Ulrich Rued v Lloyd Dormer & Anor

At a final consequentials hearing after dissolution of a partnership, an agreed contractual rate of interest governs the parties’ entitlement unless displaced by a properly established legal basis. A statutory default provision cannot be used to reopen a completed account or impose enhanced interest for alleged misconduct that was not pleaded and proved.

Part 36 comparisons must be made on a true like-for-like and realistic basis, taking account of the offer’s scope, taxation and the judgment actually obtained. Automatic costs consequences may be unjust where an offer would not have avoided the main litigation. Partnership accounts ordinarily attract no order as to costs. Partnership assets should generally be realised at proper market value, but a co-owner may acquire an asset if the mechanism is functionally equivalent to an open-market sale.

The claimant and first defendant had operated a land-development partnership. Following earlier liability, account and consequential judgments, the partnership had been dissolved and three matters remained: further interest, costs, and the mechanics for realising the remaining partnership assets.

The claimant sought additional interest under statutory provisions and on the basis of alleged misconduct. Both parties sought variations to the existing liability-phase costs order and competing costs orders for the account phase. The first defendant also sought permission to purchase a property occupied as his home rather than have it sold on the open market. The issues were whether further interest was recoverable, whether Part 36 consequences or other costs orders were justified, and how the assets should be sold.

1. Further interest. The parties had agreed that capital advanced to the partnership would be repaid with simple interest, ultimately at 3 per cent per annum. The account directed by the court incorporated that agreement, historical payments and proper credits. Section 42 of the Partnership Act 1890 was a default provision. It did not override the contractual regime, permit substitution of the statutory rate, impose enhanced interest for alleged misconduct, or reopen the completed account. Allegations of dishonest misappropriation or bad faith had to be properly pleaded and proved, and could not be introduced indirectly at the consequentials stage. No further interest was awarded.
2. Liability-phase costs. Part 36 required a genuine like-for-like comparison between the offer and the judgment, including the treatment of withholding tax and post-offer interest. The claimant’s narrow offer did not produce a more advantageous result on that proper comparison. In any event, applying Smith v Trafford Housing Trust [2012] EWHC 3320 (Ch) and the circumstances identified in CPR 36.17(5), it would be unjust to impose automatic consequences. The offers would not have avoided the central Plot 9 dispute, the liability trial or the account. The existing order requiring the defendants to pay the claimant’s liability-phase costs was therefore not varied.
3. The first defendant’s early, partial and insufficiently explained offer did not operate as a valid or meaningfully comparable Part 36 offer. The refusal to clarify its basis materially undermined its evaluation. The integrated nature of the liability trial also made detailed issue-by-issue apportionment artificial. The broad-brush approach described in Pigot v Environment Agency [2020] Costs LR 825 did not justify transferring liability costs.
4. Account-phase costs. Following Ma’har v O’Keefe [2014] EWCA Civ 1684 at [15], the orthodox starting point for an account following partnership dissolution was no order as to costs. The account was a necessary, neutral process of ascertainment, not ordinary outcome-based litigation. Neither party had shown conduct justifying a costs sanction, so there was no order as to account-phase costs.
5. Sale mechanics. Partnership assets capable of realisation should ordinarily be sold on the open market at proper value. The first defendant’s occupation of Plot 9 did not itself justify departure, but he could be given an option to purchase if the mechanism secured the economic equivalent of an arm’s-length sale in valuation and timing. Plot 9 was to be independently valued at open-market value with vacant possession, without an occupation discount. The first defendant could purchase at the full valuation within a defined period and complete promptly; otherwise it was to be marketed and sold openly.