Claimant seeking damages against defendant solicitors for alleged negligence in relation to new service contracts entered into between claimant and its two executive directors – Executives being involved in drafting of new contracts

Newcastle International Airport v Eversheds LLP: Court of Appeal, Civil Division: 28 November 2013

The claimant company owned and operated Newcastle airport. At the relevant time, the claimant had two executive directors (the executives), both of whom were employed under service contracts. The claimant’s board comprised a remuneration committee (the committee), which had a chairwoman (R). The defendant firm of solicitors acted for the claimant.

In 2006, the defendant was instructed by one of the executives (P) to draft new contracts for the executives with a view to those new contracts providing for bonuses to be payable to them by reference to their success in completing the refinancing of the claimant’s debt. Draft terms of new contracts for the executives passed between R, P and the defendant, with P being heavily involved in the drafting of the relevant terms. In the result, a final form of the draft contracts was sent to R for authorisation by the committee. The drafts were unaccompanied by any written summary explanation from the defendant as to the nature and effect of changes to earlier drafts. R reviewed the drafts to ensure they were in accord with the principles agreed by the committee. R signed the contracts on behalf of the claimant and they were duly accepted and signed by the executives.

In due course, it became clear to the claimant and, in particular the committee, that, rather than providing remuneration payable to the executives based upon the amount of return to shareholders following the refinancing put into place by the executives, the new contracts provided for their remuneration to be applied to the gross amount of the refinancing with the effect that the executives were entitled to receive massively larger bonuses. The claimant issued proceedings, inter alia, alleging that the executives, and in particular P, had had no authority to instruct the defendant to produce the draft contracts.

The judge found that the executives did have authority to act on behalf of the claimant, that the claimant had authorised them to instruct the defendant in relation to the drafting and, therefore, the defendant’s advice to the executives as to the draft contracts was the equivalent of advice to the claimant itself. The judge was critical of actions taken by R in regard to the attention that she had paid to the documents, and held that, even if the defendant had supplied more information, she would not have read it or would not have understood it. In the circumstances, the judge dismissed the action. The claimant appealed.

The claimant submitted, inter alia, that the defendant’s only client was the claimant, but the defendant had taken instructions as to the drafting of the claimant’s proposed contracts from the individuals who were the counter-parties to the draft contracts. Accordingly, there had been a conflict of interest which the defendant ought to have dealt with by contacting R and seeking instructions from her or, alternatively, ought to have provided her with a clear written summary as to the nature of the changes made in the drafts so that the committee had a comprehensive understanding of them before deciding whether or not to commit the claimant to the draft contracts.

The defendant submitted that, in its experience, employment law practice included negotiations of executives’ service agreements, including cases of companies with remuneration committees, and although the client would normally be the company alone, the defendant’s experience was that instructions in relation to the drafting of such contracts invariably came from the executive directors, with the resultant draft being reviewed by the remuneration committee and signed by those with appropriate authority (the practice).

The appeal ruled: In a conventional case in which a company authorised one of its executives to instruct a solicitor in relation to a company matter, being one in which the executive had no personal interest conflicting with that of the company but could simply be regarded as a human organ of the company, there would ordinarily be no need for the solicitor to give advice as to the matter the subject of its instruction to anyone other than the executive. Advice to him would stand as advice to the company (see [80] of the judgment).

In the instant case, the feature of the practice adopted by the defendant appeared to be that the only advice given in relation to the drafting of the new agreements was that given to the executive who had provided the instructions for it. However, the practice also recognised that the draft would be separately reviewed by the committee. However, no advice, whether oral or written, had been separately provided by the defendant to that reviewing body as to the nature, terms and effect of the draft agreement that the defendant had created. The theory of the practice, therefore, seemed to be that advice given to the executive could be treated as advice given also to the committee. That theory might have been appropriate if the advice so given had been comprehensive written advice for express onward transmission to such body.

However, that had not happened in the instant case, nor had the evidence suggested that it was the normal practice. Oral advice given to the executive in the course of taking the instructions from him could not sensibly be regarded as advice also given to the committee. The problem with the practice described by the defendant was, therefore, that it had necessarily been dependant upon the committee being equal to carrying out an unaided review of the defendant’s work without the benefit of either: (i) an oral explanation of the nature and effect of the document that, in the instant case, the claimant had been invited to sign; or (ii) a written summary of such nature and effect composed in user-friendly language. The practice had ignored the basic consideration that non-lawyers did not always find legal documents easy to understand.

Unless they were told what to look for in such documents that were of particular importance to the transaction in point, they might well miss it, or misunderstand it. It was fundamental that a solicitor owed a duty under his retainer to give the client a proper explanation of documents that required his signature, although the manner in which the solicitor would do so would vary according to the experience, sophistication and needs of the client. In the instant case, the defendant had had to obtain clarifying instructions in relation to the measure of the executives’ refinancing bonuses from one of the two executives in line for such a bonus.

Since the claimant, and not P, had been the client, that ought to have rung cautionary bells with the defendant. It was plain that the proper discharge of the defendant’s duty of care to the claimant had required it, at the conclusion of the drafting process, to have taken steps to ensure that such reviewers properly understood the effect the drafts created on P’s instructions, because advice to P in the course of the drafting exercise could not have been regarded as equivalent to advice to the claimant itself, and the defendant’s duty had been to ensure that the claimant itself had been properly advised.

Accordingly, part of the defendant’s duty to the claimant had been, at the conclusion of the drafting process, to ensure that the finished drafts provided to R, as chairwoman of the committee, had been accompanied by a memorandum explaining in user-friendly language a summary of the scheme and workings of each material change to the executives’ original contracts and identifying where, in the drafts, changes could have been found.

Had such details been provided and had been carefully read, understood and considered by R, in conjunction with the draft contracts themselves, it had been likely, if she had responded to it with proper responsibility, that she would have convened a meeting of the committee to consider the way forward, and there would have been a renegotiation of the terms reflected in the drafts.

However, the judge had been critical of R’s approach to reading documents, and in light of the judge’s factual findings, even if the necessary information had been provided by the defendant, the contracts would still have been signed containing the same refinancing bonus entitlement. Therefore, the claimant’s case failed on causation grounds (see [70]-[72], [85], [100] of the judgment).

Accordingly, by failing to provide an explanatory note, the defendant had breached its retainer, but that breach had not been causative of the claimant’s loss. In those circumstances, the appeal would be allowed to the effect that the order by which the judge dismissed the claimant’s claim would be substituted for an order that the defendant pay the claimant nominal damages for breach of retainer (see [102] of the judgment).

Decision Proudman J [2012] All ER (D) 20 (Oct) reversed in part.

Nicholas Davidson QC and Benjamin Wood (instructed by Ward Hadaway) for the claimant; Ben Patten QC and Scott Allen (instructed by Clyde & Co LLP) for the defendant.