The Court’s power to order interest on costs, including pre-judgment interest on costs is derived from CPR 44.2 (6) (g). (The equivalent rule was CPR 44.3(6)(g) before the Jackson reforms).
The rule provides that the court may order “interest on costs from or until a certain date, including a date before judgment”. The purpose of such an award is to compensate a party who has been deprived of the use of his money, or who has had to borrow money to pay for his legal costs.
The relevant principles do not materially differ from those applicable to the award of interest on damages under section 35 A of the Senior Courts Act 1981. The discretion conferred by the rule in respect of pre-judgment interest is not fettered by the statutory rate of interest, under the Judgments Act 1838, but remains at large.
Ultimately, the Court conducts a general appraisal of the position having regard to what is reasonable for both the paying and the receiving parties. This in turn normally involves an assessment of what is reasonable having regard to the class of litigant to which the relevant party belongs, rather than a minute assessment which would be inconvenient and disproportionate to undertake.
In commercial cases the rate of interest is usually set by reference to the short-term cost of unsecured borrowing for the relevant class of litigant, though it is always possible for a party to displace a ‘rule of thumb’ by adducing evidence, and the rate charged to a recipient who has actually borrowed money may be relevant but is not determinative. See F & C Alternative Investments Ltd v Barthelemy (No 3) CA 1 WLR at paragraphs 98, 99 and 102 to 105; Bim Kemi AB v Blackburn Chemicals Ltd  EWCA Civ 889 at 18 and for example, Fiona Trust & Holding Corporation v Privalov  EWHC 664 (Comm).
The rate may differ depending on whether the borrower is classed as a first class borrower, an SME or a private individual. Historically at least, first class borrowers, have generally recovered interest at the appropriate base rate plus 1 per cent, unless that was unfair or inappropriate though in the light of recent interest rate developments there is no presumption that base rate plus 1 per cent is the appropriate measure of a commercial rate of interest.
The Commercial Court Guide at para J14.1 (page 67) states
“Historically the Commercial Court has generally awarded interest at base rate plus one percent unless that was shown to be unfair to one party or the other or to be otherwise inappropriate. In the light of recent interest rate developments there is no presumption that base rate plus one percent is the appropriate measure of a commercial rate of interest”.
SMEs and private individuals have tended to recover interest at a higher rate to reflect the real cost of borrowing to that class of litigant: see for example, Jaura v Ahmed  EWCA Civ 210, F & C Alternative Investments Ltd and Attrill v Dresdner Kleinwort Ltd  EWHC 146 (QB).
In the case of The Secretary of State for the Department Of Energy and Climate Change and Coal Products Limited –v- Jeffrey Jones (and Others)  EWCA Civ 363, Swift J made a costs order which was then subject to appeal.
She ordered that the defendants pay pre-judgment interest on paid disbursements at the rate of 4 per cent above base rate. in a case where the Claimants solicitors (Hugh Jones) had agreed to fund disbursements under Credit Agreements exempted from the Consumer Credit Act 1974 which noted that payment of disbursements was subject to success under the CFAs.
This case concerned lead claims of 8 Phurnacite Workers Group Litigation (PWGL) members where, Swift J had ordered that the Defendants should pay 80 per cent of the Claimants’ costs of the action as agreed or assessed. Although there was then agreement that costs and disbursements would be subject to interest from the date of judgment in the usual way, there was no agreement regarding a further claim by the Claimants for pre-judgment interest on disbursements.
The litigation had been substantial; the trial on liability took more than six weeks, and the claimants’ disbursements exceeded £787,500. The Defendants argued against an award of pre-judgment interest on the basis that the Claimants’ liability to repay interest was “contingent” on a successful outcome for the Claimants. During the course of argument Defence Counsel had suggested by reference to what was said in Giles v Thompson  1 A.C. 142, that disbursement funding agreements such as those entered into, might be champertous and/or might give rise to a breach of the indemnity principle.
However, the Court of Appeal had no doubt that in her judgment, Swift J accepted that the relationship between the Claimants and their solicitors was governed by valid disbursement funding agreements, and that these agreements, properly construed, gave rise to a real rather than a notional liability. Accordingly the decision of upheld Swift J was upheld.
Jim Knight, Partner and Costs Lawyer