INTEREST ON COSTS: WHAT IS THE APPROPRIATE RATE TO BE PAID IN A CLAIM RELATING TO AN ESTATE

In Almond v Goff & Ors [2021] EWHC 1703 (Ch) Ms Clare Ambrose, sitting as a High Court judge, considered the appropriate rate of interest on costs in a claim concerning an estate.  She rejected the argument that interest ran at 8% under the Judgments Act. She found she had jurisdiction to award interest on costs and stated that the rate should be 2%.

THE CASE

The judge had given judgment in a case that involved construction of the terms of a will.  The defendants’ costs were to be paid out of the estate.  There was an issue as to whether interest was recoverable and, if so, what was the appropriate legal basis for the award and the appropriate rate.

THE JUDGMENT ON THIS ISSUE

ADDENDUM ON INTEREST DATED 1 JULY 2021

The issue on interest on costs

1. 1. Following judgment the parties took some time to put forward a draft order. It was agreed that the claimant and defendants should have an order that their costs be paid out of the estate in the due course of administration and that such costs to be subject to detailed assessment on the indemnity basis if not agreed. It was common ground that this was the usual order in an application made under CPR 64 asking the court to construe a will, namely that the beneficiaries’ costs are, by analogy with the personal representative’s right of indemnity, to be paid out of the estate, and fell within the Buckton 1 category, from Re Buckton [1907] 2 Ch 406.

1. 1. There was a dispute as to whether interest should be awarded on the defendants’ costs and written submissions were exchanged.

The parties’ positions

1. 1. The second and ninth defendants claimed that they should be paid interest on costs at the judgment rate of 8% from 1 July 2021. Initially the defendants relied on the Judgements Act 1838 (“the Judgments Act”), Involnert Management v Aprilgrange Ltd [2015] EWHC 2834 (Comm) and CPR 40.8.2. They later accepted that the Judgments Act does not apply. They rely on the court’s equitable jurisdiction, as seen where the court awards interests on debts and legacies following the taking of an account under CPR 40 PD-A paras 14-15. They say that the obligation to pay arises because of the fiduciary status of the administrator meaning that they should not be entitled to profit from retention of money. The administrator is therefore chargeable with the interest that they earned, or should have earned (or are estopped from denying that they earned). The basis of this practice can be seen in cases where a trustee is required to pay interest on funds that are wrongfully retained (AG v Alford (1855) 43 ER 737 at p 851, Williams Mortimer & Sunnucks on Executors at 52-54 to 52-59).

1. 1. The second and ninth defendants say that the intention of the costs order is that the parties are indemnified as to their costs, the rationale being that they were put to those costs by the actions of the testator in failing to express his testamentary intentions with clarity. They submit that on past experience there is likely to be substantial delay in distribution of assets and they will be prejudiced if there is no award of interest.

1. 1. The claimant took a neutral view on the recovery of interest.

1. 1. The third to eighth defendants objected because they contended the court had no jurisdiction to award interest. They argue that this form of costs order is an order for payment from a fund and does not therefore attract interest under the Judgments Act or otherwise because it is not an inter partes costs order in adversarial litigation: Attorney-General v Nethercote (1841) 11 SIM 529; In re Marsden’s Estate (1889) 40 Ch D 475; Wills v Crown Estate Commissioners [2003] EWHC 1718 (Ch); White Book 2021, Vol. 1, 47.19.1; Friston on Costs (3^rd Ed.), 56.112-113; Civil Costs (6^th Ed.), 19-007). They also say that the interest would operate to the detriment of the beneficiaries since there is insufficient cash available in the estate to pay the costs at present.

1. 1. The third to eighth Defendants say that the court’s equitable jurisdiction does not arise since it applies where a fiduciary withholds money from a beneficiary or profits from their position and is consequently charged with interest for their default. Here any interest awarded would fall on the estate – which in practice means the beneficiaries, and not the fiduciary. The beneficiaries have no direct control over the administration.  The eighth defendant also says that Rafferty is a minor who has taken no part.

1. 1. The alternative case of the Eighth Defendant was that interest should be awarded to all the Defendants but only at 0.1% (as the rate awarded on funds in the court’s Special Account) or 1% over the base rate since this reflected the modern application of the authorities as explained in Williams Mortimer & Sunnucks at 52-56.

The applicable law

1. 1. The Judgments Act 1838 provides that:

“17. Every judgment debt shall carry interest at the rate of [] pounds per centum per annum from [such time as shall be prescribed by rules of court] . . .  until the same shall be satisfied, and such interest may be levied under a writ of execution on such judgment.

…

18 Decrees and orders of courts of equity, &c. to have effect of judgments.

All decrees and orders of courts of equity, and all rules of courts of common law ….  whereby any sum of money, or any costs, charges, or expences, shall be payable to any person, shall have the effect of judgments in the superior courts of common law, and the persons to whom any such monies, or costs, charges, or expences, shall be payable, shall be deemed judgment creditors within the meaning of this Act; and all powers hereby given to the judges of the superior courts of common law with respect to matters depending in the same courts shall and may be exercised by courts of equity with respect to matters therein depending . . .  and all remedies hereby given to judgment creditors are in like manner given to persons to whom any monies, or costs, charges, or expences, are by such orders or rules respectively directed to be paid.”

1. 1. AG v Nethercote (1841) 11 SIM 529 dealt with a costs order in proceedings relating to a charity under which the Judgments Act was put forward to justify the award of interest. The Vice-Chancellor, Shadwell VC’s judgment was reported as:

“the section of the Act referred to [both sections 17 and 18 of the Judgments Act] seemed to him to relate to those cases in which one party was directed to pay costs to another party, and not to cases in which costs were directed to be paid out of an estate”.

1. 1. In Re Marsden’s Estate (1889) 40 Ch D 475 Chitty J was dealing with whether interest was recoverable on costs awarded under an earlier order made on taxation following an action for administration of an estate. He did not conclude that the court had no jurisdiction to award interest on such costs, but instead made clear that interest would not accrue “without special direction”.

“But it is plain that the sections of the Judgment Act and the orders have no reference to the payment of costs directed to be paid out of a fund. Without relying on Attorney General v Nethercote decided in January 1841, this has been the constant practice; and where the fund is in the hands of the Paymaster-General he is not at liberty to make any payment of interest unless there is a direction to that effect in the order. In that case the order is for taxation and payment of the costs by the trustees out of a particular fund, and there is no ground for saying that anything more than the amount of the taxed costs should be paid. If any interest was to be paid by the trustees the order ought to have directed it. In special circumstances such a direction might have been given, but the order is silent in that respect.

…Whether interest on a portion of the costs might or might not be allowed is a matter of doubt, but it is now too late to raise the question and attempt to sever the costs.”

1. 1. The reference by Chitty J to a special direction and the interest on a portion of interest referred to arguments relating to interest said to be recoverable under two separate statutes (the Solicitors Act 1860 and the Solicitors Remuneration Act 1881). Counsel for the third to eighth defendants correctly pointed out that these statues have been repealed. It is unlikely that solicitors’ rights to remuneration were lost in the replacement legislation but I need not explore that since the claim for interest is not made under legislation relating to solicitors.

1. 1. In Wills v Crown Estate Commissioners [2003] EWHC 1718 Peter Smith J decided an appeal relating to whether interest was recoverable on an order for costs in a Tomlin order. He found that “whenever there are funds out of which costs are paid, there is not an order which attracts interest. The reason for that is that there is not an order of court in adversarial litigation”. Further, the provision for costs was in a Tomlin order so did not form part of a judgment for the purpose of the Judgements Act, and it was for the parties to provide for interest.

1. 1. The White Book says:

“Following the decision in AG v Nethercote [1841] 11 Sim 529 and Re Marsden’s Estate (1889) L.R. 40 Ch. D. 475 it is quite clear that whenever there are funds out of which costs are to be paid there is not an order which attracts interest. The reason for that is that there is not an order of the court in adversarial litigation. In the case of a Tomlin Order the provisions as to payment of costs in the schedule do not fall within the Judgments Act. On the facts of the case there was a contractual agreement between the parties and if interest was to be payable it should have been expressly included or excluded: Wills v Crown Estate Commissioners [2003] EWHC 1718 (Ch), Peter Smith J.”

Conclusions

1. 1. The authorities relied upon by the third to eighth defendants make clear that interest is not recoverable under the Judgments Act on orders for costs paid out of an estate. The reason given, namely that the order is not made in adversarial litigation, is a somewhat unattractive explanation where the proceedings involved a 5-day hearing involving argument by numerous counsel. However, the application of the Judgments Act is now well established so interest cannot be awarded under that statute. The second and ninth defendants also invoked CPR 40.8 but this cannot assist since it is also concerned with payment of judgment debts.

1. 1. It was common ground that the rationale for the award of costs to the Defendants was under Re Buckton (or by analogy with it). The claimant and defendants have been put to those costs by the actions of the testator in failing to express his testamentary intentions with clarity. This (and the award of indemnity costs) would suggest that the parties should be indemnified against the cost of having to take part, including the cost of being out of money. However, I also take into account that the defendants benefit from the approach in Re Buckton in not being exposed to an adverse costs order in the same manner as ordinary litigation.

1. 1. The court clearly has an equitable jurisdiction to order an executor to pay interest on the basis of preventing unjust enrichment at the expense of the beneficiaries of a trust (AG v Alford). It also has jurisdiction to award interest on the taking of an account under PD 40A, including allowing interest at the judgment rate on administration expenses. It is also relevant that monies in the estate will be accruing interest (although currently at a low rate), and other assets in the estate may also be increasing in value. Beneficiaries of those assets will have the benefit of those increases, so that delay in the administration would unequally prejudice some defendants to the advantage of others (as is apparent from this dispute). There is a real likelihood that in the absence of any interest, delay in concluding the administration will mean that the defendants will not be properly indemnified against their costs, and some will be left more out of pocket than others.

1. 1. The approach in Re Buckton suggests that the purpose of the costs order is to indemnify the defendants for their costs so far as possible. An award of interest would protect against delay depriving the defendants (or some of them) of the benefit of the costs order. The non-adversarial nature of the proceedings does not justify the refusal of interest. However, the ordinary judgment rate is not applicable, and the purpose of the interest under the equitable jurisdiction does not ordinarily cover the cost of unsecured borrowing (which would ordinarily be compound interest, and probably well in excess of 3% on current rates), although it may reflect the purpose of indemnifying the person to whom costs are to be paid.

1. 1. I am satisfied that interest on costs should be awarded to all the defendants under the court’s equitable jurisdiction. While the jurisdiction to award interest is not based on the cost of borrowing, the principles underlying Re Buckton assume that the parties have had to finance the litigation in some way. This will entail not only the costs themselves but also bank interest that might have been earned, and also a high likelihood that interest charges have been incurred (whether on the solicitors’ bill or on an overdraft).

1. 1. Allowing 0.1% or the base rate (or even the base rate plus 1%) would not be a fair rate of interest where the defendants have reasonably been obliged to incur the costs in question, and fall within Buckton 1. The cases referred to by the eighth defendant in Williams Mortimer & Sunnucks where the Special Account rates were applied (e.g. Re Evans [1999] 2 All ER 777) involved much higher actual rates and are distinguishable since the defendants are not mere legatees but fall within the category entitled to be indemnified under Re Buckton. Allowing a rate that falls between the interest that might be earned by the estate or the litigant, and the cost of borrowing the same sum reflects the broad purpose of indemnifying the recipient. Simple interest at 2% would meet that standard.

1. 1. The other cases relied upon by the third to eighth defendants do not support the argument that there is no jurisdiction to award costs awarded out of an estate. AG v Nethercote and In Re Marsden’s Estate support the proposition that interest is not recoverable under the Judgments Act but do not address the court’s equitable jurisdiction. Similarly, Wills v Crown Estate Commissioners is distinguishable. Peter Smith J was addressing the issue of the scope of the Judgments Acts and concluded that the master had wrongly decided that AG v Nethercote was confined to the administration of estates. His decision was also based on the costs being part of a Tomlin order so the case is further distinguishable. The commentary in the White Book does not fully reflect the court’s jurisdiction outside the Judgments Act.

1. Accordingly I award interest on the costs awarded to all defendants from 1 July 2021 at the rate of 2% per annum.