Court of Appeal Confirms Big Picture Focus Means Big Loss

The dangers of leaving the details of negotiations to those interested in the 'big picture' have been clearly illustrated by a Court of Appeal decision which has left North East ratepayers severely out of pocket (Newcastle International Airport Limited v Eversheds LLP).

The case revolved around the decision by Newcastle International Airport Limited (NIAL) to give two senior executives new contracts. Surprisingly, the executives were empowered to consult NIAL's solicitors regarding the variations to their own contracts. The draft contracts were then returned to NIAL's remuneration committee for approval. The remuneration committee (whose chair the Court of Appeal judge agreed had a 'blind spot of massive proportions' concerning her role on the committee) agreed the draft contracts without amendment. The contracts that were eventually entered into released the two employees from restrictive covenants and also entitled them to bonuses of millions of pounds.

When the size of the bonuses payable became evident, NIAL sought to blame its lawyers for the fiasco. NIAL claimed that they should not have acted on the authority of those whose contracts were being amended and should have given the remuneration committee a clear summary of the changes in the contracts and their implications for NIAL.

The dispute reached the Court of Appeal, which agreed that the lawyers' actions had been unsatisfactory. Whilst it refused to accept that the executives had exceeded their authority in negotiating their own contracts and this should have been evident to the lawyers, it accepted that they should have supplied the chair of the remuneration committee with express advice regarding the nature and effect of the proposed changes to the contracts before they were entered into.

The stage seemed set for a reverse for the lawyers. However, having decided that they had failed to act appropriately, the Court then had to consider what the effect of the failure was. Here, the Court noted the chair's acceptance that she 'would have understood the terms of the executive directors' contracts if she had read them' but that she admitted to not having done so. She claimed that she did not 'bother with minutiae'. This, and her distaste for 'legalese', as expressed in her evidence, led the Court to conclude that even if the appropriate memorandum had been provided, there was no reason to conclude that it would have led to a change in the bonus provisions.

There are two obvious lessons to be learned from this case. Firstly, in order to win a claim such as this, the case has to be made out that a loss was suffered. In this case there was no evidence that NIAL would have acted any differently had the approach of the lawyers been exemplary. The loss would still have occurred.

Secondly, it makes clear that when selecting people to fill supervisory positions, it is important to choose the right sort of person to fulfil the necessary role.