This recent case has reminded lawyers to give separate advice to a company’s board of directors where there is a conflict, or potential conflict, between the “human organ of the company” who is instructing solicitors on behalf of the company and the company itself.
On 28th November 2013, the Court of Appeal heard and upheld an appeal by the claimant, Newcastle International Airport Ltd (‘the Company’), against the dismissal of its claim against Eversheds LLP for negligence.
The Company retained Eversheds LLP to draft new service contracts between it and its two executive directors. The Defendant solicitors took its instructions in respect of the service contracts from one of the two executive directors concerned. Once the contracts were complete, the Company and the two executives signed. The service contracts included an aggregate bonus payable to the executives of, approximately, £8 million and released both executives from restrictive covenants that prevented them from working at or for one of the Company’s competitor airports. Neither the board of the Company nor its remuneration committee had understood that the service contracts would have such effect when they were signed.
The Company alleged that the Defendant had been in breach of its duty of care by failing to provide the board of the Company or its remuneration committee with a written summary of the effects of the service contracts before they were signed.
The Defendant received all of its instructions in respect of the service contracts from one of the executive directors. The final draft was reviewed by the Company’s remuneration committee and signed off by someone with the appropriate authority. However, the Defendant only advised the executive directors in relation to the drafting of the service contracts; no advice was separately given to the wider board of the Company or its remuneration committee. The thought process behind this practice seemed to be that advice given to the executives could be treated as advice given to the Company.
The Court of Appeal readily accepted that in a conventional case where a company has authorised one of its executives to instruct a solicitor in relation to a matter, being one in which the executive so authorised had no personal interest that conflicted with the interests of the company, the executive could be regarded as a “human organ of the company”. There would, in such circumstances, ordinarily be no need for the solicitors to give separate advice to anyone other than the executive.
The Court of Appeal upheld, however, that the special circumstances of the case before them did not allow the Defendant solicitors to treat the executive director simply as a human organ of the company; there was a clear conflict between the interests of the executive providing the instructions to the Defendant solicitors and the interests of the company. The Company retained the Defendant’s services and it was the Company to which the Defendant owed a duty of care. In such circumstances, the Defendant had breached its duty of care. The Court of Appeal ruled that Defendant solicitors should have provided separate advice explaining the terms and effect of the service contracts, in the form of a memorandum, to the wider board of the Company and to its remuneration committee (as the committee reviewing the terms of the contracts).
The Defendant was ordered to pay the Company nominal damages of £2.00. The Lord Justice hearing the appeal could not conclude that, had the Defendants provided the type of explanatory advice that they should have provided, the contracts would not have been signed.
The Court of Appeal postponed its decision on costs until 3rd December 2013 whereupon it ordered the Company to pay all of the Defendant’s legal fees, which are estimated to be in the region of £2.5 million. The Company was ordered to pay the Defendant’s legal fees because the chairwoman of the Company admitted before the Court that she did not read complicated legal documents and sometimes failed to read emails from legal advisers.
This case is a warning to solicitors to ensure they correctly identify and advise the client to whom they owe a duty of care. It is also a warning to anyone entering into any written contractual arrangement to ensure they fully read and understand the terms of a contract before signing.
If you would like more detailed advice on employment matters, please contact the partner at Hunters having responsibility for your legal matters, or (for new enquiries) please contact a member of our Employment team.
This article is based on the law as at 13th December 2013. Although we endeavour to ensure that the content is accurate and up to date as at that date, it is designed to provide general guidance only and is not intended to be comprehensive or to constitute professional advice. Specific advice should always be sought, and you should only rely on advice which is given by reference to particular facts and circumstances.