Newcastle International Airport Ltd v Eversheds LLP

The Court of Appeal considered a professional negligence claim by Newcastle International Airport Limited against Eversheds LLP arising from the drafting of revised service agreements for two executive directors. Key legal principles decided were: (i) solicitors retained to draft executive service contracts may in special circumstances owe a duty to take reasonable steps to ensure that the company reviewers (here the chair of the remuneration committee) understand material changes, particularly where the instructions come from interested executives and the drafting raises issues needing clarification; (ii) apparent authority can arise where the company has authorised executives to instruct solicitors and the firm is entitled to rely on that appearance of authority; and (iii) causation and mitigation remain critical — if the client’s own representatives negligently fail to read or act on material information the chain of causation may be broken. The court found Eversheds breached their retainer by not providing an explanatory memorandum to the chair, but held that NIAL’s losses were not caused by that breach because the chair and other non-executive directors failed to read or act, so only nominal damages were awarded.

Background and parties: NIAL retained Eversheds to draft revised service contracts for its chief executive and finance director. The drafts, produced after instructions taken primarily from the executives, awarded substantial refinancing bonuses and narrowed post-termination restrictive covenants. The remuneration committee (RC), chaired by Ms Radcliffe, approved principles but did not properly consider or understand the detailed terms when the contracts were signed.

Procedural posture: Following a 13-day trial, Proudman J in the Chancery Division dismissed NIAL’s negligence claim ([2012] EWHC 2648 (Ch)). NIAL appealed to the Court of Appeal.

Nature of the claim / relief sought: NIAL claimed damages for negligence against Eversheds, alleging (i) lack of actual or apparent authority for the executives to instruct, (ii) lack of reasonable skill and care in drafting, and (iii) failure to provide the chair with a written summary explaining material changes. NIAL sought substantive damages for the losses arising from the bonuses and the relaxation of restrictive covenants.

Issues framed:

• Whether the executives had actual or apparent authority to instruct Eversheds.
• Whether Eversheds breached a duty of care to NIAL in the circumstances, in particular by failing to provide an explanatory memorandum to the RC chair.
• Whether any breach caused NIAL’s loss, or whether the loss was caused or aggravated by NIAL’s own directors (causation and mitigation).

Court’s reasoning and conclusions: The Court of Appeal accepted that the RC had authorised the executives to instruct solicitors and that the executives therefore had apparent authority; Eversheds were entitled to rely on that. The court criticised the practice of taking drafting instructions solely from interested executives without ensuring that the company reviewers understand material changes, and held that in the special circumstances Eversheds should have provided a user-friendly explanatory memorandum summarising each material change and its effect. That omission was a breach of the retainer. Nevertheless the court agreed with the judge that the chair’s demonstrated pattern of not reading or understanding documents, together with the failures of other non-executive directors, meant the breach did not cause the substantial loss; the chain of causation was broken and mitigation opportunities were missed. The appeal was therefore allowed in part and nominal damages were substituted.

Wider context: The court emphasised the practical importance of solicitors ensuring that those who must approve contracts understand material changes, particularly where instructions are taken from interested parties. The remedy awarded was nominal because of the client’s own failings.

Appeal allowed in part. The court held that although the executives had apparent authority to instruct Eversheds and Eversheds therefore could rely on those instructions, in the particular circumstances Eversheds breached their retainer by failing to provide a user-friendly explanatory memorandum to the chair of the remuneration committee explaining material changes in the draft service agreements. However, the breach did not cause the substantial loss because the chair and other non-executive directors failed to read or act on material documents, breaking the chain of causation; accordingly only nominal damages were awarded (£2).

Appeal from the High Court of Justice, Chancery Division (Proudman J) [2012] EWHC 2648 (Ch); heard in the Court of Appeal resulting in judgment [2013] EWCA Civ 1514.