Newcastle International Airport’s £8 million plus claim against Eversheds has failed. It arose from Eversheds’ instructions to draft employment contracts for two directors awarding them large bonuses. Eversheds were instructed by NIA and received their instructions from the two directors. It was alleged that they should have investigated their authority and whether NIA’s board agreed the bonuses.
NIA was owned by a consortium of seven local authorities and a Danish commercial airport operator.
Eversheds drafted employment contracts for NIA which entitled two executive directors to large bonuses of £8 million and significantly reduced the scope of their restrictive covenants by comparison with earlier contracts.
The two directors gave instructions to Eversheds to draft their contracts having been authorised to do so by NIA’s chair who was also the chair of its remuneration committee. Eversheds’ evidence was that this was “commonplace practice” but, oddly, the chair then failed to read the draft contracts or to draw the committee or the board’s attention to these provisions. She executed them without reference to her colleagues. Even more oddly, two other non-executive directors (nominees of the Danish co-owners of NIA) read the contracts and realised their broad effect but did nothing. Later, the board failed to take steps to re-negotiate the bonuses when it finally understood NIA’s contractual obligation to the two directors.
Proudman J held in the High Court that the two directors had actual authority to instruct Eversheds, given to them by NIA’s chair, and Eversheds had no reason to doubt that they had been correctly instructed about what had been agreed between the board of NIA and the two directors. That was sufficient to dispose of NIA’s claim that Eversheds should have investigated the scope of the directors’ authority.
Further, NIA’s claim failed on causation because if the chair had read the contracts properly and if the other two non-executive directors had spoken out when they became aware of the bonuses, the local authority shareholders (who were horrified when they finally discovered the size of the bonuses) would have vetoed them. These failures, and not any breach of duty on the part of Eversheds, had caused the loss.
The decision turns on a conventional application of agency principles to a complex factual situation in which, at the end of the day, it was clear the chair had given actual authority to the directors. The decision is, however, helpful for the profession and its indemnity insurers because, in Proudman J’s words, “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.”
The decision can probably be seen as part of the recent chain of cases starting with Pickersgill v Riley and The Football League v Edge Ellison in which the courts, dealing with experienced businessmen, have declined to impose duties on solicitors to volunteer advice without being asked for it or, as in this case, to check the authority of the individuals instructing them when they had no reason to do so. In the case of such clients, the courts seem to be prepared to accept that there are common sense limitations on a solicitor’s duty.