Carlisle & Cumbria United Independent Supporters' Society Ltd v C.U.F.C. Holdings Ltd & Ors

The Court of Appeal considered the proper allocation of costs following the compromise of a derivative action concerning the proposed disposal of company land. The court endorsed the judge's restrained approach to merits but held that the judge erred in principle by imposing a fixed cut-off date (16 January 2008) limiting the claimant's recoverable costs. The Court of Appeal exercised the costs discretion itself: the claimant (the Trust) was to recover its costs against the director respondent, Mr Story, on the standard basis and against the companies on an indemnity basis, subject to deductions for unnecessarily protracted correspondence and for additional costs incurred by relisting the application. The court also ordered that Mr Story must reimburse the companies for any sums they had paid towards his costs because he was not entitled to be indemnified by the companies in respect of costs arising from the wrongful proposed transaction.

Background and parties: The claim was a derivative action brought by the Carlisle & Cumbria United Independent Supporters' Society Limited (the Trust) on behalf of The Carlisle United Association Football Club (1921) Ltd and CUFC Holdings Ltd (together the Companies) to prevent a proposed transfer of floodplain land for no consideration to a third party in connection with arrangements of the controlling shareholder, Mr Norman Frederick Story. The Trust held just over 25% of Holdings; Mr Story held just under 75%.

Nature of the application: The Trust sought injunctive relief and leave to continue the derivative action and ultimately compromised the claim by a Tomlin order which introduced detailed protections (including instruction of the valuer chosen by the Trust, Knight Frank Rutley, and related procedural safeguards) for any future sale. The principal dispute on appeal concerned the allocation of costs arising before and during the compromise negotiations.

Procedural posture: The High Court (Peter Smith J) approved the compromise and made a costs order dated 27 July 2008 that introduced a cut-off date (16 January 2008) limiting indemnity costs recoverable from the Companies and ordering the Trust to pay the defendant director's costs after that date. The Trust appealed.

Issues framed: (i) Whether the judge was entitled to impose the cut-off date; (ii) the appropriate exercise of discretion as to the three categories of costs in issue (Trust v Story; Trust v Companies; Companies v Story); and (iii) whether Mr Story was entitled to be indemnified by the Companies for costs they had paid on his behalf.

Court's reasoning and disposition: The Court of Appeal held that the judge was entitled to limit inquiry into the merits but erred in principle by selecting 16 January 2008 as a cut-off and by excluding later costs arising from matters to which the defendants had legitimately agreed. The Court exercised the costs discretion itself. It found the post-cut-off correspondence was excessive and awarded the Trust its costs against Mr Story on the standard basis and against the Companies on an indemnity basis, but deducted 70% of the costs of correspondence from 16 January to the Tomlin order and excluded costs of and incidental to the relisted application incurred on or after 20 February 2008 that would not have been incurred if the parties had agreed the Tomlin terms earlier. The court further held that Mr Story was not entitled to an indemnity from the Companies for costs incurred defending the action in respect of the transaction which he had accepted would have amounted to a breach of duty, and ordered him to reimburse any sums the Companies had paid towards his costs.

Wider context: The decision illustrates the Court's willingness to intervene where a judge has erred in principle in fixing arbitrary cut-off dates for recoverable costs after settlement of derivative claims, and to tailor the costs award by balancing the reasonableness of litigation conduct against the substantive compromise achieved.

Appeal allowed in part. The Court of Appeal set aside the judge's imposed cut-off date of 16 January 2008 as erroneous in principle and exercised the discretion itself: the Trust was awarded its costs against Mr Story on the standard basis and against the Companies on an indemnity basis, subject to specified deductions for protracted correspondence and unnecessary relisting; additionally Mr Story was ordered to reimburse the Companies for any sums they had paid on his behalf because he was not entitled to indemnity from the Companies for costs arising from the wrongful proposed transaction.

Appeal from an order for costs made by Peter Smith J (Chancery Division) dated 27 July 2008; heard in the Court of Appeal and reported as [2010] EWCA Civ 463 (this judgment).