Newcastle International Airport Ltd v Eversheds LLP
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Proudman |
| Judgment Date | 02 October 2012 |
| Neutral Citation | [2012] EWHC 2648 (Ch) |
| Court | Chancery Division |
| Date | 02 October 2012 |
| Docket Number | Case No: HC10C01341 |
[2012] EWHC 2648 (Ch)
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mrs Justice Proudman
Case No: HC10C01341
Nicholas Davidson QC and Benjamin Wood (instructed by Ward Hadaway) for the Claimant
Ben Patten QC and Scott Allen (instructed by Clyde & Co LLP) for the Defendant
Hearing dates: 25–27 and 30/04, 1–4, 8–10, 16–17/05/2012
Approved Judgment
In this action the claimant, Newcastle International Airport Limited ("NIAL"), sues the defendant solicitors Eversheds LLP ("Eversheds") for alleged negligence in relation to new service contracts between NIAL and its two executive directors entered into in 2006.
NIAL is the owner and operator of Newcastle airport. It is owned 51% by local authorities in the North East of England ("the LA7 authorities") which appoint two unpaid non-executive directors to the Board. The other 49% is owned by CPH Newcastle Limited ("CPH"), which was at the material time a subsidiary of Kobenhavns Lufthavne A/S ("Copenhagen"), a Danish commercial airport company, which also appointed two non-executive directors to the Board. On 26 th January 2006, the Macquarie Banking Group ("Macquarie") gained control of the Copenhagen shareholding so that although there was technically no change of control of CPH there was a change of underlying ownership.
At the material times, NIAL had two, and only two, executive directors, John Parkin, the Chief Executive Officer, and Lars Friis, the Finance Director and company secretary. Mr Parkin is a British national, Mr Friis (who died of cancer at the age of 39 on 11 th December 2006) was a Danish national. Their original service contracts, drafted by Eversheds, were dated 15 th May 2002 and 18 th September 2002 respectively.
NIAL had no Human Resources or Personnel Officer at the relevant time. Thus the two executive directors were the sole point of contact and authority with the outside world.
Again at the material times, NIAL had five non-executive directors. They were:
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• Rosemary Radcliffe CBE, who was the chair of NIAL's Board and also chair of its Audit Committee and its Remuneration Committee. It was part of her duties as chair of NIAL (under the express terms of the Chair's Protocol) to bring independent judgment to bear on issues of strategy, performance, resources and standards of conduct.
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• Cllr Iain Malcolm, the deputy leader of South Tyneside Council, who was a member of NIAL's Board and also a member of the Remuneration Committee.
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• Cllr Norman Ross, also a local councillor, a member of NIAL's Board and a member of the Remuneration Committee. He too has since died.
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• Kjeld Binger, the Executive Vice President of Copenhagen, a member of NIAL's Board and a member of the Remuneration Committee.
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• Niels Boserup, the President and CEO of Copenhagen, a member of NIAL's Board and a member of the Remuneration Committee.
Neither Mr Parkin nor Mr Friis was a member of the Remuneration Committee. Although it is common ground that the Combined Code on Corporate Governance of July 2003 (revised) ("the Combined Code") did not strictly apply to NIAL, the existence and function of the Remuneration Committee was in accordance with the Code, which was constituted on the basis that executive directors should not be members. The Combined Code contained the provision (at B2):
"No director should be involved in deciding his own remuneration."
The function of the Remuneration Committee 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 of the executive directors by reference to a number of factors, including comparison with similar businesses. It is common ground that the Remuneration Committee was supposed to ensure that executive directors were provided with appropriate incentives to encourage enhanced performance and, in a fair and responsible manner, to reward them for their individual contributions to NIAL's success.
It is also common ground that none of the members of the Remuneration Committee properly understood at the time that the new contracts that were entered into in 2006 enabled Mr Parkin and Mr Friis to claim bonuses totalling £8m, nor that his contract released Mr Parkin from a covenant purporting to restrain him from working at or for Leeds/Bradford airport.
The thrust of the claim is as follows. Eversheds was instructed on behalf of NIAL. It knew that the executive directors had an interest distinct from NIAL and a conflict of interest with NIAL in that their interest was to obtain the best possible terms in their new contracts. It knew that the company had a Remuneration Committee and the function of that Remuneration Committee. Accordingly NIAL says it should have established the wishes of the Remuneration Committee through direct correspondence with Miss Radcliffe, and by explaining and giving advice to Miss Radcliffe about the changes that it was making as against the executive directors' previous contracts. It should not have taken instructions from the executive directors themselves but should have put the various options neutrally to Miss Radcliffe for her consideration.
The Particulars of Claim appends a schedule of changes which it is said should have been provided to Miss Radcliffe before execution of the contracts. Moreover at one stage in the argument Mr Davidson QC proffered a draft letter which he submitted was the type of letter that Eversheds ought to have written to Miss Radcliffe at the outset. This letter is plainly written with the benefit of hindsight to make good the deficiencies in the understanding of the members of the Remuneration Committee.
Eversheds' primary case is that the claim is misconceived in that the executive directors had apparent authority to communicate with Eversheds and give all of the instructions provided. The duty to act with skill and care imposed on Eversheds was a duty to perform the instructions so communicated to the relevant standard, not a duty to check whether the instructions were authorised. It relies on the contents of " Eversheds LLP Client Protocol for Newcastle International Airport 2006–7" dated 1 December 2005 ("the Eversheds Protocol") under the heading "Instructions and Scope of Engagement":
"We shall be entitled to act on the instructions of any of your apparently authorised employees or agents and to rely on any information provided to us by such employees and agents."
Eversheds' secondary case is that any duty which did exist would have been limited to advising Miss Radcliffe as to the meaning of such parts of the contracts which were not readily understandable without such an explanation. In any event it is alleged that any loss suffered by NIAL was not caused by defaults of Eversheds. Miss Radcliffe would not have read any advice which she was given. Such loss was caused by NIAL's own failings through the actions of its directors.
In short, Eversheds says that it acted in good faith on the basis of instructions it was entitled to accept and that the claim is the product of NIAL casting around to find someone responsible for the shortfall after settlement of proceedings against the executive directors.
The facts
Mr Parkin's 2002 Contract contained (in Schedule 1) a bonus scheme and Long Term Incentive Plan ("LTIP"). He was entitled 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 £250k if NIAL's EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for the period ending 31 December 2005 equalled or exceeded £30.7m. Mr Friis's 2002 contract contained the same bonus provisions as that of Mr Parkin, but did not originally contain an LTIP. In January 2004 Mr Friis was granted an LTIP entitling him to a bonus of £55k in the event that the same EBITDA target of £30.7m was met for the same period. From January 2004 onwards there was no relevant distinction between the two contracts other than that the amounts of Mr Parkin's bonuses were greater.
Both 2002 contracts contained restrictive covenants. In particular there was a 12-month post termination of engagement provision on being,
"engaged, concerned or interested in, or provid[ing] technical, commercial or professional advice to, any of"
the businesses carried on at 10 identified airports. Those airports were Teesside, Manchester, Edinburgh, Glasgow, Leeds/Bradford, Finningley, Prestwick, Carlisle, East Midlands and Hull. At least some of them provided services in competition with Newcastle airport. It is NIAL's case that Leeds/Bradford was one of the ones which did and that Mr Parkin had been heard to say so on a number of occasions.
Thus there was no LTIP provision for the period after 31 December 2005. Both Mr Parkin and Mr Friis had been successful in their work and NIAL's revenue had grown very substantially. NIAL was keen to retain their services and wanted to incentivise them to stay. The employment contracts were therefore due for review.
During the course of 2004 and 2005 there was some discussion between Mr Parkin and Mr Friis about the possibility of refinancing NIAL's short term loan notes. It was envisaged that new debt finance might be obtained exceeding the existing debt finance so that there would be a return of cash to the shareholders. Mr Parkin and Mr Friis were aware of an incentive bonus relating to refinancing having been awarded to the Chief Executive at Bristol Airport and believed that they too should receive such an incentive. I observe at this juncture that his bonus was very much smaller in amount than the bonuses eventually awarded to Mr Parkin and Mr...
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