Newcastle International Airport Limited v Eversheds LLP [2012] EWHC 2648 (Ch)

Newcastle International Airport Limited (NIAL) unsuccessfully sued the defendant solicitors Eversheds LLP (Eversheds) for alleged negligence concerning the drafting of new service contracts for two executive directors.

Comment

A finding against Eversheds would have made life difficult for commercial solicitors, who would need to continually check the instructions of apparently authorised agents; it would have represented a departure from the established laws of agency. The decision is a comforting one that suggests that commercial clients will struggle to impose liability on their solicitors in the event that solicitors were instructed in relation to business deals or agreements which turned out to be disadvantageous for their client.

The Court’s obiter comments concerning Eversheds’ attempted reliance on a net contribution clause are also of interest. While Eversheds did not need to avail themselves of the net contribution clause, doubt was cast on whether it had been explained sufficiently by Eversheds to have been incorporated into their retainer with NIAL.

The facts

As well as having two executive directors, NIAL had a number of non-executive directors, some of whom sat on the Remuneration Committee. The Remuneration Committee decided the level of the executive directors’ remuneration.

Towards the end of 2005, the Remuneration Committee considered revisions to the executive directors’ contracts. During this consideration period, one of the executive directors raised the possibility of a bonus payable upon the completion of a contemplated refinancing deal.

After a meeting with the chair of the Remuneration Committee, the executive directors gave instructions to Eversheds to prepare draft service contracts. Eversheds did so, providing finalised drafts to the chair of the Remuneration Committee for signing. The contracts contained provisions whereby both executive directors were entitled to a percentage of any refinancing secured by NIAL. The contracts also relaxed prior restrictive covenants preventing the executive directors from assisting other competing airports. They were signed by the chair and the executive directors.

The subsequent re-financing gave rise to bonuses payable to the executive directors of in excess of £8 million. NIAL commenced proceedings against Eversheds, alleging both that they were negligent in taking instructions from the executive directors and that they had failed to advise the Remuneration Committee of the provisions of the service agreements.

Decision

The Court concluded that NIAL had, through instructions given by the Remuneration Committee, "held out" the executive directors as authorised to give instructions on its behalf. Eversheds reasonably relied upon that holding out. Once apparent authority was established, Eversheds was held to be under no further duty to ascertain whether the agent had actual authority.

Eversheds was entitled to assume that the Remuneration Committee was satisfied that proper procedures had been followed in fixing the executive directors’ remuneration and that the instructions received from the executive directors reflected those of the Remuneration Committee. Eversheds was not required to advise the Remuneration Committee as to the effect of the draft changes in the new service agreements as the provision of advice to the executive directors, as agents of NIAL, discharged that duty.

Even if breach of duty had been established, the claim would have failed on causation as the Court concluded that any advice given to the Remuneration Committee on the changes to the service contracts would not have been read.

Note: NIAL has been granted permission to appeal the decision.