High Court holds Law Firm not guilty of professional negligence

The decision in Newcastle International Airport Ltd v Eversheds LLP is based on professional negligence and was where the Chair of the Board and Remuneration Committee had held two executive directors out to be authorised individuals to give instructions for the preparation of draft contracts.  Evidence suggested that it was common practice for remuneration committees to instruct solicitors through their executive directors, including detail as to their own contracts.  The function of the Remuneration Committee was to determine N Ltd’s policy on behalf of the Board in respect of senior executive remuneration.

In 2005 the executive directors’ contracts came up for review.  At this time, their existing contracts included bonus and Long Term Incentive Plan provisions and both contracts contained restrictive covenants.

Various discussions took place between the Chair and the two executive directors and, in particular, a refinancing bonus, to which draft wording was suggested.  On 1 December 2005 the Chair prepared a principles paper for approval by the Remuneration Committee, which was silent on the restrictive covenants.  At the committee meeting on 7 December 2005 the minutes of the meeting recorded that the Remuneration Committee agreed to the principles contained in the paper.

On 6 January 2006, Eversheds LLP, were instructed through one of the executive directors to draft amendments to the service contracts.

Various discussions then took place between the Chair and the executive directors on the draft contracts with some discussion on the restrictive covenants.

On 13 January 2006 the executive directors told the solicitors that they had been authorised by the Chair to instruct them to draft new contracts and that the Chair wished for the restrictive covenants to be narrowed and the service agreements to make clear that the executive directors were to be entitled to all aspects of their remuneration* (*non-exhaustive list).

The agreements were then approved and signed by the Chair and posted to the executive directors.  A summary was sent by the solicitors at the request of the Chair, but was unread by her.

Completion of the refinancing took place on 21 December 2006 and N Ltd subsequently brought an action for negligence against the solicitors in respect of the service contracts.

Decision

On her own case, the Chair had held the two executive directors out to have authority to give instructions to the solicitors in preparing the contracts.  This meant that they were entrusted with the conduct of those instructions and had apparent authority to give instructions on the contents of the contracts.  Once apparent authority had been established no further duty of care was imposed to ascertain whether the agent had authority in the first place.  The solicitors’ unchallenged evidence suggested that it was the commonplace practice of remuneration committees to instruct solicitors through their executive directors even where it details their own contracts.  A solicitor is not required in a commercial context to investigate the competency of his client, where is not put on notice of any lack of competency.  The draft contracts were sent to the Chair for approval and signature.  The solicitors could therefore assume that she knew of and had approved the changes and they had been properly agreed.  The reason that N Ltd suffered loss was because of its non-executive directors failing to carry out their obligations to it.