Featured case: Negligence

Newcastle International Airport Ltd v Eversheds LLP. [2012] EWHC 2648 (Ch). Proudman, J. 02 October 2012

Newcastle Airport 2

Solicitors who accepted instructions from an executive director to draft a service contract that awarded him a very significant bonus had not been negligent in accepting his instructions even though they knew that his remuneration had to be determined by the company’s remuneration committee. In the circumstances, it was clear that the director had had apparent authority to instruct the solicitors. It was of critical commercial importance that solicitors should be able to rely on the apparently authorised agents of a company.

Judgment for defendant

Newcastle International Airport (NIA) claimed damages for professional negligence against Eversheds. The dispute concerned new service contracts drafted by the firm which gave NIA executive directors significant bonuses as part of a refinancing deal.

The airport determined its executive pay through a remuneration committee, which was chaired by a non-executive director (R) and which had to perform an annual pay review based on various factors including comparison with similar businesses. As part of the 2005 annual review, the directors emailed the non-executive director to propose the introduction of a refinancing bonus such as was awarded to the executive directors at other airports. They asked for “a fair share of the proceeds” as a “simple percentage of value realised”.

The non-executive director circulated the email to the committee, which approved the principle of the refinancing bonus without any consideration of the refinancing itself.

Eversheds was then instructed by the executive directors to draft the contracts, which were signed by them and the non-executive. The non-executive received, but did not read, a summary of the changes. There was, later, a disagreement about the base sum to which agreed percentages were to be applied.

The airport’s case was that, as Eversheds knew of its remuneration committee and its function, and as it also knew that the directors had an interest that conflicted with that of the non-executive director, namely to obtain the best possible terms in their new contracts, it should have established the committee’s wishes through direct correspondence by explaining and giving advice about the changes it had been asked by the directors to make.

Eversheds’ case was that, since the directors had had apparent authority to give instructions, its duty to act with skill and care was a duty to perform the instructions to the relevant standard, not a duty to check whether they were authorised.

Judgment for defendant.

On the evidence, the non-executive director had, as a matter of deliberate choice, left all contact between the airport and the firm to the directors.

She had held the directors out as authorised to give instructions to Eversheds; she had not regarded it as part of her role to have direct contact with them. She plainly had “a blind spot of massive proportions” as to her role as chair of the remuneration committee.

The other non-executive directors had not questioned the proposals at any point because they did not want to prejudice the refinancing. Apparent authority within the definition in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 Q.B. 480 was therefore established and, under the ordinary principles of agency law, no further duty of care was imposed to ascertain whether the agent actually had authority.

Since it was seemingly common practice for remuneration committees to instruct solicitors through their executive directors, even as to the details of their own contracts, there had been nothing abnormal in the concept of giving authority in such circumstances.

Eversheds had been entitled to assume that (a) the non-executive director had briefed the other committee members; (b) the committee was satisfied that it had followed proper procedures for fixing the director’s remuneration and that the directors had not been involved in deciding their own remuneration; (c) each member of the committee had exercised due care and diligence; and (d) the committee’s chair or company secretary had ensured that all members were aware of their obligations to NIA.

There had been no duty on Eversheds to advise the non-executive director as to the meaning and effect of the draft changes because provision of that advice to the directors as agents would have discharged that duty.

In any event, Eversheds had sent the completed drafts to the non-executive for approval and signature and had thus been entitled to assume that she knew and approved of the changes.

It was of critical commercial importance that solicitors should be able to rely on the apparently authorised agents of a company. Deciding whether apparent authority had been displaced involved the court determining whether a blind eye had been turned to lack of actual authority, or whether it was irrational or dishonest to allege that apparent authority had been relied upon. In the instant case, it was not irrational or unreasonable for Eversheds not to have doubted the director’s instructions.

On the evidence, the non-executive did not read documents which she had requested and knew were important.

It was therefore unlikely that she would have read advice that she had not requested; she had a special distaste for documents produced by lawyers and viewed them as mere formalities, not something she was required to read.

When she read them, it was only a skim, and she consistently misread, missed or misunderstood their contents. Even if there had been a breach of duty by Eversheds, the whole of the subsequent loss would have arisen purely from the non-executive director’s failings.

For the claimant Newcastle Airport

Tim Toomey, Ward Hadaway partner; Nicholas Davidson QC, 4 New Square; Benjamin Wood, 4 New Square

For the defendent Eversheds

Sarah Clover, Clyde & Co partner; Ben Patten QC, 4 New Square; Scott Allen being led by Ben Patten QC, 4 New Square

Commentary: William Glassey

William Glassey
William Glassey

This is a helpful decision for solicitors and their insurers, on two important points. 

First, Proudman J has brought a common sense approach to solicitors’ ability to take their clients at face value: she rejected the suggestion that Eversheds had reason to doubt the authority of the executive directors by reason of their alleged conflict of interest – there can be no conflict where there has been full disclosure to the company, she said; and finding that Eversheds had no reason to doubt the executive directors’ authority: “Life would be very difficult for commercial solicitors if they were required to check the word of apparently authorised agents against the minutiae of all the documents in the case.”

Second, the case adds to the line of recent authority rejecting clients’ attempts to pass responsibility to solicitors for bad deals. 

It is perhaps unsurprising that the local authority shareholders “nearly had a fit” on discovering that one executive director would receive a £5.5m bonus, and the other, £2.5m.

Counsel for NIAL proffered to the Court a letter of advice which he said Eversheds should have written to point this out: Proudman J concluded, to the contrary, that responsibility lay with the chair of the Remuneration Committee, who “seemed to think it was not her job to read any documents which could be categorised as legal documents.” Ouch. 

William Glassey, partner, Mayer Brown. Claire Lewis, senior associate on the professional liability team, helped with the article