willing and able to fulfil their executive responsibilities for the LLP until F&C completed the transfer of their interests to F&C in October 2011. They were, in substance though not form, employees of the LLP and worked as such or held themselves ready to work as such. The Defendants are properly to be regarded as having earned their advanced drawings (akin to salary), in the way an employee would be found to have done in such circumstances;

iv) In light of these considerations, the justice of the case is that no deduction should be made from the interest on principal due to the Defendants to take account of advanced drawings received by them.

Interest on costs

The proceedings lasted a long time and the Defendants had to make a number of substantial payments to their lawyers over that period (eventually, they had to have resort to a conditional fee agreement to cover the latter stages of the trial). For these costs payments, I consider that it is fair that interest should be ordered in respect of those payments in the exercise of the court's discretion under CPR Part 44.3(6)(g), running from the times when the payments are made: compare Douglas v Hello! Ltd [2004] EWHC 63 (Ch); Bim Kemi AB v Blackburn Chemicals Ltd [2003] EWCA Civ 889 at [18(c)]. Such interest runs up to the time when a costs order is made, from which time the judgment interest rate operates: see Schlumberger Holdings v Electromagnetic GO Services [2009] EWHC 773 (Pat).

Again, an issue arises as to what interest rate should be applied. The Defendants say that the costs involved in the litigation were so high that a point soon arrived at which they had to borrow money from bridging finance providers at a very high rate of interest to fund their on-going legal bills. They both filed witness statements to explain this. Mr Culligan's evidence was that he took out a bridging loan of �700,000 on 25 June 2010, repayable in December 2010, at an effective rate of interest (taking into account both the fees to take out the loan and the nominal interest paid) of 47.4% p.a.. On 3 August 2010, to fund the litigation, he had to borrow more money (�585,000) from another bridging finance provider, again repayable in December 2010, at an effective rate of interest of 45.9% p.a.. On 21 December 2010 he repaid these loans by use of the proceeds of another loan, supported by a second charge on his house, of �1,742,000. This further loan was for a set period of one year, with all interest required to be paid up-front. The effective rate of interest (taking into account the nominal interest paid and all fees) is 24.1%. I am satisfied on the evidence that Mr Culligan did take out the loans at these rates and used them to pay his legal bills in relation to the litigation. There is no reason to doubt that he sought the best interest rates he could in the market and acted reasonably in taking out these loans.

Although Mr Barthelemy was able to fund his legal expenses to an extent from other sources, a similar pattern of borrowing at high effective rates of interest also appears from his evidence as well. On 16 June 2010 he and his wife borrowed �450,000 against a first charge on an investment property owned by them at an effective rate of interest of about 35% p.a.. This was repaid using the proceeds of a further loan of �525,000 taken out by them on 17 December 2010, again secured on the property. The effective rate of interest on this loan is about 20% p.a.. Again, I am satisfied on the evidence that Mr Barthelemy did take out the loans at these rates and used them (with other funds) to pay his legal bills. Again, there is no reason to doubt that he sought the best interest rates he could in the market and acted reasonably in taking out these loans.

The Defendants seek an order that in respect of costs paid by the Defendants prior to 25 June 2010, interest should be paid for the period up to 15 January 2010 at the rate of 13% p.a. (i.e. the approximate actual rate charged to small businessmen for borrowing: see para. [59] above) and from 16 January 2010 at the rate of 20% p.a. (i.e. at 13% plus an uplift to correspond, as Mr Thompson argued, with the proper effect of an order for enhanced interest under CPR Part 36.14.3(c)). In respect of costs paid by the Defendants in the period after 25 June 2010, the Defendants seek an order that the rate of interest in the period up to and including 21 December 2010 should be 40% p.a. and that for the period after 21 December 2010 the rate should be 24% or 25% p.a..

In my judgment, for the period up to 15 January 2010 (i.e. for the period until 21 days after the Defendants' offer of 24 December 2009 to settle the case on reasonable terms) the applicable rate of interest in respect of costs should be at the same conventional rate as is applicable in relation to the principal sums due to them - 3% above base rate. The same reasons apply as in relation to the interest payable on the principal referable to this period. The Defendants have not shown that there are sufficient grounds such that justice requires a departure from the usual conventional interest rate.

I consider that the interest rate in respect of costs for the period from 16 January 2010 to 24 June 2010 should be 10% above base rate, by analogy with CPR Part 36.14(3)(c). This is for reasons similar to those relevant to the application of this rate in relation to principal in the period from 16 January 2010. The Defendants have not shown that there are sufficient grounds such that justice requires a departure from an interest rate at this level in this period.

I think that the position after 25 June 2010 (taking that as a convenient single date for use in relation to both the Defendants) is different. From that time there is evidence that the Defendants suffered particularly high losses as a result of the litigation, in the form of interest charges on bridging loans. In my view, this is a period in which the divergence between application of a conventional approach (even at a rate of 10% above base rate) and the underlying purpose of an award of interest to compensate individuals for losses actually suffered by them because of monies they have had to pay out is particularly acute, such that justice requires a different approach.

I reach that view on the basis of a combination of four factors, which in my opinion take the case outside the range of cases within which a conventional approach not directly tailored to the particular circumstances of the individual case is appropriate: (a) the very high costs which the Defendants as private individuals had to fund in order to keep their claim alive and prosecute it effectively, under circumstances of particularly complex and burdensome attritional litigation; (b) the very substantial difference between the interest the Defendants themselves have 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; (c) the fact that they did in fact take out loans at these high effective rates of interest, and acted reasonably in doing so, specifically in order to fund their on-going legal costs (one is not, therefore, engaged in a notional exercise regarding what might have been done if a sum of money had been paid by a defendant to a claimant at some point in time); and (d) the fact that costs have been ordered to be paid by F&C on the indemnity basis in that period. In my judgment, these factors in combination mean that it would not be appropriate to confine the Defendants even to the enhanced rate of interest applicable by analogy with CPR Part 36.14(3), and that instead the justice of the case is that they should be paid interest at the actual effective rate they themselves have had to bear.

In this regard I particularly emphasise the importance for my reasoning of factor (d) (award of costs on an indemnity basis). In my view, where a party has acted in the course of litigation in a way that attracts an order of costs against them to be assessed on an indemnity basis, that is a good indicator that that party is to be taken to have assumed to a particularly extensive degree the risk of continuing with the litigation in question. 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 is intended to serve. In this regard, a very loose comparison may be drawn with the position in terms of recovery where a party is liable for one of the more serious intentional torts, such as deceit, where the wrongdoer may, by acting in a manner attracting particular disapproval from the court, be taken to have assumed to a greater extent than would otherwise be the case responsibility for the losses suffered by the innocent party: see Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 and 4Eng Ltd v Harper and Smith [2009] EWHC 2633 (Ch) at [14(3)]. Moreover, using an award of indemnity costs as a marker is attractive because the standards to be applied are well-known and there will already have been argument about that issue in a suitable case. CPR Part 36.14(3) also suggests that it may be appropriate to link indemnity costs with a special approach to questions of interest on costs.

In addition, a focus on the award of indemnity costs as being a particularly important factor in deciding to move beyond a simple conventional approach to the assessment of damages gives greater scope for the court to manage potentially burdensome sub-trials focused on an examination of what parties actually did. If there is to be serious argument about what rate of interest was actually paid by a claimant to fund on-going legal expenses, with a need for evidence and possibly extensive submissions, it would be possible to divide up a hearing to examine first whether there should be an order for indemnity costs, and only if there was would parties need to proceed to a more detailed examination of the detailed facts of the case. In this way, even while being prepared to rectify an injustice to a claimant, the court can still seek to adopt an approach which continues to afford some of the benefits of a more convention-based approach.

In my judgment, therefore, in relation to interest on costs paid by the Defendants in the period after 25 June 2010, the interest rate to be ordered in relation to the period up to and including 21 December 2010 should be 40% p.a. (as a rough average of the rates borne in that period by the two Defendants: see paras. [73] and [74] above); and in relation to the period after 21 December 2010 should be 22% (again as a rough average of the rates borne by the Defendants in that period). I think an order in these terms will be broadly just between the parties while at the same time being reasonably simple and straightforward to apply with minimal cost and effort. I do not think that further investigation of the precise facts (such as which of the Defendants paid what proportion of each costs payment, and funded from what sources) would be appropriate or justified in the circumstances of this case.

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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> F&C Alternative Investments (Holdings) Ltd v Barthelemy & Anor [2011] EWHC 2807 (Ch) (28 October 2011) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/2807.html Cite as: [2011] EWHC 2807 (Ch), [2012] Bus LR 891

England and Wales High Court (Chancery Division) Decisions