Case No: A2/2011/3333
Neutral Citation Number: [2012] EWCA Civ 843
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The High Court of Justice (Chancery Division)
The Honourable Mr Justice Sales
Neutral Citation Number: [2011] EWHC 2807 (Ch)

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 22/06/2012
Before :

LADY JUSTICE ARDEN
LORD JUSTICE TOMLINSON
and
LORD JUSTICE DAVIS
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Between :

	F & C Alternative Investments (Holdings) Limited & Ors	Appellants	
	- and -		
	Barthelemy & Anor	Respondents	

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Mr Simon Browne QC and Mr Andrew Ayres (instructed by Norton Rose) for the Appellants
Mr Andrew Thompson (instructed by Jeffery Green Russell) for the Respondents

Hearing dates : 22nd and 23rd May 2012
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Judgment
Lord Justice Davis : 
Introduction 
1.	This appeal is the culmination of very heavy and very bitterly fought litigation. It related to the complete breakdown in the working relationship between the members of a limited liability partnership which was involved in the management of a fund of hedge funds operating on an absolute return basis. The trial was, we were told, originally estimated to last 6-7 weeks. In the event it took some 95 days, spread out over an extensive period. The judgment of the trial judge (Sales J), delivered on 14th July 2011, ran to 303 pages. 
2.	Although the appellants (a word I use loosely to cover where appropriate the relevant F&C entity concerned) succeeded on some of the issues raised at trial, the overall victors were the respondents. There were further hearings on consequential matters. The appellants, in the result, were ordered on 4th October 2011 to pay each of the respondents nearly £4 million. The judge also proceeded to make an order as to costs and interest. He gave a detailed and careful judgment on the issues of costs and interest on 28th October 2011. 
3.	The actual terms of that Order (dated 28th October 2011) in so far as relevant for the purposes of this appeal are as follows:
“1. F&C Holdings and F&C Plc are jointly and severally liable to pay each of the Defendants interest on the sum of £3,914,359.20 ordered to be paid to each of the Defendants under paragraphs 1 and 2 of the Order of this Court made on 4 October 2011 for the period from 26 February 2009 until 15 January 2010 (inclusive) at the rate of 3% per annum above base rate and then from 15 January 2010 until 7 October 2011 at the rate of 10% per annum above base rate, being £831,023.82 in total payable to Mr Culligan and £831,023.82 in total payable to Mr Barthelemy.
2. F&C Holdings and F&C Plc (their liability to be joint and several) shall pay Mr Culligan £831,023.82 and Mr Barthelemy £831,023.82 in respect of the liabilities under paragraph 1 above.
3. F&C Holdings is liable to pay the Defendants 70% of their costs of all 3 sets of proceedings to be subject to detailed assessment (if not agreed) on the standard basis in respect of the period up to 15 January 2010 (inclusive) and on the indemnity basis in respect of the period from 16 January 2010 (inclusive).
4. F&C Holdings is liable to pay the Defendants interest on the costs payable by it to the Defendants pursuant to paragraph 3 above from the date of payment of such costs by the Defendants to their solicitors until the date hereof, at the following rates:-
a.	in respect of costs paid by the Defendants prior to 25 June 2010:-
i.	for the period up to and including 15 January 2010 at the rate of 3% per annum above base rate;
ii.	for the period from and including 16 January 2010 at the rate of 10% per annum above base rate;
b.	in respect of costs paid by the Defendants on or after 25 June 2010:-
i.	for the period up to and including 21 December 2010 at the rate of 40% per annum; and
ii.	for the period after 21 December 2010 at the rate of 22% per annum.
.....”

4.	The appellants do not appeal against the substantive conclusions of the judge whereby he gave judgment in favour of the respondents. The appeal is confined to a challenge to the judge’s decision to award indemnity costs as from 16th January 2010; and as to the rates of interest which the judge assessed as payable by the appellants, both on the judgment amount and on costs, as from the 16th January 2010. Permission to appeal on those issues was granted by Jackson LJ on 21st February 2012. 
5.	The respondents have since put in a respondents’ notice seeking to support the judge’s conclusions on those issues and further advancing various grounds of cross-appeal, aimed at increasing the award of costs from the figure of 70% selected by the judge and at increasing the interest rate of 3% over base rate prior to the 16th January 2010 as selected by the judge. This court at the hearing of the appeal granted permission to cross-appeal on the grounds advanced and also the necessary extension of time for that purpose. In reality, the various grounds of appeal and cross-appeal are closely connected. 
6.	There is no doubt that both appeal and cross-appeal by any measure satisfy a test of proportionality. We were told that the respondents’ solicitors have lodged a Bill of Costs for the purposes of detailed assessment in a sum exceeding £5 million. As the Order itself connotes, interest on the judgment debt and costs will also potentially be huge. The outcome of this appeal and cross-appeal stands to have a very significant financial impact for the parties. 
7.	The appellants were represented by Mr Simon Browne QC (who did not appear below) leading Mr Ayres (who did). The respondents were represented by Mr Andrew Thompson (who also appeared below).
The background facts
8.	In view of the nature of the appeal and cross-appeal it is, mercifully, necessary to give only a very brief resumé of the underlying facts. They are, of course set out and reviewed at great length in the judgment below: [2011] EWHC 1731 (Ch).
9.	Shortly put, then, the position was this. F&C Partners LLP (the LLP) was established as a limited liability partnership as a manager of funds of hedge funds. Its members were F&C Alternative Investments (Holdings) Limited – part of the F&C Group – and Francois Barthelemy and Anthony Culligan. The partnership was regulated by the terms of a detailed written Agreement dated 3rd December 2004. The company had a 60% interest in the LLP and the respondents had 20% each. 
10.	The Agreement included provisions whereby the respondents could, in certain circumstances where the appellants were in breach of contract, require the appellants to purchase their interests at a stated multiple of the profits of the LLP in a certain period, by way of exercising put options. The Agreement also conferred certain entitlements on the respondents as to drawings (with a minimum of £150,000 per annum, irrespective of any losses). 
11.	The nature of the business – managing a fund of hedge funds – was necessarily one which carried significant risk. In late 2008 the whole market was in turmoil after the collapse of Lehman Brothers. The LLP suffered. It had not been performing very well from around mid 2007 and it had suffered large losses in 2008. There was discord between the members as to how to redress the position. The broad strategy proposed by the appellants – found by the judge to be a reasonable one, proposed in good faith – was, in effect, to hunker down and then rebuild the investment track record. They proposed significant cost cutting to this end, including staff reductions. The respondents’ reaction – also found to be reasonable and proposed in good faith – was strongly to dispute that. They wished to retain the staff, develop new products and expand the business. 
12.	 As the debate wore on, each side, as the judge found, became increasingly frustrated with the other and distrustful of the motives and good faith of that other. The respondents, indeed, came to think that the appellants wanted to drive the LLP out of business, in considerable part so as to avoid buying out their interests pursuant to the provisions of the Agreement. They also thought that the appellants were trying to protect their Dutch investment team through fear that active marketing of the LLP’s products might expose them to complaints about prior mis-selling (which at trial was styled the “mis-selling case”). The judge was to find that those suspicions on the part of the respondents were misplaced. The judge further found that the respondents’ belief that the appellants had decided on a strategy to destroy or undermine the LLP’s business, and to close it down, (which at trial was styled “the liquidation case”) was also misplaced. 
13.	At all events, the dispute at the time became such as to “poison relations”, as the judge put it. The upshot was that the appellants resolved at a members’ meeting to stop the February drawings of the respondents (something the judge was to find was a breach of the Agreement). In consequence, the respondents served put option notices – validly as the judge was to find – on 25th February 2009. Further complaints were made by the respondents and further put option notices were served on 22nd May 2009 – validly as the judge found – and again on 24th December 2009 (invalidly as the judge found, but in any event they were not relevant on his other findings).
14.	The respondents also complained that the appellants were conducting the affairs of the LLP in a manner unfairly prejudicial to them. The judge was to find that this complaint was made out: but he doubted whether success on that would result in higher compensation than would be achievable under the put options: and in the result the claim for further compensation was not pursued. For their part, the appellants were in turn to complain that the respondents had conducted the affairs of the LLP in a manner unfairly prejudicial to the appellants. The judge was to reject most of the contentions raised to support that complaint and rejected the overall case of the appellants of unfairly prejudicial conduct. 
15.	The actual course of proceedings was this. The appellants issued Part 7 proceedings on 6th March 2009 (subsequently amended to deal with the further purported exercise of the put options) claiming, among other things, a declaration that the put options had not been validly exercised and that the appellants had no liability to pay the respondents the sums sought. The respondents put in a defence and counterclaim, seeking that effect be given to the put options and the terms of the Agreement. Thereafter the respondents presented their own petition under sections 994 to 996 of the Companies Act 2006 in June 2009. The appellants presented their cross-petition on 28th April 2010.
16.	The reality was that all three sets of proceedings were closely inter-linked. The judge summarised his conclusion, by way of overview, as follows:
“The net result of the claims and counterclaims, therefore, is that the Defendants succeed in the Part 7 proceedings and are entitled to have their interests in the LLP bought out by F&C, pursuant to their valid exercise of the Put Options under paragraph 1.7 of the Fourth Schedule; the Defendants fail in their wide claim under the Petition that F&C conspired to close the LLP, but succeed in other parts of their complaint in the Petition; and Holdings fails in its claims under the Cross-Petition.”

Negotiations
17.	Unsurprisingly, the parties had sought to compromise their differences. As events show, they failed. 
18.	On the 21st July 2009 the appellants offered, by lengthy letter from their solicitors, to buy out the respondents at a price to be independently fixed (with no offer as to costs). There was a mediation on 9th December 2009, with a mediator very experienced in company law and corporate disputes, but that did not achieve settlement. Various offers and counter-offers (some of which it is necessary to detail below) were then made and withdrawn prior to commencement of the trial on 14th June 2010. Willingness to negotiate was still indicated and offers continued to be made: on 14th September 2010 – during a break in the trial – there was a settlement meeting attended by the same mediator (for whose costs the appellants agreed to be responsible). Offers and counter-offers thereafter continued to be made and not accepted until close of the oral evidence on 27th January 2011. Mutual willingness to negotiate further was still thereafter being expressed. 
19.	In view of the arguments raised before the judge (and before us) on the questions of costs and interest, it is necessary to refer to some of the offer letters in more detail.
20.	In particular, on 24th December 2009 the solicitors for the respondents wrote a lengthy letter to the solicitors for the appellants. It was headed “Without Prejudice Save as to Costs”. The letter referred to the litigation background and expressed the view that it would be mutually beneficial for both sides to move on, free of the impediments of the litigation and of the failed relationship. The offer was to settle all the proceedings. The letter then said this:
“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.”

The offer put  forward in essence was that the respondents would sell their interests to the appellant for a total of £5,871,538.80 (being the price calculated under the terms of the Agreement, but with a multiplier reduced from 8 to 6 – styled as a “major concession”), together with costs of the proceedings on a standard basis. 
21.	The letter, in its closing remarks, stated: “The offer in this form is open for acceptance until 4pm on 15 January 2010.” It went on to state: 
“After 4pm on 15 January 2010 the terms of the offer change so that the multiplier referred to in paragraph 8 above is 8 rather than 6 and the offer will remain open for acceptance until such time as it is withdrawn by notice in writing to you…. For the avoidance of doubt, our clients reserve the right to withdraw or amend the terms of the offer either before 4pm on 15 January 2010 or at any time thereafter.” 
The letter concluded in this way:
“Your client should be aware that in the unfortunate event that this offer is not accepted, then in due course our clients will be inviting the Court to apply the same consequences as regards costs and interest as would apply had it been possible to make the offer under Part 36.”

22.	Two points may immediately be noted about this letter:
(1)	First, the offer of the amount the respondents were prepared to accept was in an amount which proved to be significantly less, in the result, than that to which the judge subsequently held they were entitled;
(2)	Second, the offer was not, and was expressly stated not to be, an offer within the terms of CPR Part 36.
23.	The appellants did not accept the offer within the indicated time; and by further letter (marked Without Prejudice Save as to Costs) of the 15th January 2010 the respondents’ solicitors duly indicated that the offered multiplier increased from 6 to 8 and the consequential total price payable was £7,828,718.40 (the total principal amount, of course, awarded by the judge after the trial). 
24.	There was a “lawyers only” settlement meeting on 27th April 2010, and a counterproposal (made “Without Prejudice save as to costs”) was put forward by the appellants’ solicitors on 29th April 2010. This resulted in a further proposal, without prejudice save as to costs, from the respondents’ solicitors dated 21st May 2010, withdrawing the offer of 15th January 2010 and making fresh proposals, albeit retaining the proposed price of £7,828,718.40 and payment of costs. One entirely new term was this:
“In addition it is a condition of any settlement that your clients must 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). ”

This reflects the fact that the appellants had reported to the FSA certain alleged conduct on the part of the respondents (which conduct formed part of the issues in the proceedings and in respect of which, in the result, they were effectively exonerated by the trial judge).
25.	On 25th May 2010 the appellants’ solicitors wrote a letter, without prejudice save as to costs, rejecting the offer of 21st May 2010 and counter-offering the sum of £2.5 million, including the respondents’ costs, open for acceptance until midnight 30th May 2010 and thereafter progressively declining up to the date of trial when it was to lapse.  
26.	That counter-offer in turn was not accepted. There was further correspondence, without prejudice save as to costs, without result. On 1st September 2010 the appellants’ solicitors wrote a letter, among other things saying this:
“We remain confident that our clients will be successful and we have so advised our clients. 
We do, however, appreciate and welcome the expression of willingness which you have made on behalf of your clients to meet and negotiate a sensible compromise.
Your clients will be aware that the costs of this case continue to mount at a rapid rate and it is obviously in both parties’ interests for a compromise to be reached. As we have stated before, that compromise cannot, however, be reached at the expense purely of our clients. Your clients’ repeated offers to settle for the maximum sum which they claim to be entitled to under the LLP Agreement is neither reasonable nor in the spirit of compromise which your clients purport to embrace.
Our clients remain, as ever, willing to consider a meaningful proposal from your clients, amounting to a reasonable offer to settle these proceedings. If and when your clients are prepared to commence a reasonable negotiation then of course our clients would be happy to join that discussion.”

A personally addressed letter to the respondents dated 7th October 2010 followed. It was signed by a non-executive director of F&C, indicating a willingness to welcome reasonable proposals. That the letter was from a non-executive director suggests - and as Mr Browne confirmed on instructions – that an “outside” senior figure, unconnected with the subject matter of the dispute, had been on behalf of the appellants brought in: no doubt to lend a degree of detachment. The upshot was that the respondents offered to settle at a price of £5,871,538.80, plus costs on a standard basis: the letter being sent on (Friday) 22nd October 2010 and being expressed to be open until 10am on 25th October 2010, when the trial was due to restart. That letter included a number of proposed terms, including a new term to the effect that all data and systems of the LLP be transferred to the respondents. A renewed offer, to broadly similar effect, was subsequently made by letter from the respondents’ solicitors of 21st January 2011, but was not accepted. Inconclusive proposals thereafter continued to be made. 
27.	Overall, this cannot be said to be a case where the parties were not trying to settle the litigation. They clearly were. But they plainly took a different view of the respective merits of the respective cases: that of the respondents, in the overall outcome, being the one found to be right. 
The judgment of 28th October 2011
28.	The judge received lengthy oral and written submissions on consequential matters (including costs and interest) arising from his main judgment and his decision of 28th October 2011 was a reserved decision ([2011] EWHC 2807 (Ch)).
29.	On the question of incidence of costs, he noted that the respondents had failed on the mis-selling case and the liquidation case. He declined to refer the matter to a costs judge to be assessed on an issues basis but instead dealt with the matter by considering disallowance of a proportion of their costs. That was clearly a sensible approach and no one suggests that, of itself, there was anything wrong with that. The judge described it as a “broad evaluative exercise”. He treated the costs of the three separate proceedings as a composite whole – and, again, no one criticizes that – and indicated his 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 [respondents’] claims on which they won”. He stated that it was appropriate to increase the figure to 30% “to make due allowance for an element of F&C’s costs referable to those issues.” He considered that such an outcome achieved “broad justice” between the parties.
30.	He then dealt with the basis of costs: standard or indemnity. It is to be noted that (in paragraph 29 of his judgment) he rejected a submission by Mr Thompson not just that the appellants had repeatedly rejected proposals to settle at a level more generous to the appellants than achieved at trial but that they should have appreciated they had no good defence to the put option claims and had therefore acted irresponsibly in continuing to contest those claims. The judge also rejected a claim that the appellants had acted unreasonably or irresponsibly in pursuing the cross-petition. 
31.	The reason why the judge made an order of indemnity costs (after 15th January 2010) was, in essence, by reference to the respondents’ offers, and in particular the offer of 24th December 2009. He found that the respondents could not reasonably, for the reason given in the letter itself, frame that offer under Part 36. He accepted the submission that there was a “glitch” in the wording of Part 36.10 in not extending to a case such as this; he considered that the offer in fact made “mimicked” with appropriate adjustments the operation of Part 36 and that it was a sensible way to fashion the offer. He noted that the offer was much lower than the respondents’ true entitlement. He then reviewed the respondents’ subsequent offer letters (as summarised above) and noted that all were below or at the level of their entitlement. He also considered that the subsequent requirements for the appellants to withdraw the letter to the FSA and for transfer of the intellectual property were reasonable. 
32.	He said this at paragraph 49 of his judgment:
“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.”

He cited various authorities, which he considered supported this approach; emphasised the need for incentives for parties to settle litigation of this kind; and said that in the circumstances there was a “strong analogy” when exercising the discretion under CPR Part 44.3 to be drawn with the “central case” covered by CPR Part 36.10(2) and (3). He repeated that “sensible offers” had been made by the respondents. He also stated that the appellants failed to make any reasonable counter-proposals.
33.	Thus it was that he considered costs should be on a standard basis until 15th January 2010 but thereafter should be on an indemnity basis.
34.	Turning to the issue of interest on principal, the judge reviewed the evidence. He noted that for small businessmen the rate for this purpose was commonly put at 3% over Base Rate. He rejected the appellants’ submission that the appropriate rate here was 1% over Base Rate, and ordered interest at 3% over Base Rate until 15th January 2010. But in this context the judge likewise drew an analogy with Part 36.14. He also stated that he considered 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.” However, he rejected a submission that the rate should be still higher than 10% over Base Rate, noting the cap set in CPR Part 36.14(3)(a) and taking the view that no greater “incentive” rate was called for in a case of this kind. 
35.	Turning to interest on costs, the judge referred to the evidence filed. The second respondent’s evidence was to the effect that, on 25th June 2010, he had taken out a bridging loan of £700,000 to fund the defence, at an “effective rate” of interest of, apparently, 47.4% p.a. He had to borrow a further £585,000 on 3rd August 2010 at 45.9% p.a. Subsequently he repaid those loans by refinancing the mortgage on his home at an effective rate of 24.1% p.a. The judge accepted that evidence, as he also accepted the evidence of the first respondent, to the effect that he had borrowed £450,000 on 16th June 2010 to fund the litigation, secured by a charge on a property at an effective rate of interest of around 35% p.a. repaid by refinancing through a loan taken out on 17th December 2010 at an effective rate of about 20% p.a.
36.	The judge’s view, in respect of interest on costs, was that 3% over Base Rate was again appropriate until 15th January 2010; 10% over Base Rate was appropriate up to 24th June 2010 “by analogy with CPR Part 36.14(3)(c)”; and that the position after mid-June was different again, because of the very high rates of interest payable by the respondents on loans to fund the litigation: so that a “different approach” was required. 
37.	The judge said this, to justify this approach:
“78. 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. 
79. 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.”

38.	It thus can be seen that at all stages of his reasoning on these various aspects the judge attached prime importance to the analogy which he drew with Part 36. 
The Rules
39.	In the relevant respects, the Rules are as follows.
40.	CPR Part 36.2(1) expressly provides that an offer to settle which is made in accordance with that Rule is called a Part 36 offer. Part 36.2(2) then sets out certain requirements. (There have been a number of decisions emphasising the need carefully to draft a Part 36 offer to ensure it complies with the Rules). Part 36.3 contains other general provisions relating to Part 36 offers: by Part 36.3(5) it is provided that before the expiry of the relevant period a Part 36 offer may be withdrawn or its terms changed to be less advantageous to the offeree only if the court gives permission.
41.	Part 36.10 is in these terms:
“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.”
Part 36.14 provides as follows:
“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.
(1A) For the purposes of paragraph (1), in relation to any money claim or money element of a claim ‘more advantageous’ means better in money terms by any amount, however small, and ‘at least as advantageous’ shall be construed accordingly.
(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.)”
Part 44.3 is in these terms:
“44.3 – (1) The court has discretion as to –
(a) whether costs are payable by one party to another;
(b) the amount of those costs; and
(c) when they are to be paid.
(2) If the court decides to make an order about costs –
(a) the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but
(b) the court may make a different order.
	….
 (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.
(5) The conduct of the parties includes –
(a) conduct before, as well as during, the proceedings and in particular the extent to which the parties followed the Practice Direction (Pre-Action Conduct) or any relevant pre-action protocol;
(b) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;
(c) the manner in which a party has pursued or defended his case or a particular allegation or issue; and
(d) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.
(6) The orders which the court may make under this rule include an order that a party must pay –
(a) a proportion of another party’s costs;
(b) a stated amount in respect of another party’s costs;
(c) costs from or until a certain date only;
(d) costs incurred before proceedings have begun;
(e) costs relating to particular steps taken in the proceedings;
(f) costs relating only to a distinct part of the proceedings; and
(g) interest on costs from or until a certain date, including a date before judgment.
(7) Where the court would otherwise consider making an order under paragraph (6)(f), it must instead, if practicable, make an order under paragraph (6)(a) or (c).
(8) Where the court has ordered a party to pay costs, it may order an amount to be paid on account before the costs are assessed.
(9) Where a party entitled to costs is also liable to pay costs the court may assess the costs which that party is liable to pay and either –
(a) set off the amount assessed against the amount the party is entitled to be paid and direct him to pay any balance; or
(b) delay the issue of a certificate for the costs to which the party is entitled until he has paid the amount which he is liable to pay.”
Part 44.4(1) is in these terms:
“44.4 – (1) Where the court is to assess the amount of costs (whether by summary or detailed assessment) it will assess those costs –
(a) on the standard basis; or
(b) on the indemnity basis,
but the court will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount….”

42.	Decisions on costs after a trial are pre-eminently matters of discretion and evaluation. Further, it is particularly important to bear in mind that a trial judge – especially after a trial such as this one – will have a knowledge of and feel for a case which an appellate court cannot begin to replicate. The ultimate test, of course, for the purposes of an appeal of this kind is whether the decision challenged is wrong. But it is well established that an appellate court may only interfere if the decision on costs is wrong in principle; or if it involves taking into account a matter which should not have been taken into account or failing to take into account a matter which should have been taken into account; or if it is plainly unsustainable. 
Submissions and Disposition on the Grounds of Appeal and Cross-Appeal
43.	It is convenient to take the issues on appeal and cross-appeal collectively, in the order presented by Mr Thompson. 
(1) Disallowance of 30% of respondents’ costs
44.	In advancing this point by way of cross-appeal, Mr Thompson accepts that the judge was entitled to assess that around 15% of the proceedings were taken up with the mis-selling and liquidation issues at a level discrete from the respondents’ claims on which they succeeded. He also accepts that the judge was fully entitled to approach the matter on a global basis. The only point made is that the judge erred in deciding not simply that the respondents should bear their own costs of these two issues- that is, by disallowing 15% of costs, which Mr Thompson accepts the judge was entitled to do – but by also attributing a 15% liability to the respondents for an element of the appellants’ costs in respect of those issues. 
45.	At first sight, indeed at second sight, that is a surprising challenge. Granted that the respondents were, overall, the successful party and thus, as a starting-point, should have their costs, nevertheless Part 44.3 confers ample powers to depart from that starting point – it is of course a feature of Part 44 that it encourages, where appropriate, such a departure and facilitates the awards of a proportion of costs. In the present case, the respondents chose to pursue those issues – unsuccessfully – to trial at considerable expense. On those issues, the appellants were victorious. In such circumstances, how can it be said that the judge was disentitled from deducting from the award to the respondents both the respondents’ costs of those issues and an element of the appellants’ costs on those issues also?
46.	Mr Thompson’s answer was by reference to authority. He concedes, by reference to the Court of Appeal authority of Summit Property Limited v Pitmans [2001] EWCA Civ 2020; [2002] 2 CPLR 97 that such an outcome does not require the unsuccessful party on the issue to have acted unreasonably or improperly: see paragraph 16 of the judgment of Longmore LJ. But he relies on what Longmore LJ said at paragraph 17 of his judgment, to the following effect:
“It is thus a matter of ordinary common sense that if it is appropriate to consider costs on an issue basis at all, it may be appropriate, in a suitably exceptional case, to make an order which not only deprives a successful party of his costs of a particular issue but also an order which requires him to pay the otherwise unsuccessful party’s costs of that issue, without it being necessary for the court to decide that allegations have been made improperly or unreasonably.”

Mr Thompson submits there was nothing exceptional in the present case to justify such an order, nor does the judge identify any exceptional feature. Accordingly, he said, the judge erred in such a way that the appellate court should interfere.
47.	In my view that is a hopeless argument. The Rules themselves impose no requirement of exceptionality as such and none is to be implied – although there of course needs to be reason, based on justice, for departing from the general rule set out in Part 44.3(2). This one, parenthetic, comment of Longmore LJ cannot be promoted into some kind of extra-statutory legal requirement: and it is plain that Longmore LJ intended no such thing. 
48.	That is illustrated by Longmore LJ’s own express rejection of a need to find unreasonable or improper conduct (which might otherwise carry with it a suggestion of exceptionality). Further, in the immediately preceding paragraph of his judgment Longmore LJ had cited with approval the principles set out by Chadwick LJ in Johnsey Estates (1990) Ltd v Secretary of State for the Environment [2001] EWCA Civ 635. Those principles nowhere suggest a test of exceptionality on this aspect of the costs regime. Indeed Chadwick LJ was himself one of the constitution of the court in Summit. In paragraph 27 of his judgment (in dealing with the issues based approach to costs) he said: 
“Then, if the costs are to follow the event on that issue, the party who has been unsuccessful on that issue must expect to pay the costs of that issue to the party who has succeeded on that issue”.

In a subsequent case, Aspin v Metric Group Ltd [2007] EWCA Civ 922, Chadwick LJ referred, on the issues based approach, to circumstances whereby an (overall) successful party may be deprived of the costs of an issue he has lost “or even, in a suitable case, that that party should pay the costs of the otherwise unsuccessful party on that issue”. No requirement of exceptionality is indicated. 
49.	In my view, that is the right approach. The application of the rules in this context requires no further gloss. The question of the extent to which costs of a particular issue are to be disallowed or notionally paid should be left to the evaluation and discretion of the judge, by reference to the justice and circumstances of the particular case. 
50.	Accordingly, there was no error of principle in the judge’s approach: and his decision cannot otherwise begin to be styled as perverse or one not properly open to him. It is, I might add, plain that the two issues – in particular the liquidation issue – formed a significant and hard fought element of a hard fought trial.
(2) Indemnity costs
51.	This has perhaps, given its ramifications with regard to other issues also, been the principal point raised on the appeal. 
52.	It was a fundamental feature of the judge’s reasoning in this regard that an analogy could be drawn here with Part 36.14. Mr Browne’s submission was that the judge simply was not entitled to have regard, by way of analogy, with Part 36 for this purpose: and it was an error of principle for him to do so. Further, it is an accepted general principle that for indemnity costs, rather than standard costs, to be awarded something out of the norm by way of improper or unreasonable conduct is called for. And here, Mr Browne said, the judge identified no such feature; he essentially relied solely on the supposed analogy with Part 36 to achieve the result that he did. Accordingly he erred in principle or the exercise of his discretion was otherwise flawed by taking into account a matter he was not entitled to take into account. For his part, Mr Thompson submitted that the judge was justified, given the circumstances, in approaching the matter as he did. 
53.	In my view, the submissions of Mr Browne are correct. I simply do not think that the judge was justified in drawing an analogy (in assessing the settlement correspondence, and in particular the without prejudice save as to costs letter of 24th December 2009) with Part 36 so as to justify an award of indemnity costs. 
54.	The starting point has to be that on any view the letter of 24th December 2009 was not a Part 36 offer. Not only was it not so headed: but also it in terms stated that it was not a Part 36 offer, explaining why (for reasons which are, it is true, entirely understandable and which the judge plainly considered thoroughly reasonable). Moreover, as Mr Browne pointed out, the letter did not comply with (or “mimic”, in the judge’s words) Part 36 in all other respects as well. For example, it stated that the respondents reserved the right to withdraw or amend the offer at any time, whereas Part 36.3(5) requires the permission of the court within the relevant period.
55.	Thus this was not a Part 36 offer and the judge had no jurisdiction to make a costs order under Part 36.14. The judge’s jurisdiction as to costs thus fell to be exercised under Part 44.3: as, indeed, the closing words of Part 36.14 mandate. The judge rightly accepted that he was required to exercise the jurisdiction under Part 44.3. 
56.	Once that position is appreciated, however, I have the greatest difficulty in seeing how the costs regime of Part 36, whether indirectly or by analogy, can properly be invoked. Part 36.14 represents a departure from otherwise established costs practice. It imposes a deliberately swingeing costs sanction, by Part 36.14(3), on a claimant who fails at trial to beat a defendant’s Part 36 offer. That is, for policy reasons, designed to encourage a sensible approach of claimants to offers and to promote settlement (that defendants do not get corresponding benefits under Part 36 may  be for reasons in part explained by Simon Brown LJ in paragraph 6 of his judgment in the case of Kiam v MGN Ltd [2002] EWCA Civ 66). But there is no reason or justification, in my view, for indirectly extending Part 36 beyond its expressed ambit. Indeed to do so would tend to undermine the requirements of Part 36 and the repeated insistence of the courts that intended Part 36 offers should be very carefully drafted so as to comply with the requirements of Part 36. As Mr Browne observed, Part 36 is highly prescriptive with regard to both procedures and sanctions.
57.	The judge thought that the failure of Part 36 to extend to the position of litigants in the position of the respondents constituted a “glitch” in the operation of Part 36 and called for adjustment to reflect “the infelicity in the wording” of Part 36. With respect, I do not regard that as a permissible approach. Parliament has decided what the ambit of Part 36 is to be. It is to be regarded as self-contained for these purposes and it is not for the parties or the courts to go around looking for asserted glitches or asserted omissions so as to bring a case indirectly within the reach of Part 36 when it cannot directly be so brought in. As stated by Moore-Bick LJ in the course of his judgment in Gibbon v Manchester CC [2010] EWCA Civ 726; [2010] 1 WLR 2018 (a case apparently not cited to the judge): 
“4. In seeking to settle the proceedings, therefore, parties are not bound to make use of the mechanism provided by Part 36, but if they wish to take advantage of the particular consequences for costs and other matters that flow from making a Part 36 offer, in relation to which the courts’ discretion is much more confined, they must follow its requirements.
5. Part 36 is drafted as a self-contained code…”

58.	In truth the letter of 24th December 2009 from the respondents’ solicitors was an ingenious and unilateral construct. It was the respondents’ own choice (albeit for understandable reasons) not to make a Part 36 offer. It is the case that the letter informed the appellants that if the offer contained in it was not accepted then the respondents would in due course invite the court to apply the same consequences with regard to costs (and interest) as would apply had the offer been made under Part 36. That is what it said. But the fact is that from the point of view of the appellants they were in receipt of an offer which undoubtedly was not a Part 36 offer. 
59.	Mr Thompson relied (as he did before the judge) on a number of authorities to support the judge’s conclusion. 
60.	In the case of Carver v BAA Plc [2008] EWCA Civ 412, the Court of Appeal felt able to adopt a broad approach to the phrase “more advantageous” as used in Part 36.14(1)(a) (it is not without interest that that approach was reversed by amendment to the Rules, as now enshrined in Part 36.14(IA)). But that was not a decision under Part 44.3 nor did it deal with any attempt to bring in the regime of Part 36 by analogy.
61.	More in point is Huntley v Simmonds [2009] EWHC 406 (QB). There Underhill J was called on to consider the question of indemnity costs in the circumstances of the case before him. There an offer “at first sight fell squarely within the terms of CPR 36.14 (2)” as the judge put it. The recipient had itself at the time referred to it as “your Part 36 offer”. However there were various errors, styled by Underhill J as the “purest technicalities”, such that the offer did not formally comply with the requirements of Part 36. It was submitted that the discretion should be exercised under Part 44.3(4)(c) to produce the same result as if it had formally complied with Part 36. Underhill J indicated that, in an appropriate case (of which that was one), the court could give effect to a non-compliant Part 36 offer by the exercise of discretion under Part 44.
62.	In Fitzroy Robinson Ltd v Mentmore Towers Ltd [2010] EWHC 98 (TCC) Coulson J made an award of indemnity costs in circumstances where there were abundant reasons for concluding, as the judge did, that there was thoroughly unreasonable conduct on the part of the defendant in that case. In addition, however, three offer letters marked without prejudice save as to costs had been sent by the claimant (and rejected) which were “not strictly in accordance with CPR Part 36”, as Coulson J put it. Coulson J then said this at paragraph 25 of his judgment:
“On analysis, it can be seen that FRL did better than all of these offers. Accordingly, whilst r.36.14 does not strictly apply – these offers not being in accordance with Part 36 – it seems to me that, when considering the appropriate order to make, I can and should take into account the provision that, if the latter two offers noted above had been made under Part 36, indemnity costs would have been payable as a matter of course.”

63.	Given the facts there can be no quarrel at all with the overall result in Fitzroy Robinson; nor can there be any quarrel with the judge having regard to the without prejudice save as to costs offers as part of the relevant material in deciding overall whether to order indemnity costs. But in my respectful view, it goes altogether too far to take into account as a factor that, had only those offers been made as Part 36 offers, then indemnity costs would have been payable as a matter of course. That is a course neither mandated nor permitted either under Part 36 or under Part 44.3. Similarly, while the result in Huntley may be capable of being justified on the special facts, in my view it is not permissible wholly to discount a number of failures to comply with the requirements of Part 36 as the merest technicality. Perhaps there can be de minimis errors or obvious slips which mislead no one: but the general rule, in my opinion, is that for an offer to be a Part 36 offer it must strictly comply with the requirements. 
64.	Since, in the present case, the offer of 24th December 2009 was neither in substance nor in form compliant with Part 36 – indeed it was expressly designed not to be a Part 36 offer – the judge was wrong in principle, in my view, to take as directly analogous, and as applicable, the potential costs consequences had it been a Part 36 offer.
65.	Moreover, that conclusion seems to me to be entirely consistent with the express provisions of Part 36.1(2) – not referred to in argument before us or mentioned by the judge – which are to this effect:
“36.1(2) – Nothing in this Section prevents a party making an offer to settle in whatever way he chooses, but if the offer is not made in accordance with rule 36.2, it will not have the consequences specified in rules 36.10, 36.11 and 36.14.
(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.)”

In this regard, reference may also be made to the discussion in the Court of Appeal decision in French v Groupama Insurance Ltd [2011] EWCA Civ 1119: which highlights the difference between the present wording of this sub-rule and the previous wording and further highlights the availability of the discretion under Part 44.3.
66.	There is no doubt, of course, that the judge was therefore entitled, under Part 44.3(4) (c), to have regard to that letter (and indeed the other offer letters) in deciding what order to make about costs. Mr Thompson, by his respondents’ notice, accordingly sought to uphold the judge’s conclusion by reference to that offer letter, as well as the other offers. He re-emphasised that had only they been accepted (on terms favourable, as it transpired, to the appellants) thereafter none of the resulting costs would have been incurred at all. Thus his submission amounted to saying that there was conduct on the part of the appellants upon which the judge could properly rely as justifying an award of indemnity costs. 
67.	The difficulty with this submission is that it finds no real reflection in the judge’s findings.
68.	Although Mr Thompson trawled through the main judgment for epithets critical of the appellants’ behaviour, the fact remains that in the costs judgment the judge – well familiar with the whole case – found that the appellants had not acted unreasonably or irresponsibly in pursing their case. The sole ground for the award of indemnity costs was, in reality, the rejected offers of settlement and, in particular, the “strong analogy” the judge drew with Part 36. In this context, it is, I think, to be borne in mind that the judge had refused to award indemnity costs for the period prior to 16th January 2010; and had made no finding that the way in which the Part 7 litigation was set in train and pursued was unreasonable or oppressive on the part of the appellants. 
69.	Mr Thompson sought to say that the judge had, by inference, found the appellants’ conduct unreasonable. That is not a tenable submission. Had the judge thought that he would have said so. It seems to me that, ghosting Mr Thompson’s argument, is the notion that because a (very) reasonable offer was – more than once - made by the respondents, on terms conveying less than what transpired to be their true entitlement, and was rejected by the appellants therefore the appellants were unreasonable in rejecting that offer. That is a non sequitur. The position has to be judged at the time of the offer not only by reference to the maker of the offer but also by reference to the recipient. At that time, the appellants were optimistic as to their prospects: and there was no finding by the judge that that was an unwarranted or unjustified view to take. In the event, their high hopes were dashed – a common-place of litigation generally. It transpired that the appellants had assessed the position wrongly. But that is a hindsight call.
70.	There may be special cases where refusal to accept reasonable offers of settlement is capable of justifying an award of indemnity costs: see Epsom College v Pierse Contracting Southern Ltd [2011] EWCA Civ 1449. But, as Rix LJ there emphasised, the failure to accept such offers, or to accede to an approach for settlement, must be unreasonable: - see paragraphs 71 and 72 of his judgment. He referred to the judgment of Simon Brown LJ in the Kiam case. In the course of his judgment (with which Waller LJ and Sedley LJ agreed), Simon Brown LJ had said this:
“12. I for my part, understand the Court there to have been deciding no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight. An indemnity costs order made under Rule 44 (unlike one made under Rule 36) does, I think, carry at least some stigma. It is of its nature penal rather than exhortatory. The indemnity costs order made on the principal appeal in McPhilemy was certainly of that character. We held that the appeal involved an abuse of process on the footing that:
“to have permitted the defendants to argue their case on perversity must inevitably have bought the administration of justice into disrepute among right-thinking people.”
13. It follows from all this that in my judgment it will be a rare case indeed where the refusal of a settlement offer will attract under Rule 44 not merely an adverse order for costs, but an order on an indemnity rather than standard basis. …. It is very important that Reid Minty should not be understood and applied for all the world as if under the CPR it is now generally appropriate to condemn in indemnity costs those who decline reasonable settlement offers.”

Those observations are, as it seems to me, directly in point in the present case. 
71.	Mr Thompson latched on to the reference by the judge, at paragraph 54 of his judgment, to the failure of the appellant not only to fail to accept any of the offers but also “to make any reasonable counter-proposals” on the put option case and so “taking on the risk of bearing the considerable costs involved” in litigating such issues. It may be that the counter-proposals which were made were unreasonable in the sense that, as it turned out, they fell significantly short of the eventual result. But there was no finding that they should have been seen as such at the time. After all, the appellants had prior to trial offered £2.5 million including costs (which was hardly insubstantial, even if it turned out to be far lower then the respondents’ true entitlement as found by the judge). Moreover the appellants had from time to time made counter-suggestions and offers, had always indicated a willingness to negotiate and had participated in two mediations. The appellants cannot be said to have been – nor were found by the judge to have been – unreasonably obdurate or unreasonably intransigent with regard to settlement. The problem was that, in good faith, they and their lawyers had a diametrically opposed view of the respective strengths and weaknesses of the respective cases as compared to the respondents. There was no conduct here, in my view, of a sufficient order of unreasonableness to justify an award of indemnity costs. To the extent that Mr Thompson then went so far as to say that no finding of unreasonableness was needed to justify an award of indemnity costs, that is contrary to settled practice and to authority. An award of indemnity costs (outside Part 36) is a significant departure from the norm and requires appropriate justification. 
72.	I should add that, as I see it, there were also real difficulties, potentially, in the appellants acceding to the subsequently proposed term concerning withdrawal of the complaint to the FSA. However, I do not think I need to go into that further. 
73.	Accordingly, in my judgment the award of indemnity costs as from 16th January 2010 was wrong in principle, cannot stand and must be set aside.
(3) Incidence of costs as from 16th January 2010
74.	Those conclusions render academic the next issue raised by way of the respondents’ notice. 
75.	Mr Thompson submitted that, on its true construction. Part 36.14(3)(b) had the effect, in referring to “his costs”, of entitling the respondents to all their costs as from 16th January 2010, and not simply 70%. To the extent that the Court of Appeal in Kastor Navigation Co. Ltd v Axa Global Risks (UK) Ltd [2004] EWCA Civ 277; [2004] 2 CLC 68 seemed to have decided otherwise (endorsing the conclusion of Tomlinson J at first instance on this point), he submitted that was in the context of the Rules as they then stood and a different result was to be reached in the light of the Rules as amended (in 2007). 
76.	Mr Browne for his part submitted that the judge had rightly rejected this argument. He submitted that the rule changes would have been made in the knowledge of the Kastor decision and one would not expect the phrase “his costs” now to have a different interpretation. In any event, he submitted, it is to be inferred that the judge would have considered it unjust for the respondents to have all their costs. 
77.	Since, on the view I take, Part 36 had no proper application here I think it neither necessary nor appropriate to indicate a conclusion on this point. 
(4) Respondents should have 85% of their costs as from 16th January 2010
78.	This point was also raised by the respondents’ notice. It was said to be an alternative to the Part 36 argument. 
79.	For the reasons I have already given it can have no validity. The judge was perfectly entitled in his discretion to award 70% of the costs for the entirety of the proceedings. It of course would not have been necessary for the liquidation and mis-selling issues to have been pursued had the settlement offer been accepted; but the settlement offer having been rejected, it was for the respondents to decide as to whether or not to continue to maintain those allegations. They elected to do so and failed on those issues. The judge was entitled to deduct costs as he did, accordingly. 
(5) (6) Interest on principal as from 16th January 2010
80.	As noted above, the judge ordered that interest on principal be paid at 3% over Base Rate until 15th January 2010, and thereafter at 10% over Base Rate.
81.	The assessment of the appropriate interest rate on a judgment sum is, of course, a matter for the discretion of the court: it is empowered to stipulate such rate as it thinks fit (or as the Rule may provide) under section 35A of the Senior Courts Act 1981.
82.	The appellants’ point is straightforward and tracks their position on the indemnity costs issue. The judge selected a rate of 3% over Base Rate for the prior period and there is no challenge to that on this appeal. The judge in terms selected a higher rate for the subsequent period (see paragraph 68 of his judgment) by reference to the same analogy with Part 36 as he had previously drawn. (Indeed, he underscored that by refusing to award any rate higher than 10% over Base Rate, in part just because Part 36.14(3)(a) provided such a cap). Accordingly, the argument goes, if the analogy with Part 36 was not properly drawn, the setting of the rate at a rate higher than for the preceding period was not made on a proper basis. 
83.	I can see no answer to that: it must follow. Taking the view, as I do, that the position could not be dictated by Part 36, I conclude that there can be no justification for departing from the rate of 3% over Base Rate which the judge had selected for the previous period. 
84.	I should add that the judge did give as an additional reason for awarding 10% over Base Rate that it “would provide a suitable incentive to settlement in circumstances such as those in this case”. I do not see how such a consideration, taken of itself, can justify increasing the rate of interest otherwise properly payable. 
85.	By way of his respondents’ notice, however, Mr Thompson sought to uphold the judge’s award of 10% over Base Rate by other means. He accepted that 3% over Base Rate could be a rate properly to be awarded for the class of case where the successful party is equated with a small business. He accepted, also, that the respondents did not advance their position as exceptional. His point was that the economic circumstances of the time were exceptional, justifying a departure from conventional rates; and on that footing a rate of (at least) 10% over Base Rate was justified. 
86.	He referred to a number of authorities in this respect, notably the comment of Rix LJ in Jaura v Ahmed [2002] EWCA Civ 210 who, after reviewing the authorities, said this at paragraphs 25 and 26 of his judgment: 
“25. A schedule of base rates for the relevant period has been handed to us and we have been encouraged to fix a rate ourselves, without the need for remission or further assessment. This schedule shows that in August 1995, at the beginning of the period, base rate was at 6.75%, as indeed is confirmed by Mr Jaura’s bank statements. At the end of the relevant period, which I take to be the date of the judge’s order below on 5 March 2001, base rate was 5.75%. In between base rate has fluctuated between a high of 7.5% reached between 4 June and 7 October 1998 and a low of 5% which obtained between 10 June 1999 and 7 September 1999. Even applying Mr Frieze’s rule of thumb of 2% above base, 8% over the whole of the period would be too little. However, in my judgment the appropriate rate should be 3% over base from time to time. I strongly suspect that even that figure does insufficient justice to Mr Jaura, but I do not think that this court has enough evidence to support the case that the rate charged to Mr Jaura (4.5% above base) was typical of small businessmen in his position. Even so, there is evidence that Mr Jaura was alive to the opportunity of achieving the most economic borrowing rate available to him, and was prepared to transfer banks and switch his borrowing structure to achieve the best rate. In the circumstances I am confident that a rate of 3% above base does no injustice whatever to Mrs Ahmed.
26. It is right that defendants who have kept small businessmen out of money to which a court ultimately judges them to have been entitled should pay a rate which properly reflects the real cost of borrowing incurred by such a class of businessmen. The law should be prepared to recognise, as I suspect evidence might well reveal, that the borrowing costs generally incurred by them are well removed from the conventional rate of 1% above base (and sometimes even less) available to first class borrowers.”

87.	In this regard, Mr Thompson referred to the evidence filed on the part of the respondents, to the effect that at the relevant times Base Rate had been at exceptionally low levels. But, as the evidence indicated, by reference to unsecured sterling personal loans to households (up to £5,000), that very low Base Rate had not resulted in significantly lower borrowing rates for such households which at the relevant times were in the range, on the evidence, of 9% to 15%. Given, Mr Thompson submitted, that an award of interest is generally underpinned by a compensatory purpose, a rate of (at least) 10% over Base Rate was, he said, justified here. 
88.	I do not agree, for a number of reasons.
1)	First, the selected comparator (household loans up to £5,000) does not fit well with the small business categorisation properly taken by the judge as applicable to the present case. 
2)	Second, the reality is that the court generally takes a pragmatic approach here, the rate set often being less than what the successful party might have to pay if a borrower but more than he would receive as a lender.
3)	Third, and perhaps most fundamentally, the judge had taken into account that evidence. Having done so, he selected a rate of 3% over Base Rate for the period up to 16th January 2010. There can be no viable challenge to that exercise of discretion. Since, as I have concluded, there is no other justification for increasing the rate as from 16th January 2010, the judge’s assessment of a rate of 3% over Base Rate should apply to that period also. 
(7) Interest on principal before 16th January 2010
89.	It was a logical corollary of Mr Thompson’s argument, summarised above, that the rate of interest in the earlier period up to 16th January 2010 should have been (at least) 10% over Base Rate as well. For like reasons, that necessarily fails as a cross-appeal point. The judge’s assessment and exercise of discretion cannot validly be challenged on this. 
(8) Interest on costs before 16th January 2010
90.	Mr Thompson, by way of cross-appeal, further sought to raise, on grounds corresponding to those raised with regard to interest on the judgment sum, a challenge to the judge’s decision to award interest on costs for the period before 16th January 2010 at the rate of 3% over Base Rate. That argument necessarily fails also, in my view, given my previous conclusions. 
(9) (10) Interest on costs from 16th January 2010 to 24th June 2010 and from 25th June 2010 to judgment
91.	It will be recalled that, under the Order, the judge awarded interest on costs from 16th January 2010 to 24th June 2010 at a rate of 10% p.a over Base Rate; at a rate thereafter until 21st December 2010 at a rate of 40% p.a; and at a rate from 22nd December of 22% p.a.
92.	I do not think I was the only member of this court to have been disconcerted, on first sight of the Order, by those figures.
93.	I do appreciate that, again, this was a discretionary matter. But, again, I think, with respect, that the judge’s approach was erroneous in principle. 
94.	As to the first period (16th January 2010 to 24th June 2010) the judge explicitly stated that the interest rate should be 10% over Base Rate by analogy with Part 36.14(3)(c). Since, as is my view, the analogy cannot stand it follows that there is no reason why the interest rate should not be the same 3% over Base Rate as selected by the judge for the preceding period.
95.	As to the subsequent periods, the judge’s view was that the evidence showed that the respondents suffered particularly high losses as a result of the litigation (in the form of interest charges on bridging loans initially taken out in June 2010 to fund the ongoing costs of the litigation); and that the divergence in those periods between the application of a “conventional approach” (as the judge styled it) and the underlying purpose of an interest award being to compensate individuals for losses actually suffered “is particularly acute such that justice requires a different approach”.
96.	We were taken by counsel to the evidence filed. Even allowing for the circumstances, 40% or thereabouts for secured bridging lending seems remarkably high. Mr Browne said that the evidence was filed very late by the respondents: and, although no adjournment was sought, the underlying documentation was not produced. The judge talks about an “effective rate of interest”. It may well be that some significant element over and above simple interest has come into the figures. Mr Culligan’s own witness statement, for example, indicates that substantial arrangement and redemption fees and other charges were involved.
97.	Mr Browne complained that such awards of interest were excessive. He also said that they bear no relation to what could be awarded under section 17(1) of the Judgments Act 1838.
98.	In my view, with all respect to the judge, these awards of interest also cannot stand, for a number of reasons.
1)	First, and most significantly, the judge emphasised at paragraphs 78 and 79 of his judgment the importance for his reasoning on these awards of interest of his having decided to award costs on an indemnity basis (that is, pursuant to the analogy he had drawn with Part 36). The inference thus is that the judge would not have made those awards of interest if costs had been awarded on a standard basis. Since, as I have concluded, such an award of costs on an indemnity basis involved an error of principle, this important part of his reasoning on interest on costs is likewise vitiated. It is, putting it another way, a matter that should not have been taken into account. 
2)	Second, the judge drew a “very loose comparison” with intentional torts such as deceit; and also used the award of indemnity costs as a marker “because the standards to be applied are well known”. Those remarks are suggestive of some unreasonable or improper conduct in the litigation on the part of the appellants: but, as I have said, the judge at an earlier stage of his judgment had rejected such a suggestion. In my view, there can here be no justification for some kind of penal award of interest on costs.
3)	Third, the judge focused almost entirely on the actual funding position of these particular respondents. Of course regard has to be had to the compensatory principle; but reasonableness so far as the paying party is concerned also comes into it. The appellants no doubt would have appreciated that there would have been costs funding pressures on the respondents in this major litigation. But they were hedge fund managers, to be equated for costs purposes with small businessmen (as the judge had found), and the appellants had been given no prior notification or reason to think that the respondents were borrowing such sums and at such rates to fund the defence. The first they knew of it was when the respondents’ evidence was served very shortly before the costs hearing (which evidence, incidentally, did not itemise the assets of the respondents). Further, as Mr Browne said, costs of funding litigation by way of bridging loans are not ordinarily recoverable in themselves as costs of litigation: but the judge’s approach comes near to having that consequence. It is also something of a puzzle, given the particular importance the judge attached to the indemnity costs award (and the analogy with Part 36), that the judge did not attach more weight to the 10%  above Base Rate cap contained in Part 36.14(3)(c). After all, if this had been a Part 36 case, the respondents could not necessarily have circumvented the stipulation of Part 36.14(3)(c) by saying that their funding of the litigation costs had in fact been provided at a rate greater than 10% above Base Rate.
4)	In the context of awards of interest on judgment sums, the court ordinarily does not have regard to, or at least is not bound by, the rate at which a particular recipient in his particular circumstances might have borrowed funds: rather the court ordinarily focuses on the relevant class of person (if I can put it that way): see, for example, Jaura v Ahmed (supra); and see also the discussion of Andrew Smith J in Fiona Trust & Holding Corporation v Privalov [2011] EWHC 664 (Comm) at paragraphs 13 to 17 of his judgment. I appreciate that those remarks were made in the context of a sum of which the recipient has been deprived for a period rather than in the context of a recipient who has actually paid out money. Even so, the approach underscores the need for a general appraisal, having regard to what is fair, reasonable and proportionate as between both paying party and receiving party. Certainly such matters are not to be decided by some kind of automatic application of an egg shell skull rule. Indeed, in his written submissions Mr Thompson fairly accepted that the approach of the court in exercising its discretion in relation to interest on costs should be similar to that in relation to interest on principal – albeit subject, as he submitted, to the court being “more prepared to take account, if relevant” of the rate at which the receiving party had actually had to borrow money to fund the litigation. 
99.	I agree with Mr Thompson that the requirements of the Judgments Act 1838 relate to the period after judgment, not before judgment: and the discretion conferred by Part 44.3(6)(g) is not to be fettered by reference to that statute. Nevertheless, for the reasons I have given I do consider that the judge erred in principle in the awards of interest on costs which he made for these periods; or otherwise took into account matters that should not have been taken into account. Considering the position, I think that the proper award of interest on costs for these periods should also be 3% above Base Rate. 
Conclusion 
100.	I would, for my part, allow the appeal on each of the three grounds advanced. I would substitute an order for standard costs in place of the order for indemnity costs for the period from 16th January 2010; and I would substitute an award of 3% p.a over Base Rate for all periods from 16th January 2010 on both judgment sum and on costs, until judgment. I would dismiss all grounds of cross-appeal.
Lord Justice Tomlinson : 

101.	I agree.  Ordinarily one would not wish to interfere with a judge’s discretionary award of costs made after a very long and complex trial, but for the reasons given by My Lord I am satisfied that the judge approached his task upon a flawed basis. Although we are differing from the judge, I do not feel it necessary to add anything on that central point.
102.	I only add a cautionary note as to the reliance on “rules of thumb” or conventional rates in relation to the selection of the appropriate rate at which interest should be awarded.  Such rules of thumb or conventional rates are useful in that in the usual run of cases the court is rarely supplied with adequate evidence upon which to reach an informed conclusion as to the appropriate rate.  Ordinarily a rule of thumb or convention enables practical justice to be done without incurring the cost of adducing evidence as to appropriate interest rates, which expenditure might in many routine and simple low value cases be out of proportion to the amount at stake.
103.	In this case there was a suggestion that in the aftermath of the financial upheaval in September 2008 the gap between “policy” rates such as the Bank of England Base Rate and LIBOR and the actual cost of borrowing for both corporate and personal customers has or may have widened.  The evidence proffered of actual borrowing rates proved insufficient to bear out this suggestion since it related only to unsecured consumer borrowing described as “household loans” of up to £5,000.
104.	An uplift of 3% above base rate for a particular class of borrower, “small businessmen”, was adopted in Jaura v Ahmed, cited at paragraph 85 above, on the basis of evidence which the court there recognised to be incomplete and in some respects inadequate.  That was in 2002.  I do not know to what extent this case has been relied upon more generally as establishing a “rule of thumb” for litigants of the class there described.  However, the judge here applied what he described as the “adjusted standardised approach” applied in Jaura v Ahmed and the only challenge thereto has been that it was insufficiently generous to the respondents, not that it over-compensated them.
105.	A rule of thumb or conventional approach of that sort, if such it has become, will always require reappraisal in the light of changing conditions, and will always yield to comprehensive evidence if shown thereby to be or to have become inappropriate.  For the reasons given by My Lord the present is not a case in which such a reappraisal can be attempted.  However I would not wish it to be thought that our decision in this case is an indication that any conventional approach is necessarily appropriate or is automatically to be applied in all cases where interest for a period falling after late 2008 is under consideration.  The special circumstances which have since obtained, at any rate in this jurisdiction, may call for a reappraisal of the conventional approach in cases where the debt or obligation is denominated in sterling.  That said, I am not aware of any suggestion, apart from that made in this case, that the conventional uplift of 1% above base rate or LIBOR has become inappropriate in respect of the usual run of corporate borrowers. Indeed, I note that in Les Laboratoires Servier v. Apotex [2011] EWHC 1318 (Pat) there was unchallenged evidence to the effect that an uplift of 1% over the suitable reference rate, there in fact found to be LIBOR, remained appropriate for the period November 2008 to May 2011, the recipient party being a private company in the pharmaceutical sector with significant assets. I would also not assume that an uplift of 3% for “small businessmen”, if that has become conventional, will necessarily be shown to be inadequate.
Lady Justice Arden:
106.	I agree with both judgments.