F & C Alternative Investments (Holdings) Ltd & Ors v Barthelemy & Anor

A settlement offer made outside Part 36 cannot attract its costs and interest consequences by analogy. The offer remains relevant to the ordinary costs discretion. Refusal of a reasonable offer justifies indemnity costs only where the refusal is unreasonable to a high degree, assessed when the offer was made. An overall successful party may bear the opposing party’s costs of unsuccessful issues without exceptional circumstances or improper conduct. Pre-judgment interest requires a fair, reasonable and proportionate appraisal of both parties’ positions. Actual litigation borrowing charges do not automatically determine the rate, and encouraging settlement alone does not justify an increase. Conventional interest rates remain open to reappraisal on adequate evidence of changing borrowing conditions.

F&C Alternative Investments (Holdings) Limited held a 60% interest in F&C Partners LLP, which managed funds of hedge funds. Francois Barthelemy and Anthony Culligan each held 20%. Following a breakdown in their working relationship, the individual members exercised contractual put options requiring their interests to be bought out. The F&C entities disputed the options’ validity. The litigation also included competing unfair prejudice petitions.

After a 95-day trial, Sales J substantially upheld the individual members’ claims, although their mis-selling and liquidation allegations failed: [2011] EWHC 1731 (Ch). His consequential judgment, [2011] EWHC 2807 (Ch), awarded them 70% of their costs. Costs after 15 January 2010 were payable on the indemnity basis. Enhanced interest was awarded on both the principal sums and costs, partly by analogy with Part 36 and partly by reference to expensive litigation funding.

The F&C entities appealed those enhanced awards without challenging the substantive judgment. The individual members cross-appealed the costs percentage and earlier interest rates. The central issues were whether offers expressly made outside Part 36 justified equivalent consequences and whether actual borrowing charges justified unusually high interest on costs.

1. The appeal was allowed unanimously and every ground of cross-appeal was dismissed. Standard costs were substituted for indemnity costs from 16 January 2010. Interest on the judgment sums and costs for all periods from that date until judgment was reduced to 3% per annum above base rate. The award of 70% of the respondents’ costs remained.

2. An appellate court could interfere with a costs discretion where the decision was wrong in principle, involved erroneous consideration of relevant or irrelevant matters, or was plainly unsustainable. The trial judge was entitled to reduce the successful parties’ costs both for their unsuccessful issues and for an element of their opponents’ costs of those issues. Neither exceptionality nor unreasonable or improper conduct was required. The reference to an exceptional case in Summit Property Limited v Pitmans imposed no additional legal test.

3. Part 36 was a self-contained code. Its particular consequences required compliance with its requirements, as explained in Gibbon v Manchester CC. The December settlement offer expressly excluded Part 36 and reserved withdrawal rights inconsistent with it. Its consequences therefore fell under Part 44.3. Courts could not remedy perceived omissions in Part 36 by extending its sanctions by analogy.

   The contrary reasoning in Fitzroy Robinson Ltd v Mentmore Towers Ltd and Huntley v Simmonds was disapproved, although their results were not rejected. The possibility of de minimis errors or obvious slips misleading nobody was left open.

4. Under the ordinary costs discretion, rejected offers remained relevant but did not automatically justify indemnity costs. Following Kiam v MGN Ltd, unreasonable conduct had to be unreasonable to a high degree. The assessment concerned the recipient’s position at the time, rather than the eventual result. The appellants had negotiated and mediated, and the judge had rejected allegations that pursuing their case was unreasonable. The indemnity award therefore lacked sufficient justification.

5. The enhanced interest on principal and costs likewise rested on an impermissible Part 36 analogy. Encouraging settlement alone did not justify increasing otherwise appropriate interest. The evidence about small household loans did not establish that the selected small-business rate was inadequate.

6. Actual borrowing charges did not automatically determine interest on costs. Compensation required a general appraisal of fairness, reasonableness and proportionality between paying and receiving parties. The exceptional funding rates had not been notified beforehand, and the judge’s reliance on indemnity costs was flawed. The Judgments Act 1838 concerned post-judgment interest and did not fetter the pre-judgment discretion.

7. Tomlinson LJ, with Arden LJ agreeing, added that conventional interest rates were practical aids rather than fixed rules. Comprehensive evidence of changing borrowing conditions could require their reappraisal. The evidence in this case did not permit that exercise.

• Court of Appeal (Civil Division): [2012] EWCA Civ 843 . Allowed the appeal against indemnity costs and enhanced interest. Substituted standard costs and interest at 3% above base rate for the challenged periods. Dismissed the cross-appeal and preserved the 70% costs award.
• High Court (Chancery Division): Sales J, [2011] EWHC 2807 (Ch) . Awarded 70% of the respondents’ costs, with indemnity assessment after 15 January 2010, and enhanced interest on principal and costs. Those enhanced awards were reversed on appeal.
• High Court (Chancery Division): Sales J, [2011] EWHC 1731 (Ch) . Substantially upheld the respondents’ put option claims and rejected the appellants’ unfair prejudice case. The substantive conclusions were not appealed.