Newcastle International Airport Ltd v Eversheds LLP

A solicitor retained to draft a company’s executive service agreements may take instructions through the executives where the company has authorised them to act as its agents. That authority may include clarifying drafting instructions.

However, where the executives’ personal interests conflict with those of the company, advice given to an executive cannot necessarily be treated as advice to the company. The solicitor must take reasonable steps to ensure that the company’s independent reviewers understand the nature and effect of material changes. In an appropriate case this requires a clear, user-friendly explanatory memorandum identifying the changes and where they appear in the documents.

A breach of that duty does not cause recoverable loss where the evidence establishes that the company would have suffered the same loss despite proper advice. Nominal damages may nevertheless be awarded for breach of retainer.

Newcastle International Airport Ltd appealed against the dismissal of its negligence claim against its solicitors, Eversheds LLP. Eversheds had drafted revised service agreements for two executive directors. The agreements provided substantial refinancing bonuses and relaxed restrictive covenants, although the airport’s remuneration committee did not appreciate their effect before signature.

Mrs Justice Proudman dismissed the claim, holding that the executives had authority to instruct Eversheds, that Eversheds owed no separate duty to advise the remuneration committee, and that any breach would not have caused the loss because of the committee’s own conduct. The central issues on appeal were the executives’ authority, the scope of Eversheds’ duty of care, and causation.

1. Authority. The executives had apparent authority to instruct Eversheds in relation to the drafting of the revised agreements. That authority necessarily included answering questions and providing clarification required during the drafting exercise. Eversheds were entitled to rely on the executives’ instructions.
2. Duty of care. The ordinary position is that advice to an authorised executive may amount to advice to the company. This case was different because the executives were the counterparties to the agreements and had personal interests in their terms. The drafts were to be reviewed independently by the remuneration committee on behalf of the company.
3. In those special circumstances, Eversheds’ duty under the retainer required them to take reasonable steps to ensure that the reviewers understood the effect of the material changes. The appropriate step was to provide a memorandum in user-friendly language summarising the scheme and workings of each material change and identifying where the changes appeared in the drafts. Eversheds’ failure to provide such a memorandum was a breach of duty.
4. Causation. The judge was entitled to find that the chairwoman of the remuneration committee would not have read and understood such a memorandum sufficiently to prevent the refinancing bonus provisions from being adopted. The breach therefore did not cause substantial loss. The Court of Appeal also declined to decide the mitigation issue.
5. The appeal was allowed in the formal sense. The order dismissing the claim was set aside and Eversheds were ordered to pay nominal damages of £2 for breach of retainer.

• Court of Appeal (Civil Division): The appeal from the Chancery Division was allowed in form. The dismissal was set aside and nominal damages of £2 were substituted.
• High Court, Chancery Division: Mrs Justice Proudman dismissed Newcastle International Airport Ltd’s claim for damages for alleged negligence against Eversheds LLP: [2012] EWHC 2648 (Ch).