Newcastle International Airport Ltd v Eversheds LLP
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer,Lord Justice Underhill,Lord Justice Moore-Bick |
| Judgment Date | 28 November 2013 |
| Neutral Citation | [2013] EWCA Civ 1514 |
| Docket Number | Case No: A3/2012/2827 |
| Court | Court of Appeal (Civil Division) |
| Date | 28 November 2013 |
[2013] EWCA Civ 1514
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mrs Justice Proudman
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Moore-Bick
Lord Justice Rimer
and
Lord Justice Underhill
Case No: A3/2012/2827
Mr Nicholas Davidson QC and Mr Benjamin Wood (instructed by Ward Hadaway) for the Appellant
Mr Ben Patten QC and Mr Scott Allen (instructed by Clyde & Co LLP) for the Respondent
Introduction
This appeal, by the claimant, Newcastle International Airport Limited ('NIAL'), is against the order made on 25 October 2012 by Proudman J in the Chancery Division, after a 13-day trial, dismissing with costs NIAL's claim for damages for alleged negligence against Eversheds LLP, solicitors.
NIAL owns and operates Newcastle airport. At the material times, it had two executive directors ('the executives'): John Parkin, the chief executive officer; and Lars Friis, the finance director and company secretary. NIAL retained Eversheds to draft new service contracts between NIAL and the executives by way of variations of their existing contracts. Eversheds did so, taking their instructions from Mr Parkin. NIAL and the executives signed the contracts so drafted, which had the effect of: (i) upon completion of the refinancing of NIAL's debt, entitling the executives to bonuses totalling some £8m, and (ii) releasing the executives from restrictive covenants restraining them from working at or for Leeds/Bradford airport, one of Newcastle airport's competitors. Neither NIAL's board nor its remuneration committee ('RC') understood that the contracts had such effects when NIAL signed them.
Various local authorities in the North East of England (' LA7') have a majority holding in NIAL; and the subsequent realisation of, in particular, effect (i) above — described in the Newcastle press as a 'bonanza' — caused considerable consternation. A major factor resulting in NIAL's signing of the contracts was the incompetence displayed in relation to the consideration of their terms by the chairman of the RC, Rosemary Radcliffe CBE, although it must also be said that she appears otherwise to enjoy universal plaudits for her general ability. In this case, however, she deployed little of it and things went badly wrong.
The claim against Eversheds was, the judge said, 'the product of NIAL casting around to find someone responsible for the shortfall after settlement of proceedings against the executive directors'. The judge found against NIAL. She found that Eversheds had not breached their duty of care to NIAL; and, if wrong on that, she found against NIAL on causation and mitigation.
Mr Davidson QC and Mr Wood, for NIAL, who both appeared below, submitted that the judge was wrong on all issues. They said that she should have held that: (i) Eversheds had no authority from NIAL to draft the contracts in the terms they did, and/or (ii) drafted them without reasonable skill and care, and/or (iii) failed, as they should have done, to provide Ms Radcliffe with a summary written explanation of the revisions they had made to the existing contracts. They said the judge was also wrong on causation and mitigation. Mr Patten QC and Mr Allen, for Eversheds, who also appeared below, submitted that in all respects the judge's decision should be upheld.
I must first tell the story. In doing so, I have gratefully drawn on the judge's judgment, although I have supplemented it by a fuller account of some of the documents.
The facts
LA7 hold 51% of the shares in NIAL. The other 49% was owned by CPH Newcastle Limited ('CPH'), at the material times a subsidiary of Kobenhavns Lufthavne A/S ('Copenhagen'), a Danish commercial airport company. CPH had acquired its shareholding from LA7 in May 2001. On 26 January 2006, (as it happened, the day the executives signed the contracts) the Macquarie Banking Group ('Macquarie') obtained control of Copenhagen, but Copenhagen retained its 49% shareholding in NIAL via CPH.
Mr Parkin is a British citizen; Mr Friis, who died on 11 December 2006, was a Danish citizen. Before the relevant events, each had service contracts dated 15 May and 18 September 2002 respectively. They had both been drafted by Eversheds, who had acted for NIAL since May 2001.
NIAL also had five non-executive directors: Ms Radcliffe, who chaired NIAL's board, its audit committee and the RC; Councillors Malcolm and Ross (who also died before the trial), who were LA7 appointees and also members of the RC; and Mr Binger and Mr Boserup, who were Copenhagen appointees and also members of the RC. Neither Mr Parkin nor Mr Friis was on the RC.
The function of the RC was to determine NIAL's policy on behalf of the board in respect of senior executive remuneration. There was to be an annual review of individual remuneration arrangements by reference to various factors, including comparisons with similar businesses. The RC was supposed to ensure that the executives were provided with appropriate incentives to encourage enhanced performance and, in a fair and responsible manner, to reward them for their contributions to NIAL's success.
The executives' 2002 contracts
Mr Parkin's 2002 contract included a bonus scheme and a Long Term Incentive Plan ('LTIP'). The former entitled him to a bonus each year of up to 50% of his salary if his annual performance targets were met. The LTIP entitled him to a bonus of £250,000 if NIAL's EBITDA (earnings before interest, tax, depreciation and amortisation) for the period ending 31 December 2005 equalled or exceeded £30.7m. Mr Friis's 2002 contract included a like annual bonus provision but did not include an LTIP until 2004, when an amendment granted him one of £55,000 on like terms as Mr Parkin's. From January 2004, there was no relevant difference between the two executives' contracts save that Mr Parkin's bonuses were larger.
Both executives' 2002 contracts included restrictive covenants, including a 12-month post-termination provision on being 'engaged, concerned or interested in, or provid[ing] technical, commercial or professional advice, to any of' the businesses carried on at ten named airports in England and Scotland, including Leeds/Bradford. The services of some of the ten, including Leeds/Bradford, competed with those of Newcastle airport.
Mr Parkin and Mr Friis were successful executives but their 2002 contracts provided for no LTIP after 2005. Their contracts were therefore due for review and NIAL was keen to retain and incentivise both executives. The relevant events in relation to the review took place in 2005 and 2006.
The revision of the executives' contracts
During 2004 and 2005 the two executives had discussed the possibility of re-financing NIAL's short term loan notes. They had in mind an arrangement under which the new finance might exceed the existing finance and so enable a return of cash to NIAL's shareholders. They were aware of an incentive bonus having been awarded to the chief executive at Bristol airport in relation to re-financing he had arranged and they believed they should receive a like one. The bonuses they eventually received upon the refinancing that happened at NIAL were, however, much larger than his.
On 22 November 2005, Mr Friis, acting on behalf of Ms Radcliffe, obtained a report from remuneration consultants, the Monks Partnership ('Monks'), a trading name of PricewaterhouseCoopers LLP. The report was prepared by Ms Rayner and was directed at providing guidance as to the bases upon which the executives might be rewarded under their new contracts. It opened by describing itself as 'providing base salary and total earnings market guidelines' for the executives. Monks' understanding of NIAL's operation had been derived from discussions with, and information provided by, the executives and Ms Radcliffe. Paragraph 1.3 referred to the impending end to the existing LTIP arrangement in December 2005 and that 'there is therefore seen to be an urgent need to provide a fresh set of incentives to retain and motivate the key board members'. Paragraph 1.4 referred to Monks' understanding that the executives had been very successful over the previous three years and 'that it is considered critical to the continued success of the business that they remain motivated over the next stage of business development'. The report included market practice guidelines derived from a comparator group of listed parent companies, said to be intended to form 'a framework of best practice for listed companies to follow', and it said that the RC was therefore likely to have regard to such practice in setting the remuneration packages. The report continued:
'1.9 … we understand that turnover is not considered an ideal indicator of business performance for NIAL by the [RC] since airports tend to have an unusually high profit margin relative to their turnover. However, in our consulting experience other measures (e.g. profit, employee numbers, etc) do not provide such a robust correlation to pay as turnover in most sectors of industry. As it is not possible to develop a comparator group of only airports, we have, as discussed, used a general industrial and service sector comparator group, where there is a strong correlation between turnover and pay.
1.10 [NIAL] is an unlisted company. It has not been possible to specifically consider the remuneration of executives in unlisted comparator companies: we have, therefore, created a comparator...
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