Parties forced to take out loans at high interest to pay their legal costs can recover that interest, judge says

In his ruling, Mr Justice Sales said that where costs were awarded against one party on an indemnity basis the other party should be able to recover interest on those costs at a rate which reflected the actual rate they had to bear.

When costs are awarded on an indemnity basis, any doubt is resolved in favour of the party receiving the award.

Keith Levene, a legal costs expert with Pinsent Masons, the law firm behind Out-Law.com, described the judgment as "groundbreaking".

"This is the first time a judge has included such a penal order in relation to costs - probably because of what he called the 'bitterly fought litigation' in this case. This included a trial lasting some 95 days, and legal fees running to seven-figure sums," he said.

Interest on costs will usually accrue at the standard judgment debt rate of 8%, he said.

Mr Justice Sales said that the high rate of interest was justified in this case because of the very high cost that two private individuals, who had been partners in a limited liability partnership with a third corporate partner, had to find in order to keep their claim alive through "particular complex and burdensome" proceedings.

The case concerned a limited liability partnership with two individual members, a Mr Barthelemy and a Mr Culligan, and a corporate partner. The partnership agreement allowed the two men to force the corporate partner, who held a 60% majority interest, to purchase their own interests in certain circumstances involving breach of contract by the corporate partner. It would have to do so at a rate that was a stipulated multiple of the partnership's profits at the time.

The corporate partner claimed the two men had not exercised these 'Put Option' notices validly, and counter-claimed that Barthelemy and Culligan should transfer their interests at a price advantageous to the corporate partner.

The judge upheld Barthelemy and Culligan's claims and ordered the corporate partner to pay 70% of their costs. However the two men had had to borrow money from bridging finance providers to fund their legal bills, at rates of interest which were in some cases as high as 47.4%. The judge said that there was a substantial difference between what the two men had to pay themselves and the amount which would have been awarded under the usual rules.

The two men had made four offers over the course of the court proceedings, which affected the way the costs were awarded. Mr Justice Sales added that there was "no reason to doubt" the two had acted reasonably in taking out the loans, and had sought the best interest rates they could in the market.

"Given the complexity of the dispute in a case such as this and the substantial amount of time, effort and cost on both sides likely to be required to resolve it, it is especially important that the costs rules should be operated in a way which makes it very clear that powerful incentives exist for parties to seek to settle the dispute on reasonable terms at an early stage, and which gives clear and predictable signals about what penalties may be imposed... if reasonable offers of settlement are rejected," he said.

Legal costs expert Levene said that awarding Barthelemy and Culligan interest which reflected the rates they actually had to pay was significantly out of line with courts' approach in the current climate, which tended towards bringing costs down as much as possible.

"If anything, as the Bank of England base rate has remained at a record low of 0.5% for some time now if anything judges have been varying the interest rate down," he said.

"If one party engaged in heavy litigation makes an offer, and the other party does not negotiate to attempt to avoid the costs of that litigation, the party that does not negotiate should bear the consequences of that."

The decision had to be viewed in this context, and would likely go to appeal, Levene said.