Non-lawyers do not always find legal documents easy to understand – no kidding!!

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

The Crusader

Do Anything You Have To Do!

Why would you get into a contract, not stick to the requirements and then have to try to wriggle your way out of it when it goes horribly wrong?  It’s amazing when you read some of the cases that go through the Courts, as to how many people or businesses get into a contract which, although it suits all of the parties involved at the time, when it then goes wrong (perhaps through no fault of anyone but just unfortunate circumstances like the insolvency of a client) they have to try and pick up the pieces.  Often, the contract states quite clearly what is supposed to happen.  For instance, there might be a clause saying that you will go to arbitration or you may have a contract with someone from overseas which states that the Courts of England and Wales will be correct place to bash it out.

I was just reading a case whereby there was a company complaining about losing their equipment when a lease of a building they were occupying was terminated.  The odd thing about this case to me was that the company had 28 days in which to go in and remove their equipment.  They didn’t do so and therefore lost the right to either get the equipment or to get compensation from the landlord when he leased the place to someone else.  I don’t know all the circumstances of the case but it just goes to show how easily things can go wrong.  Looking in from the outside, you wonder why they didn’t get round to removing their equipment – after all, 28 days is quite a long time.  But there you go…they didn’t and they ended up unsuccessfully taking the landlord to Court to try and get some compensation.  In trying to win, they used obscure legal arguments which failed to impress the Judge.

The lesson is – try your best to comply with the terms of all of your contracts otherwise you could end up dangling on a string trying to make it right when it is much too late.  Trying to use clever arguments to compensate for poor operational decisions is not the best way of spending your company’s budget.  Litigation can take out your bottom line.  If, however, you’ve already gone past the point of no return and you are going to have to go to Court, don’t forget that you may be able to get a solicitor to do it on a no win no fee basis.  Check out my website for some help with that.

Tina Morgan    www.john-kennedy.co.uk

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