Who, in a company, has the authority to instruct solicitors and when do the solicitors need to take care that they have given the proper advice to their client? The following case says that the executive directors of a company usually have the authority to act on behalf of the company but that solicitors should take extra precautions to make sure that their client (the company) is fully advised if the executive directors have a personal interest in the outcome of the advice.
The company who owned Newcastle airport needed new contracts
drafted for their executive directors who were both employed by them. The company’s board had a remuneration
committee which had a chairwoman. One of
the executive directors instructed Eversheds (solicitors) to draft the new
contracts to include bonuses to be paid to them for completing the refinancing
of the company’s debt. The draft
contracts went to and fro between the solicitors, one of the executive directors
and the chairwoman of the remuneration committee. The executive director was heavily involved
in the drafting of his own contract.
Eventually, a final draft was sent to the remuneration committee
chairwoman for authorisation. No written
summary was provided by the solicitor as to the nature and effect of the
changes to any earlier drafts. The
chairwoman reviewed the draft contracts and then signed them after which they were
accepted and signed by the executive directors.
In due course, it became apparent that the executive
directors were to receive massively larger bonuses than was anticipated by the
remuneration committee due to the drafting of the contracts and so the company
decided to sue the solicitors. One of
their claims was that the executive directors had not had the authority to
instruct the solicitors to produce the draft contracts.
The judge in the first case found that the executive
directors did have the authority to act on behalf of the company and,
therefore, the solicitors’ advice given to the executive directors was given to
the company itself. The judge was
critical of the chairwoman and found that even if the solicitors had supplied
more information regarding the final contract, she would not have read it or
understood it. The claim was dismissed
but the company appealed. They said that
there was a conflict of interest as the solicitors had taken their instructions
from the executive directors who had an interest in the terms of the
contract. They said the solicitors
should have recognised the conflict of interest and dealt directly with the
chairwoman or should have supplied a written summary of the changes
incorporated into the final draft.
The Court of Appeal said that usually if a company
authorised one of its executives to instruct solicitors (in a matter in which
the executive had no personal interest) that would be sufficient for the
solicitors to deal only with the executive.
In this case, however, the solicitors treated the matter as advice given
to the executive director was advice given to the remuneration committee. This relied on the committee being equal to
carrying out an unaided review of the solicitors’ work without any kind of oral
explanation or written summary to assist them.
This “ignored the basic consideration that non-lawyers did not always
find legal documents easy to understand” [http://www.lawgazette.co.uk/law/law-reports/negligence/5039090.article]. The solicitors had a duty of care to ensure
that their client, the company, properly understood the effects that the new
contracts would produce and they had a duty to ensure that their client (the
company) had been properly advised.
Nevertheless, the judge had been critical of the chairwoman’s
approach to reading documents and so, even if the necessary information had
been provided by the solicitors, it is likely that the contracts would still
have been signed. The outcome of this
case, therefore, was that there were no winners. The solicitors had breached their retainer
but that breach had not caused the company’s loss. The solicitors would have to pay nominal
damages to the company for breach of the retainer. (Case reference: Newcastle
International Airport v Eversheds LLP: Court of Appeal, Civil Division 28
November 2013)
Go to www.john-kennedy.co.uk
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