Costs disputes frequently involve having to look at a solicitor’s retainer and deciding what it means so as to determine whether or not a costs claim offends the much maligned but still alive indemnity principle. Many practitioners and judges thought that Arnold v Britton was the last word and that it reflected a move away from what might be termed a “liberal” approach to contractual interpretation (as espoused by Lord Hoffman) to a more “conservative” approach (as espoused by Lord Neuberger).
Well, we were wrong. The Supreme Court has had another stab at the proper approach to contractual interpretation in Wood v Capita Insurance Services Ltd.
Part of the appellant’s submissions to the Supreme Court was that the Court of Appeal had been influenced by the respondent’s submission that Arnold v Britton represented a rowing back from guidance given in Rainy Sky SA v Kookmin Bank, leading the Court of Appeal to place too much emphasis on the words of the agreement and insufficient weight to the factual matrix. In fact, the Court of Appeal stated that it did not accept the proposition that Arnold had altered the guidance given in Rainy Sky and insisted that submissions be made without reference to the well-known authorities on contractual interpretation, which (surprisingly enough) the Court of Appeal said it knew very well.
Lord Hodge gave the only judgment in Wood v Capita, Lords Neuberger, Mance, Clarke and Sumption agreeing. He emphasised that interpretation is not a literalist exercise focused solely on the wording of the particular clause. The court had to take into account the whole relevant factual background available to the parties at the time of the contract. Where there were rival meanings, the court could give weight to the implications of competing constructions by reaching a view as to which was more consistent with business common sense. This approach applied both in complex formal contracts and those lacking in formality. He ended by saying that Rainy Sky and Arnold were saying the same thing.
The purpose of this blog is not to analyse Wood v Capita as such, far less to come up with an overarching synopsis of the proper approach to contractual interpretation. Rather, it is to highlight the danger that can arise when courts (especially the highest) embark on the exercise of trying to give “guidance” that goes far beyond what is actually necessary to decide the case in question. There is a strong temptation to do this and courts are often invited to do so, seemingly on the basis that this will help practitioners and the courts below.
What it often leads to, however, is that the words of guidance are treated as if they were statute and, all too often, they are applied too literally. Who can forget Mitchell? The “guidance” given in Mitchell was seized upon, applied too literally and led to unnecessary satellite litigation. Fortunately, it was not long until that was put right by Denton.
In a very different context, in the litigation concerning deprivation of liberty that went to the Supreme Court in 2014 (commonly known as Cheshire West), the Supreme Court again gave guidance as to what was and was not a deprivation of liberty. The result has been a plethora of cases and one High Court judge, sitting as a Court of Protection judge, openly disagreeing with the guidance (and being rapped over the knuckles by the Court of Appeal for his pains). No doubt in that case too, the Supreme Court will “clarify” its guidance and point out that they, too, have been misunderstood.
Who, also, can forget the “guidance” given by the Court of Appeal in Garrett v Halton Borough Council as to the steps that a solicitor should reasonably take to discharge his or her obligations under Regulation 4(2)(c) of the Conditional Fee Agreements Regulations 2000 when those Regulations had, by then, been revoked. Far from being of any assistance to solicitors as to what they might have to do in the future, the guidance was used as a tool by those resisting having to pay costs in the “cost wars”.
What, then, is the point of this blog? Two things. First, whenever a court gives “guidance” we must remember that it is only guidance and is not a statute, must not be applied too literally and must bend to the actual circumstances of each case. Second, for the courts, perhaps a touchstone for the giving of guidance should be two questions. The first, is this guidance necessary for the decision in this particular case? If not, is this guidance necessary more generally or will it only serve to produce more uncertainty and, therefore, more litigation not less?