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Solicitors' duty of care: Conflict of interest

Newcastle International Airport Ltd v Eversheds LLP
28.11.13
Court of Appeal

In this action the Claimant, Newcastle International Airport Limited Ltd (“NIAL”), sued Eversheds LLP (“Eversheds”) for alleged negligence in relation to the preparation of new service contracts entered into in 2006 between NIAL and its two executive directors.

Facts

NIAL ran Newcastle airport. Refinancing of NIAL was planned, with a consequential cash return to shareholders.  NIAL required the preparation of new contracts, including bonus provisions, for its two executive directors. 

The new contracts were to be approved by the remuneration committee (“RC”), chaired by a Ms Radcliffe. One of the directors, Mr Parkin, wanted the new contracts to contain a non-discretionary bonus relating to the refinancing of NIAL and the loosening of restrictive covenants by which the directors were bound. Ms Radcliffe authorised Mr Parkin to instruct Eversheds to prepare draft contracts.  Mr Parkin gave instructions that the contracts were to contain the bonus provision and watering down of the restrictive covenant.  Ms Radcliffe and Eversheds made no attempt to contact each other, although Mr Parkin provided Ms Radcliffe with most of the relevant information from Eversheds. Unfortunately, she frequently failed to read that information, and when she did, she often fundamentally misunderstood it.

The contracts were approved and signed, apparently without anyone on the RC giving much thought to the presence of the provisions about the bonus and restrictive covenant. The terms were, on any view, very favourable to the directors, including a percentage of the gross refinancing, rather than of the consequential benefit to NIAL.

The refinancing was completed, generating a massive windfall of £8 million for the directors.  Although NIAL recovered some money from the directors, they sued Eversheds for the balance after that action was compromised.

Appeal

The trial judge had concluded that Eversheds had not breached their duty of care to NIAL, and that, even if they had, NIAL's conduct broke the chain of causation; the loss NIAL suffered was caused by its failure to review the contracts before signing them.

Whilst NIAL accepted the trial judge’s findings about the shortcomings of Ms Radcliffe, they contended that the Court should have found that Eversheds were in breach of duty in taking instructions from Mr Parkin without direct reference to Ms Radcliffe in circumstances in which there was a conflict of interest between the directors and the Claimant.  They argued that Eversheds should have provided the RC with an appropriate summary of the new contracts compared with the existing ones and that, had they done so, the RC would have ensured that the provisions regarding bonuses and restrictive covenants would have been amended to NIAL’s benefit.

Court of Appeal findings

Whilst the Court of Appeal accepted that, typically, in a situation where there was no conflict of interest between the executive who instructed the solicitors and the company there would be no need for the solicitor to provide separate advice, in a situation where there is a clear conflict, Eversheds’ failure to provide a separate memorandum of advice summarising the main terms of the new contracts to Ms Radcliffe did constitute a breach of the duty of care they owed to NIAL. As to whether such a breach caused damage to NIAL, it was clear from the findings of the trial judge that, even if Eversheds had provided the necessary information to Ms Radcliffe, it was unlikely that she would have read this and would, nonetheless, have authorised the contracts in any event. On this basis, the appeal on causation was dismissed and nominal damages of £2.00 were awarded.

Comment

It was part of a solicitors’ contract with its client that a client be given a proper explanation of documents the client was required to sign. The manner in which the solicitor would give that advice would vary according to the experience, sophistication and needs of the client. In this case there should have been an easy to understand memorandum prepared for NIAL’s RC setting out the main provisions of the documents and where they could be found.

Ordinarily, if a director of a company gives instructions to a solicitor to do something and there is no issue of there being a conflict of interest between the company and the director’s personal interests, the solicitor can take instructions from the director and advice to the director would be advice to the company    Where, however,  there is a conflict, or a potential conflict, between the personal interests of the executive and the interests of the company itself, which is the ultimate client, there should either be an oral explanation of the material terms of any document prepared or a written memorandum setting out the main terms.

Although when well prepared, causation defences can be very effective, this decision serves as a useful reminder of the evidential difficulties associated with running such defences successfully.

Contact

For further information please contact Steven O’Sullivan, Senior Associate on 0207 280 8868

By Steven O'Sullivan

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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