The High Court’s decision in Rued v Dormer [2026] EWHC 1074 (Ch) addresses the application of Part 36 costs consequences where competing offers were made in multi-issue partnership litigation, and determines the proper costs treatment of a contested account following dissolution.
Background
This judgment arose from a long-running partnership dispute between Ulrich Rued (the claimant) and Lloyd Dormer (the first defendant), who are brothers-in-law. In the second half of 1997, the two men agreed to go into partnership for the purpose of developing land. The business commenced trading on 1 December 1997. Lloyd identified and purchased two parcels of land in Somerset, known as Wellington and Hill Farm. Ulrich, who has resided throughout in Switzerland, provided the cash funding by way of loans, which were to be repaid with interest, after which the profits would be divided equally between the parties. Lloyd retained day-to-day control of the partnership business, including control over the banking arrangements and the manner in which the development was undertaken.
By 2015, the relationship between the parties had irretrievably broken down. Lloyd declined to make repayments of capital and interest, and the dispute became entrenched. The claim was issued on 7 August 2018, and the partnership was formally dissolved when the claim form was served on Lloyd. Substantive work on the Hill Farm development had stopped in November 2016.
The proceedings involved a liability trial, an account phase, and a series of consequential hearings. Judgments were handed down following both the liability trial and the account phase, with a further consequentials hearing producing a judgment on 18 July 2025. Throughout the proceedings, the court was assisted by detailed expert reports from the single joint expert, Mr Jonathan Dodge FCA CF, a partner at FRP Advisory Trading Limited, who was not called to give oral evidence.
Following the liability trial and the first consequential hearing, an order was made on 9 September 2021 (the “9.9.21 Order”). That order provided that the defendants should pay the claimant’s costs of the liability phase on the standard basis, to be assessed if not agreed, with execution stayed until the account hearing. Permission was also given to the parties to apply to vary the costs order after the account: to the claimant, to vary the basis from standard to indemnity on the basis of any beaten without prejudice offers; and to the defendants, to refer the court to any applicable without prejudice offers. The 9.9.21 Order also declared that Plot 9 had been transferred in breach of trust by Lloyd to himself and his wife Gabriella, and that it was held on trust for Ulrich as to 50% and Lloyd and Gabriella as to 50%.
The final consequentials hearing, which is the subject of this judgment, required the court to determine three outstanding issues: interest, costs, and the mechanics of sale. The costs analysis is the focus of this post.
Costs Issues Before the Court
The costs issues arising at the final consequentials hearing fell into two distinct categories: first, whether the costs order made in respect of the liability phase under the 9.9.21 Order should be varied; and second, what costs order should be made in respect of the account phase.
On the liability phase, the variation question was driven by competing Part 36 offers. Ulrich sought to upgrade the existing standard basis costs order to an indemnity basis costs order, relying on a Part 36 offer he had made on 5 April 2019 in respect of the repayment of capital and interest. Lloyd, by contrast, sought to recover 90% of his own costs of the liability phase from 12 January 2019 (being 21 days after his own Part 36 offer dated 21 December 2018), with Ulrich receiving only 10% of his liability costs from that date. Lloyd’s position was therefore that his Part 36 offer had not been beaten by the outcome of the liability trial, and that the costs consequences under CPR 36.17(3) should apply in his favour.
On the account phase, both parties sought their costs. Ulrich argued that the account was an inevitable and necessary consequence of the liability judgment and that Lloyd’s poor record-keeping had made the process more burdensome than it needed to be. Lloyd argued that he had been substantially vindicated on the central issues within the account, including wages and expenses, and that the final accounting position was far closer to his case than to Ulrich’s, such that costs should follow the event in his favour.
The court was therefore required to analyse the validity and effect of two competing Part 36 offers, consider whether the automatic costs consequences of CPR 36.17 applied, assess whether it would be unjust to apply those consequences, consider whether an issue-based or percentage-based costs order was appropriate for the liability phase, and determine the correct starting point and any departure from it for the account phase.
The Parties’ Positions
Ulrich’s position on the liability phase: Mr Sinai, counsel for Ulrich, submitted that the Part 36 offer dated 5 April 2019, which offered to accept £1,439,043.16 in settlement of the loan issue, had been beaten. Following the liability trial, Lloyd was ordered to pay £1,537,158.60, and on that basis Ulrich contended that he had obtained a more advantageous judgment, triggering the costs consequences under CPR 36.17(4), including indemnity costs from the date of expiry of the relevant period. Ulrich also contended that the existing costs order in the 9.9.21 Order should not be varied in Lloyd’s favour, and that Lloyd’s Part 36 offer of 21 December 2018 had not been beaten.
Lloyd’s position on the liability phase: Mr Teasdale, counsel for Lloyd on costs, submitted that Ulrich’s Part 36 offer of 5 April 2019 had not in fact been beaten once the differing treatment of withholding tax was properly taken into account. He further submitted that Lloyd’s own Part 36 offer of 21 December 2018, made at £1,601,000 and excluding Hill Farm and Plot 9, had not been beaten by Ulrich, and that accordingly Lloyd was entitled to 90% of his costs of the liability phase from 12 January 2019, with Ulrich receiving only 10% of his liability costs from that date. Lloyd also raised the question of an issue-based costs approach, inviting the court to reflect the outcome on individual issues within the liability phase.
Ulrich’s position on the account phase: Mr Sinai submitted that the account was an inevitable and necessary consequence of the liability judgment, and that Ulrich should not be left to bear the costs of an accounting exercise which flowed directly from findings made in his favour. He further submitted that the account was rendered more costly and burdensome because Lloyd had not kept proper records over many years, requiring wages and expenses to be reconstructed and tested in detail. He also relied on what he described as successes on individual accounting adjustments, pointing out that a number of issues were resolved in Ulrich’s favour even if the final arithmetic outcome was not what he had anticipated.
Lloyd’s position on the account phase: Mr Teasdale accepted that the orthodox starting point for costs following a partnership account is no order as to costs, as established in Ma’har v O’Keefe [2014] EWCA Civ 1684. However, he submitted that departure from that starting point was justified because the account had been heavily contested and outcome-determinative. He argued that the account was driven by Ulrich’s case that Lloyd’s wage and expense claims were overstated or illegitimate, and that the court’s findings had vindicated the overwhelming majority of those claims. He further submitted that the account had left Ulrich worse off than before, and that on that basis costs should follow the event in Lloyd’s favour.
The Court’s Decision
Ulrich’s Part 36 offer of 5 April 2019: The court rejected Ulrich’s submission that his Part 36 offer had been beaten. The offer was expressly limited to the repayment of capital and interest (the loan issue) and did not purport to resolve the wider liability issues, including the partnership account, Plot 9, wages, commission, or the taking of the account itself. It was therefore an offer to settle only a discrete monetary component of a much broader claim.
The court held that the comparison required by CPR 36.17(1)(b) must be a true like-for-like comparison, requiring careful attention to what the offer in fact proposed, how taxation and withholding were treated, and what the court ultimately ordered. The withholding tax issue had arisen previously in relation to an earlier Part 36 offer made by Ulrich on 7 September 2016. Lloyd’s response to that offer was to accept it but to state that he was obliged to withhold part of the sum attributable to interest in order to comply with UK tax obligations under section 874 of the Income Tax Act 2007, which requires that part be paid direct to HMRC in satisfaction of the lender’s tax obligations. The parties became embroiled in a dispute as to whether sums could be paid directly to Ulrich or not, and no agreement was reached.
Ulrich’s Part 36 offer dated 5 April 2019 repeated the same position on tax as the 2016 offer: that the sum must be paid to him direct. This was not a new point raised by Lloyd at the consequentials hearing; it was a known and unresolved dispute that infected the 2019 offer from the outset. Ulrich’s offer was framed on the basis which assumed direct payment to him without accounting for the operation of withholding tax, whereas the liability judgment proceeded on a different and legally correct footing, under which sums properly payable to HMRC under section 874 were treated as discharging part of Lloyd’s liability.
Once the judgment sum was adjusted to remove interest accruing after expiry of the relevant period, and once the differing treatment of withholding tax was correctly taken into account, Ulrich did not obtain a result more advantageous than his offer.
Even if that conclusion were wrong, the court held it would in any event be unjust to apply the automatic consequences of CPR 36.17(4) in the circumstances of this case. The offer concerned only a narrow aspect of the liability dispute and ignored the reality that substantial issues would still have to proceed to trial and determination. Acceptance of Ulrich’s narrow offer would not have avoided the determination of Plot 9 issues or the taking of a full account. The automatic imposition of indemnity costs and enhanced interest would therefore bear no proper causal relationship with the way in which the costs were actually incurred.
Lloyd’s Part 36 offer of 21 December 2018: The court held that Lloyd’s offer was made at a very early stage of the proceedings, before disclosure or evidence, and arguably before Ulrich had access to the information required to understand how the settlement figure was constituted or how acceptance would operate in practice without an account.
The judgment records at paragraph 55 that Lloyd’s offer was framed as settling all claims save for Hill Farm and Plot 9. However, at the time it was made, the litigation had not reached a stage where the practical consequences of settling with those two matters excluded could be identified with any meaningful certainty. The liability phase was not a simple money claim concerned only with quantification. It required determination of issues of entitlement and alleged wrongdoing, including whether Lloyd was liable to repay the capital advanced by Ulrich, whether interest was payable, whether Lloyd was entitled to retain or appropriate Plot 9, whether the defences relied upon by Lloyd had substance, and whether Ulrich was entitled to declaratory relief establishing basic partnership accounting obligations.
The offer figure of £1,601,000 therefore rested upon assumptions about liabilities and credits which, at that time, could not be reliably tested by Ulrich. On 14 January 2019, Ulrich’s solicitors sought clarification of matters which were plainly material to an evaluation of the offer. In particular, Ulrich asked Lloyd to explain how the global figure of £1.601 million had been calculated, what element of that sum, if any, represented partnership profits as distinct from repayment of capital and interest, and how acceptance of the offer was said to operate in circumstances where no account had been taken and where Lloyd’s position on wages and partnership liabilities remained undefined.
By letter dated 18 January 2019, Lloyd’s solicitors declined to provide any such clarification. The court considered that refusal a significant feature of the CPR 36.17(5) analysis. Ulrich was being asked to accept a substantial compromise without being told what, in legal or factual terms, he was being asked to concede or how the proposed settlement figure related to the pleaded and disputed liability issues. In a case of this kind, where Ulrich had no visibility into the accounting basis for a proposed figure at a preliminary stage, a refusal to clarify materially undermined the contention that the offer was one capable of being meaningfully assessed and accepted.
The court was not persuaded that Lloyd’s Part 36 offer was a valid offer within the meaning of Part 36. If that conclusion were wrong, it was difficult to evaluate whether Ulrich failed to obtain a judgment more advantageous than Lloyd’s Part 36 offer. At paragraph 63, the court recorded Mr Sinai’s challenge to the characterisation of Lloyd’s offer as settling all issues bar Plot 9 and Hillside (as the judgment refers to it at that point). The court accepted that challenge as “a fair point”, noting that the offer plainly did not cover all other issues. The offer excluded Plot 9, which later proved to be a central issue at the liability trial, did not concede repayment liability on the footing ultimately established by the court, and did not withdraw, qualify or narrow the substantive defences which Lloyd continued to advance through to trial. The later account proceedings demonstrated that the quantification of key items such as wages, overtime, commission and deductions were the subject of substantial dispute requiring expert analysis and judicial determination. That in turn demonstrated the practical impossibility of a reliable comparison between the offer and the eventual outcome.
If Lloyd’s Part 36 offer was a valid offer to which the costs consequences of Part 36 applied, the court held it would be unjust to apply CPR Part 36.17(3) in respect of the liability phase. There needed to be a meaningful causal connection between the refusal of the offer and the incurring of the liability phase costs. Lloyd’s offer excluded Plot 9, but this was a substantial and central issue in the liability trial, including the question of whether it had been transferred in breach of trust and at an undervalue. Even if the “offered parts” were accepted, the liability trial would still have been required to determine the excluded Plot 9 issues, together with consequential matters that could not sensibly be severed without an account. Lloyd did not accept liability on the basis ultimately found by the court and he advanced positive defences, which had they been accepted, would have defeated or undermined Ulrich’s claims.
The court was not satisfied that Lloyd could show that his offer was a genuine mechanism which, if accepted, would have avoided the incurring of the costs of the liability trial for which he now sought to shift responsibility. Taking all the circumstances together under CPR 36.17(5), there was no causal connection between the refusal of the offer and the liability-phase costs incurred. The costs of the liability phase were incurred because Lloyd contested liability on serious grounds and failed on them at trial. To apply CPR Part 36.17(3) would be to permit Lloyd, who unsuccessfully resisted liability and who declined to clarify his offer, to achieve an unjust result because of an early, opaque and partial offer.
Issue-based costs approach: Mr Teasdale had also raised the question of an issue-based costs approach. However, the court held that the liability phase did not consist of discrete, neatly severable issues capable of being cleanly costed in isolation. The evidence, witnesses and legal submissions overlapped substantially across the repayment claim, the Plot 9 dispute, the regulatory defences and the declaratory relief sought. The trial was conducted as an integrated whole.
In such circumstances, the court is not required, nor is it generally appropriate, to engage in forensic dissection of costs issue by issue. The authorities recognise that this risks introducing artificiality, uncertainty and disproportionate satellite litigation at the assessment stage. The proper approach is instead a broad-brush, evaluative assessment, reflected if appropriate in a percentage order. That approach was articulated clearly by the Court of Appeal in Pigot v Environment Agency [2020] Costs LR 825, where it was explained that an issues-based costs order is often best expressed as a percentage of the whole in order to avoid an unreal and overly technical partitioning of costs.
Any attempt to isolate costs attributable to Plot 9 at detailed assessment would be artificial and speculative. More fundamentally, however, the adoption of an issues-based or percentage-based approach did not assist Ulrich on the question of Part 36. The question under CPR 36.17(5) is not merely how any costs order might be structured, but whether it would be just to apply the automatic consequences at all. For the reasons already given, the liability-phase costs were incurred because Lloyd contested liability on serious and wide-ranging grounds and failed on the central issues. An issues-based order which nonetheless transferred a substantial proportion of those costs to Ulrich would be inconsistent with the substantive outcome of the liability trial.
Accordingly, even applying the principles in Pigot, the only percentage-based order consistent with justice and with the court’s findings would be one which continues to reflect Ulrich’s success on the core liability issues. That is precisely what the existing costs order following the liability judgment achieved. At paragraph 77, the court observed that had it been evaluating the liability of costs by reference to CPR Part 44.2, the same points as set out above could be made. The court therefore did not consider that the costs liability determined in the 9.9.21 order should be varied. When making the 9.9.21 order, the court had rejected Lloyd’s submission that the liability trial had resulted in a “score draw”.
Account phase: The court held that the account in this case followed directly from the findings made at the liability trial. Ulrich succeeded on the core liability issues, including repayment, interest, and the characterisation of partnership assets. Those findings plainly entitled him, as a matter of principle, to require Lloyd to account for partnership dealings following dissolution. Ulrich could not fairly be criticised for seeking an account in circumstances where, without one, the financial consequences of the liability findings could not be worked out at all.
In the case of an account ordered following the dissolution of a partnership, the orthodox starting point is that there should be no order as to costs: Ma’har v O’Keefe [2014] EWCA Civ 1684. That reflects the character of an account as a process designed to ascertain the parties’ respective financial positions rather than to determine liability as between adversaries. That exercise may be complex, time-consuming and contested. That of itself is not a reason to displace the starting point of no order as to costs. However, where the account proceedings can fairly be characterised as having been unnecessarily generated by one party, or where one party has plainly failed on the issues which justified the taking of the account at all, or where there are admissible offers, the court may make a different order.
Both parties contended that they were each entitled to their costs of the account phase. Ulrich submitted that the account was an inevitable and necessary consequence of the liability judgment and that, having succeeded at that stage, he should not be left to bear the costs of the accounting exercise which flowed from it. Lloyd, by contrast, submitted that the account was a heavily contested and outcome-driven process in which he was vindicated on the central issues, such that Ulrich should bear its costs.
The court held that Ulrich’s reliance on liability-phase success explained why he should not be penalised in costs for having sought an account. It did not, however, justify an order requiring Lloyd to fund a process in which Ulrich’s own accounting case did not succeed overall. Lloyd was entitled to say that he was substantially successful on many of the issues within the account. The majority of Lloyd’s wage and expense claims were allowed, and the final accounting position was far closer to Lloyd’s case than that of Ulrich. However, this was not a freestanding adversarial claim, but rather a process that Lloyd was obliged to undergo because of adverse findings at the liability stage.
The account was not an option for Lloyd; it was required to give effect to declarations made against him. His success within that process explained why he should not be criticised for the manner in which it was defended. It did not follow that he was entitled to recover the costs of a necessary accounting exercise imposed by prior liability findings. To accept Mr Teasdale’s characterisation risked converting the account process into ordinary outcome-based litigation for costs purposes, undermining the long-standing approach that accounts are, in substance, neutral mechanisms of ascertainment.
The court held that both parties sought to characterise the account phase by reference to success: liability success in Ulrich’s case, accounting success in Lloyd’s case. That approach obscured the true nature of the account. The account was neither an extension of the liability trial nor a failed damages claim. It was a necessary implementing exercise, albeit one which required judicial resolution of contested issues. Its function was to ascertain the true financial position following dissolution. The fact that the answer was unfavourable to Ulrich on balance did not render the exercise unreasonable. The fact that it favoured Lloyd did not convert it into litigation for which costs should follow the event.
The court was not satisfied that either party had pointed to conduct during the account phase which justified a costs sanction. Ulrich’s challenges to wages and expenses were not hopeless or abusive in the context of incomplete records. Lloyd’s defence of those claims was robust but not unreasonable. The complexity and expense of the account were inherent in the partnership’s historic operation and affected both parties. The account was itself an interwoven complex process which required extensive input from Mr Dodge, the expert, and judicial evaluation. At paragraph 94, the court made a specific factual observation relevant to why it rejected Lloyd’s costs argument: “This is a case where Lloyd controlled the development, had access to all the financial records and elected to transfer a partnership asset without Ulrich’s knowledge to himself and his wife at an undervalue. It is hardly surprising that when Lloyd had to recreate records there was a level of distrust.”
The court also considered whether an issues-based or percentage-based order might be appropriate for the account phase, but concluded that this would be artificial and would no doubt invite further satellite disputes.
In summary, this was a case where the account was inevitable following the liability trial, it was a process legitimately sought by Ulrich following the breakdown of the business relationship, and the account trial was properly defended by Lloyd. Both parties advanced perfectly arguable cases and the process achieved its intended purpose. Neither party’s submissions demonstrated that justice required the costs burden of the account to be shifted to the other side. The court therefore concluded that the appropriate order was that there be no order as to the costs of the account.
Mechanics of Sale
The partnership had been dissolved. The remaining partnership assets comprised cash, the undeveloped land at Hill Farm, and Plot 9. The governing principles are well established. Subject to exceptional circumstances, partnership assets capable of being realised should be sold on the open market, so as to secure a fair value for both partners.
Following the liability and account judgments, the court was required to determine the appropriate mechanism for realisation of the partnership assets, and in particular the treatment of Plot 9, which was presently occupied by Lloyd and his wife as their home. The court had already found that Plot 9 was transferred into Lloyd’s and Gabriella’s names without Ulrich’s knowledge or consent, and at an undervalue, and that Lloyd’s case that there was a concluded agreement permitting Lloyd to acquire Plot 9 for £180,000 was rejected.
The question at this stage was therefore not whether Lloyd was entitled to retain Plot 9 by reference to any historic agreement, but whether, as a matter of mechanics, the court should permit Lloyd to purchase Plot 9 now, and if so on what terms. Ulrich’s position was that the partnership assets should be realised by sale on the open market, with the proceeds applied in satisfaction of the parties’ entitlements. Lloyd submitted that the court should permit him to purchase Plot 9, relying on the fact that it was now his home and that a forced open-market sale would be disruptive and unnecessary if value could be realised without exposure to the market.
The court approached the issue on the basis that the partnership assets must be realised at proper value, and that Ulrich was entitled to receive the economic equivalent of an open-market sale. The fact that Plot 9 was Lloyd’s home did not, of itself, justify departure from that principle. However, nor did it preclude a structure which permitted Lloyd to acquire Plot 9 provided that the mechanism delivered full market value and did not expose Ulrich to any further disadvantage.
The court held that Plot 9 should be valued by an independent chartered surveyor, jointly instructed by the parties if possible, or otherwise appointed by the court. The valuation should be on the basis of open-market value with vacant possession, ignoring the fact that Lloyd was currently in occupation. Neither Lloyd nor any member of his family should be in attendance when the valuer carried out an inspection of Plot 9. The valuation should be carried out on the same basis as would be adopted for an open-market sale, including proper allowance for the standard and completion state of the property, but excluding any discount for a private or “friendly” sale.
Upon receipt of the valuation, Lloyd should be given the option, exercisable within a defined period, to purchase Plot 9 at the full valuation figure. If Lloyd exercised that option, he should be required to complete the purchase within a short and defined timeframe, and to pay the full purchase price into the partnership account (or as otherwise directed) without set-off, save insofar as set-off had already been determined by the account judgment. The purpose of these requirements was to ensure that Ulrich received the same financial outcome as he would on an arm’s-length sale, without being exposed to delay, uncertainty, or further leverage.
If Lloyd did not exercise the option within the specified period, Plot 9 should be marketed and sold on the open market in the usual way, with vacant possession if required. This mechanism struck a fair balance between the parties’ competing positions. It protected Ulrich by ensuring that Plot 9 was realised at full market value and that he was not compelled to accept a private sale at an undervalue or on uncertain terms. At the same time, it accommodated Lloyd’s understandable wish to remain in occupation of his home, but only on terms which fully respected Ulrich’s rights and reflected the findings already made.
Importantly, this approach did not give Lloyd any advantage flowing from the prior unauthorised transfer of Plot 9 or from any alleged historic understanding which the court had rejected. His ability to purchase arose solely from the court’s pragmatic management of the realisation process.
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