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Dealing with conflicted directors

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29/01/2014

A recent Court of Appeal decision has lessons for both solicitors and non-executive directors on how to manage conflict situations.

Background
In Newcastle International Airport Ltd v Eversheds LLP [1] the defendant solicitors, Eversheds, had been instructed to draft the terms of new employment contracts for two executive directors of the claimants, Newcastle International Airport Limited (NIAL). These instructions were the product of a meeting between the executive directors and the chair of the Remuneration Committee. Eversheds provided finalised drafts to the chair of the Remuneration Committee for signing following negotiations with the two directors. The contract contained terms which allowed for substantial bonuses and, in one case, a release from certain restrictive covenants that had been part of the directors’ existing contracts. When the full extent of the bonus liability became apparent, NIAL sued Eversheds, arguing that the solicitors were negligent in taking instructions from the same executive directors on the provisions of the service agreements without consultation with the Remuneration Committee.

The High Court disagreed. The court found that the chair of the Remuneration Committee had ‘held out’ that the directors were specifically authorised to communicate with Eversheds direct on NIAL’s behalf. Once this apparent authority as agent was established at the outset, Eversheds were under no obligation to continually check with NIAL that the agent had actual authority to act on particular provisions of the draft contracts.

NIAL appealed.

Judgment
The Court of Appeal allowed the appeal.

The High Court decision had focused on the question of whether the directors had the requisite authority to give instructions to Eversheds in relation to the revised contracts. The Court found that the judge had been correct in finding that the directors had the requisite authority. However, in the words of the Court:

“This case is not about authority. It is about, and only about, what, in the particular circumstances in which they were placed, was Eversheds’ duty towards their client, NIAL; whether they breached it; and whether any breach caused damage to NIAL. The duty question arises because of the conflict of interest between NIAL and the executives in relation to the giving of instructions for the revised contracts, a conflict of which Eversheds were or ought to have been aware.”

The Court found that Eversheds had breached their duty of care. The Court said it was “less than ideal” that Eversheds had taken instructions from the directors in this case, although it stopped short of saying that it was wrong to do so. However, the Court considered that Eversheds’ duty required it, at the end of the drafting process, to give express, separate advice to the chair of the Remuneration Committee as to the nature and effect of the changes that had been made to the service contracts.

Ordinarily, where a director was authorised by his or her company to instruct solicitors in relation to a matter where there was no question of that director’s personal interest conflicting with that of the company, there was no obligation on the solicitors to give their advice to any person other than the director instructing them. This was, however, not such a case. In the special circumstances of the case, Eversheds were obliged to provide the finished drafts to the chair of the Remuneration Committee and to ensure that these “were 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 the changes could be found”.

The next issue to be decided was whether that breach of duty was causative of loss. That involved answering the question of whether, had Eversheds provided an explanatory memorandum of the changes to the contract, the chair would have read that memorandum. The Court concluded that she would not have done so, accepting the judge’s findings that she took a broad brush approach (in the words of the Court, “a blind spot of massive proportions”) to the discharge of her duties as chair and was not a woman who concerned herself with the minutiae. On that basis, NIAL’s claim failed.

Walker Morris comment
The case has lessons for both solicitors and clients. For solicitors, it is to be aware of the identity of the client and the interests of that client and to be mindful of any conflicts between the company and the agent instructing the solicitors on behalf of that company.

The lesson for clients – specifically non-executives and independent members of committees – is to attend to the detail in the discharge of their obligations. Rigorous – even any – scrutiny of draft contracts may not be something to look forward to but, as this case demonstrates, it can be costly if it is not done.

[1] [2013] EWCA Civ 1514

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