Newcastle International Airport Ltd (NIAL) v Eversheds LLP

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:

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.

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 Friis.

On 22^nd November 2005 Mr Friis on behalf of Miss Radcliffe obtained a report from PwC Monks, remuneration consultants, as to the terms of the executive directors’ new contracts. That report did not mention a refinancing bonus or any release of the restrictive covenants because no instructions were given on either matter.

Miss Radcliffe sent a copy of the report to Mr Parkin on 25^th November 2005 and asked him for his observations. In his written response dated 29^th November 2005 (which has been called his “shopping list” email) Mr Parkin raised the subject of a refinancing bonus. It included the following passage:

“Refinancing- this is a one off matter to be considered as it will likely be on our agenda in due course. My comments are based upon my experience of events at Bristol. Should shareholders decide to extract value by refinancing the company, then I feel it should be the case that management receives its fair share of the proceeds of its work which has created the opportunity. I would welcome a clause to that effect at a level commensurate with what has been achieved, perhaps best expressed as a simple percentage of value realised to each Executive. This would fit well with the broader approach you plan to take of establishing the principles without expressing contentious actual numbers as the precise amounts payable would ultimately be driven by a value number agreed by the Shareholders.”

Miss Radcliffe did not ask Mr Parkin what he meant by “a fair share of the proceeds”, “a simple percentage” or “value realised”, nor did she forward Mr Parkin’s email to any other member of the Remuneration Committee. Instead, she forwarded the email to Ms Rayner of PwC Monks without comment. When Ms Rayner provided a summary report it did not deal with the refinancing bonus and Miss Radcliffe did not query this omission.

On 1^st December 2005 Miss Radcliffe prepared a paper (“the Principles Paper”) for approval by the Remuneration Committee. It did not mention restrictive covenants. It contained the following passage (which looks like an afterthought and had not been raised with PwC Monks) under the heading “Principles of a market-based approach for new arrangements”:

“Remuneration Committee to retain discretion to vary performance conditions to avoid unexpected results where distorting events occur [There is then a reference to paragraph 5.15 of the PwC Monks Report which I set out below] and also to ensure management receives its fair share of the proceeds of any refinancing of the business that may occur during the plan period.”

The Principles Paper goes on, under the heading “Recommendation”, to ask the Remuneration Committee to approve “the principles set out above for a market-based approach to Executive Director remuneration from 1 January 2006.”

Paragraph 5.15 of the PwC Monks report relates to discretionary bonuses and reads as follows:

“We have noticed that some recent LTIPs, employed either by companies in fast-changing market sectors, or in organisations going through periods of significant change (eg growth or reorganisation), have included an element of Remuneration Committee discretion in their design. These plans recognise the volatile conditions under which the LTIP was adopted and permit adjustment of the performance conditions ‘in the event that failure to do so would produce an unfair result’. This could be applied, for instance, if expected company performance is substantially altered, negatively or positively, due to any circumstance that is considered entirely beyond the control of the LTIP participants.”

On 1^st December 2005 Miss Radcliffe sent the Principles Paper to Ms Rayner who responded on the same day: “The revisions are fine.” Miss Radcliffe then immediately circulated the Principles Paper, together with a copy of the PwC Monks report, to the members of the Remuneration Committee and to Mr Parkin.

Even after all relevant parties had been cross-examined it is not at all clear what the members of the Remuneration Committee understood by the provisions in the Principles Paper quoted above. The approach taken by Cllr Malcolm was to rely on Miss Radcliffe’s executive summary rather than to read the lengthy and complex report from PwC Monks. No-one gave any thought to what kind of distorting events might occur on the refinancing, what was meant by fair share of the proceeds or even (certainly in the case of Cllr Malcolm and Miss Radcliffe) how large the refinancing might be. Miss Radcliffe was in effect asking the Remuneration Committee to authorise her to develop principles of a refinancing bonus when there were as yet no real principles to develop.

On 6^th December 2005 Mr Slater of South Tyneside Council provided, in consultation with Mr Scott, the local government solicitor advising the LA7 authorities, a Briefing Note for Councillors Malcolm and Ross for the purposes of a proposed telephone meeting of the Remuneration Committee on the following day. Mr Slater gave evidence to this Court and to my mind he was by far the most impressive witness to appear in this case. He and Mr Scott appear to be the only people who adopted a proper considered attitude to revision of the contracts of the executive directors. The Briefing Note sets out in admirably clear and brief terms the role and duties of the Remuneration Committee, the factors which the non-executive directors should bear in mind and in particular those factors appropriate to directors appointed by local authority shareholders.

Towards the end of the Briefing Note Mr Slater set out in the form of bullet points six questions “that you may wish to raise” at the telephone meeting. They are searching questions designed to explore some of the conclusions reached in the PwC Monks report and the Principles Paper before giving the approval sought in the Principles Paper. One of them was as follows:

“Is it right that management should get a share of any proceeds of re-financing of the business, given that this will be a Local Authority decision?”

The meeting was duly held by conference call on 7^th December 2005. It was attended by Councillors Malcolm and Ross and by Mr Rasmus Christiansen on behalf of Mr Binger and Mr Boserup. The minutes of the meeting record that the Remuneration Committee agreed the principles contained in the Principles Paper, “and asked the Chairman to lead further work to put the principles into practice for the ensuing years.” None of Mr Slater’s questions was asked although Cllr Malcolm spoke to Mr Slater about his Briefing Note in advance of the meeting. Mr Slater and Mr Scott (whose role was to advise rather than direct) naturally assumed that Cllrs Malcolm and Ross had been satisfied of all relevant matters.

On 6 January 2006 Eversheds received instructions through Mr Parkin to draft amendments to the service contracts.

On 10 January 2006 Miss Radcliffe had a meeting with Mr Parkin and Mr Friis to discuss the amendments. This meeting is crucial as it is the source of the instructions on detailed matters relied on by Mr Parkin.

There was no formal minute but it is common ground that Mr Friis took notes at the meeting. His note (which reflects an aide-memoire which Mr Parkin says he prepared for use at the meeting) records in relation to a refinancing bonus, “Minimum percentage (floor) 1% ⅓ FD, 2% ⅔ CEO”. Mr Parkin’s aide-memoire also contains the line “Contract variations- amend or withdraw ‘restricted businesses’ clause.” The fact that there was some discussion about the restrictive covenants is corroborated by Mr Friis’s note, which records,

“∙ Protection against change of ownership→compensation?

Change contracts terminated?

∙ Competition clause?

∙ Teeside? √”

The fact of the discussion is also corroborated by an email on 11 January 2006 from Mr Friis to Mr Parkin attaching his notes from the meeting “in relation to contractual issues”. One of the points he mentions in that email is:

“Competition clause- can this be enforced if so it should only include real competitors (Teeside) and only be in place for the duration of the notice period.”

Also on 11 January 2006 Mr Parkin forwarded this email to Mr Simon Loy of Eversheds, attaching a paper which Mr Parkin had drafted containing proposals for the new contracts. In place of the paragraph in the Principles Paper, Mr Parkin’s paper contained the following paragraph:

“Remuneration Committee to retain discretion to vary performance conditions to avoid unexpected results where distorting events occur (5.15) and also to ensure management receives its fair share of the proceeds of any refinancing of the business that may occur during the plan period-such fair share award to be a minimum payment of 1% to FD and 2% to CEO of refinancing proceeds, payable on completion.”

The next day Mr Parkin emailed the same draft paper to Miss Radcliffe, amending it only by removing the reference to paragraph 5.15 of the PwC Monks report. His covering email said:

“Rosemary, as requested, here is a draft paper for your consideration reflecting the points discussed at our recent meeting.”

On 12 January 2006 PwC Monks wrote a Note in the form of a letter containing an update of the position but that firm was not asked to, and did not, advise on whether the refinancing bonus was in accordance with current remuneration market practice. That letter contained an Appendix summarising the LTIP proposals on which PwC Monks had been asked to comment.

Mr Parkin and Mr Friis met Mr Loy on 13 January 2006 and there was also some email correspondence. Mr Loy was told that Mr Parkin and Mr Friis had been authorised by Miss Radcliffe to instruct Mr Loy to draft new contracts, that Miss Radcliffe wanted the drafts to be produced as quickly as possible, that the note reflected agreement that had been reached at the meeting of 10 January 2006, that Miss Radcliffe wanted the scope of the restrictive covenants to be narrowed to just three airports, that Miss Radcliffe wanted the service agreements to make clear that the executive directors were to be entitled to all aspects of their remuneration including the refinancing bonus in the event of change of control of NIAL and that the refinancing bonus percentages were to be paid “net of existing debt i.e. a percentage of the new value created” and would be payable upon the completion of any refinancing. Mr Loy handed the drafting to Eversheds’ Leeds employment team (Paul Cotton, Matthew Gorringe and Louise Lightfoot), telling Mr Parkin that contracts would be produced in draft form by the end of the week.

On 17 January 2006 Miss Radcliffe considered and amended the draft paper which Mr Parkin had sent her. Importantly, she made some amendments to the bullet point dealing with the refinancing bonuses. The amendments were minor but the fact that she made them shows that she must have read the relevant provision. Her version read as follows:

“Remuneration Committee to retain discretion to vary performance conditions to avoid unexpected results where distorting events occur and also to ensure management receives its “fair share” of the proceeds of any refinancing of the business that may occur during the plan period- such “fair share” award to be a minimum payment of 2% to CEO and 1% to FD of refinancing proceeds, payable on completion.”

On 17 January 2006 Miss Radcliffe circulated the paper as so amended (“the Proposals Paper”) to the Remuneration Committee, together with the Principles Paper, the minutes of the meeting of 7 December 2005 and PwC Monks’s Note of 12 January 2006, including the Appendix. Her covering email stated,

“May I ask that you read the Note and indicate your approval to me by Monday 23 January 2006 so that we can proceed to make the necessary detailed arrangements.”

Subsequently she sent the Proposals Paper to Mr Parkin and Mr Friis, asking whether the lawyers had been asked what other changes were necessary to the contracts. Mr Parkin replied that the contracts would be ready by Friday and forwarded Miss Radcliffe’s email and the Proposals Paper to Eversheds.

Thereafter there is a sequence of emails in which Mr Parkin gave detailed instructions on the drafting to Mr Gorringe and Miss Lightfoot. Various versions of the drafts were produced. Mr Parkin complained that the drafts were not in final form by 20 January 2006 and told Mr Gorringe and Mr Loy that he had decided not to send the drafts to Miss Radcliffe until she was provided with the finished versions.

There was then some email traffic between Miss Radcliffe and members of the Remuneration Committee. On 23 January 2006 Ms Lightfoot sent Mr Parkin the final form of drafts with all italics and square brackets removed. They contained the final form of change of control provisions, the final form of the definition of refinancing and of refinancing proceeds.

On 20^th January 2006 Cllrs Malcolm and Ross emailed Miss Radcliffe to approve the Proposals Paper and the recommendations made in it. On 23 January 2006 Mr Christiansen, on behalf of Mr Boserup and Mr Binger, said that subject to one matter relating to the annual bonus, “we fully support that new contracts can be drawn up”. Miss Radcliffe sorted out the outstanding point and the contracts were re-amended to deal with it. Mr Parkin forwarded the amended contracts to Miss Radcliffe on 23 January 2006.

On 25 January 2006 Miss Radcliffe responded in the following terms:

“I have now reviewed these and believe them to be fully in accord with the principles agreed by the Committee…”

She signed the signature page of the agreements the same day and posted them to Mr Parkin and Mr Friis, who signed the agreements when they received them the following day.

At Miss Radcliffe’s request, communicated through Mr Parkin, Ms Lightfoot sent a summary of the changes between the 2002 contracts and the 2006 contracts (forwarded to Miss Radcliffe on 27 January and again on 9 February 2006). The summary included the following:

“2.

A new schedule 2 has been inserted with details of the LTIP and refinancing payment. As a result, a definition of ‘incentive plan’ has been inserted into the definitions section of the Service Agreement…

5.

A new clause 3.4 has been inserted to give the executive the right to treat any change in control as notice of termination of his employment served by the company which will trigger a payment in lieu of notice. In addition, clause 3.4 makes it clear that the rights set out in schedule 2, including the refinancing payment, will not be affected by any payment made on a change of control. Consequently a definition of change in control has been included in the definitions section…

13.

The definition of ‘restricted business’ has been narrowed at Clause 14. It now only refers to the three airports…”

Miss Radcliffe received, but did not read, the summary.

It is plain from the sequence of events and also from Miss Radcliffe’s oral evidence that as a matter of deliberate choice she left all contact between NIAL and Eversheds to Mr Parkin and Mr Friis. She did not regard it as part of her role to have direct contact with solicitors. That is evident from the email attaching the Proposals Paper which she sent to her fellow members of the Remuneration Committee on 17 January 2006 and then immediately forwarded to Mr Parkin and Mr Friis and which Mr Parkin himself then forwarded to Eversheds on the following day.

The next meeting of the Remuneration Committee was held on 16 February 2006. Miss Radcliffe says that copies of the schedule of changes were available at that meeting but that no-one asked to see them. No-one else has any recollection of such a schedule. It is now impossible to determine whether Miss Radcliffe is correct about whether the schedule of changes was in fact available but I find that she did not in any event draw attention to any of the changes. Indeed she herself was unaware of the important ones.

It is common ground that no complaint was made at that meeting about the fact that Miss Radcliffe had already signed the new contracts. All that was discussed was the issue of base pay figures.

However Mr Binger, Mr Boserup and Mr Christiansen say that in agreeing to have the contracts drawn up they did not intend to consent to the agreements being signed. They had intended to have further discussions about the percentages inserted in the Proposals Paper. They say that they believed that it was too late by 16 February 2006 to make a fuss over what was done. Mr Binger said that he knew that no discretion was to be applied to the refinancing bonus and he had no quarrel with that interpretation.

Mr Binger’s understanding was that “proceeds of the refinancing” was the difference between the old debt and the new debt. In general terms the Copenhagen directors believed that the percentages were liable to be applied to the amount of return to shareholders, some £100m. They did not realise that the base sum was to be the gross amount of the refinancing. However they did realise that even on the basis of return to shareholders the refinancing bonuses payable to Mr Parkin and Mr Friis were likely to be very large indeed. Mr Boserup relied on Mr Binger.

It is clear that there had never been any discussion between the members of the Remuneration Committee about the question of the sum to which the percentages would be applied. Thus not only was there an issue as to whether the executive directors would be entitled to a minimum percentage, there was also an issue as to the base figure to which any percentage would be applied. Cllr Ross’s state of mind will never be known, but it is fair to assume that, like Cllr Malcolm, he did not apply his mind at all to the refinancing bonus.

However if complaint was to be made about the bonuses by the Copenhagen directors it is evident that this was the time to make it. First, for all they knew, it might be that the contracts could be undone on the basis that Miss Radcliffe had mistakenly thought that she was authorised to sign them. Secondly, because no detailed proposals had been made for a refinancing at that point it might well have been that the contracts could be renegotiated at such an early stage.

I look with a jaundiced eye at the evidence of the Copenhagen directors about the reasons for their silence at this meeting. I have little doubt that the principal reason for their conduct was that they did not want to prejudice the possibility of a refinancing. They knew that as commercial entities their interests, and those of Macquarie which had just taken over Copenhagen’s 49% shareholding in NIAL, were different from those of the LA7 authorities. They rightly feared that if it became apparent to Cllr Malcolm or Cllr Ross that a refinancing would entail huge bonuses for the executive directors the LA7 authorities would block any refinancing as a matter of principle.

It was important to the Copenhagen directors that PwC Monks had approved the refinancing bonuses because it was necessary to obtain the approval of the LA7 authorities to the refinancing and advice from independent remuneration consultants was a necessary part of this process.

From 17 February 2006 work proceeded on the refinancing. On 12 October 2006 NIAL committed itself to the transaction. On 11 December 2006, the day that Mr Friis died, Eversheds (directly instructed by Mr Parkin) instructed Mr Goudie QC to advise on whether Mr Friis’s right to a payment in respect of the refinancing survived his death. Again on the same day, Mr Parkin emailed Miss Radcliffe saying that he would be forwarding a note to her setting out “how the refinancing numbers are constructed to meet the formula in the Exec contracts”. On 12 December Mr Goudie QC produced a first draft of his Opinion.

Miss Radcliffe expressed no surprise at the principle of the refinancing bonus and was only concerned about the question of resolving Mr Friis’s entitlement. On 12 December 2006 Mr Loy spoke to Miss Radcliffe directly for the first time, asking her to supply information towards finalising Eversheds’ report and Mr Goudie QC’s Opinion. Her principal interest at that stage was to ensure that NIAL was entitled to pay a refinancing bonus to Mr Friis’s estate. Eversheds’ report contained paragraphs setting out the relevant provisions, for example that Mr Friis should receive a minimum of 1% of the proceeds of any refinancing of the business, payable on completion. Miss Radcliffe responded by forwarding to Mr Loy a number of emails from January 2006. She also emailed him a chronology she had compiled of “the relevant decisions leading up to the signing of the new contracts by JP and LF”.

As a result Mr Goudie QC finalised his Opinion. It is crystal clear from the terms of that Opinion that payments were likely to be made in the order of £5.5m in the case of Mr Parkin and of £2.5m in the case of Mr Friis and that the Local Authorities would receive some £80m. Mr Crossman of Eversheds also sent Miss Radcliffe a copy of Eversheds’ finalised report on the question of Mr Friis’s estate’s entitlement to the refinancing bonus. The report summarised Mr Goudie QC’s Opinion and attached a copy. Mr Crossman also sent Miss Radcliffe copies of the service agreements as well as draft minutes for the forthcoming Remuneration Committee meeting and a briefing note from Mr Parkin setting out the calculation of the refinancing bonus payments to be made to him and Mr Friis.

Miss Radcliffe again maintained that she did not read or even open any of these attachments. She said that her priority was to secure payments to Mr Friis’s estate and the penny had simply not dropped as to the size of the amounts which would be payable to Mr Parkin and to Mr Friis’s estate.

On 15 December 2006 Miss Radcliffe forwarded copies of the executive directors’ contracts to the other members of the Remuneration Committee. As a result, Copenhagen’s shareholder Macquarie (as can be seen from an email from Mr Stent of Macquarie to Mr Boserup) was very unhappy at the level of the bonuses.

A meeting of the Remuneration Committee took place by telephone conference call on 18 December 2006. There are no minutes of this meeting, but it is plain that Mr Binger raised a number of questions about the refinancing payment. In an email of the same date Mr Christiansen put a number of questions in writing to Miss Radcliffe, namely,

Eversheds then produced a note on how the percentages of 1% and 2% came to be included in the contracts, and Miss Radcliffe circulated this note to the other members of the Remuneration Committee on the afternoon of 19 December 2006. Her covering email was, on one view, defensive, but on any view asserted that the other members of the Remuneration Committee ought to have known all about the figures relating to the bonus:

“…I have to say that I was surprised to hear [the bonus percentages] being questioned at this stage. The figures were clearly included in my Note to the Committee sent on 17 January 2006, a Note the contents of which was agreed by all members save only in relation to a comment made by Rasmus on behalf of Niels and Kjeld concerning the arrangements for annual bonus. Otherwise the proposals were agreed in their entirety. As you will see, Eversheds’ note confirms this audit trail.”

Miss Radcliffe’s evidence was that she still believed that the refinancing bonus was entirely discretionary, although she accepted that the relevant provision in her Proposals Paper, which she must have read as she herself amended it, was clear and unambiguous that any discretion only applied over and above the guaranteed minimum percentages.

Mr Goudie QC produced a supplementary Opinion and Eversheds a supplementary report. Mr Binger raised more questions with Miss Radcliffe to which she again replied and in which she again did not suggest that she had not realised that the refinancing bonus was to be wholly discretionary.

The day fixed for completion of the refinancing was 21 December 2006 immediately after a Remuneration Committee meeting scheduled for 8.30 am. Cllr Malcolm gave evidence that he had read Mr Goudie’s Opinion on the train and realised the enormity of the situation for the first time. There were heated discussions at the meeting. The minutes show that Cllr Malcolm said he was still unclear as to the figures to which the percentages were to be applied and believed that the issues could and should have been dealt with months beforehand. He suspected that consideration of the issues had been left so late because they were controversial. Miss Radcliffe replied firmly that she believed that the issues had been fully dealt with in January 2006. The note of the meeting contains a statement inserted by her that the matter had been “fully dealt with at the time when the service agreements were being finalised in January 2006”. Prior to that meeting, on 20 December 2006, she emailed the Committee expressing no concern but saying instead that the percentages had been “entirely adequately dealt with”.

Again she said in evidence that she did not then believe that the bonuses would exceed £1m. When the court queried this with her she insisted that even at this stage, immediately before the refinancing itself, she did not think in terms of the actual figures. I believe she was speaking the truth, but it is a truth which demonstrates just how vague her thinking was.

At that eleventh hour Mr Parkin was asked to accept a bonus calculated as a percentage of the amount released to shareholders, that is to say, £163m, rather than a percentage of the gross refinancing, £282m. He refused. He said he believed his contractual entitlement to be clear. Cllr Malcolm dug his heels in and said he did not want to complete the refinancing if the bonuses were to be paid. Mr On of Eversheds was then asked to advise urgently on the consequences for NIAL if completion did not take place that day. Eventually an interim compromise was reached and the refinancing completed by the deadline.

Thereafter there was a meeting of the Remuneration Committee on 27 February 2007, attended by Mr Stent, who raised a number of questions. He wanted to know who had first proposed the percentages, why the percentages were apparently presented to the Remuneration Committee as included in the advice given by PwC Monks when they were not, why the total value of the bonuses was not specifically raised with the Remuneration Committee at the time the service contracts were approved and why Mr Parkin had been the person responsible for instructing Eversheds on the drafting of his own service agreement.

Miss Radcliffe was defensive in her response. She said that she could not recollect who had first raised the percentages, that the Principles Paper had been approved by the Remuneration Committee prior to instructions being given to Eversheds, the Remuneration Committee had the opportunity to question all or any of the matters and instead each member of the Committee approved the Proposals Paper.

On 6 March 2007 Mr Christiansen noticed for the first time that the restrictive covenants in Mr Parkin’s 2002 contract had been altered in his new service contract. Miss Radcliffe reacted by saying the following in an email dated 7 March 2007,

“I am a little nervous about clauses of this kind in general, as it is, I understand, often argued that, in practice, they may be unenforceable in the UK as they restrict an individual’s ability to pursue his trade or profession. And of course, if all airports included such clauses it would place restrictions on the scope of choice of recruiting successors.”

It is notable that she did not say, as she now does, that Mr Parkin dishonestly slipped release of the covenants into his new contract without prior discussion with her. Eversheds was asked to report on how the covenant came to be amended and it said, as was the case, that Mr Parkin and Mr Friis had given specific instructions to relax the covenant on the basis that they alleged that Miss Radcliffe had agreed the change.

NIAL then discovered that Mr Parkin had apparently been assisting a company named Bridgepoint Limited to acquire Leeds/Bradford International airport.

A number of things happened with which I am not directly concerned. Despite a statement of support from Cllr Malcolm (in an attempt to keep Mr Parkin on-side) Mr Parkin resigned from NIAL in dudgeon. NIAL issued proceedings against him and against the estate of Mr Friis. On 26 September 2007 Miss Radcliffe also resigned from NIAL, concluding an agreement whereby she could not be sued for anything done in her office as Chair and whereby she was also entitled to be paid for the time she spent in assisting NIAL with ongoing litigation.

On 24 October 2008 NIAL reached a settlement of its proceedings against Mr Parkin and the estate of Mr Friis. The terms of those settlements are confidential although it is evident that there is a considerable shortfall in recovery as the parties have had to reveal the sums recovered in order to address the claims for loss.

Eversheds is not bound by the terms of the settlement. It joined Mr Parkin as a Part 20 defendant earlier this year. However that joinder was too late to enable the Part 20 proceedings to be tried with the claim; the alternative would have been to vacate the trial date. On 25 January I directed that the Part 20 claim be stayed and that no finding of fact in the claim should be binding in the Part 20 proceedings or indeed against other additional parties. By that time Mr Parkin had either joined or proposed to join ten such additional parties.

Miss Radcliffe was cross-examined over three days. She is plainly a capable, experienced, worldly and intelligent person. She has a long and impressive track record of work in the field of corporate finance. Other witnesses attested to her abilities in glowing terms. However it is hard to accept that she acted, as she insisted, reasonably and appropriately, having regard to her terms of engagement and responsibilities. Although she is an honest person, she plainly has what the defendant has rightly termed “a blind spot of massive proportions” as to her role as chair of the Remuneration Committee and its significance. An important part of that role was to ensure that new contractual provisions affecting executive directors were subject to independent scrutiny by the Remuneration Committee.

Miss Radcliffe did not bother with minutiae; she concerned herself only with the broader picture. In the course of her oral evidence she used the expression “legalese” in a contemptuous and dismissive manner on countless occasions. Although she readily accepted that she would have understood the terms of the executive directors’ contracts if she had read them she said that she did not in fact do so. Throughout she maintained that she did read clause 8.1 of the LTIP but did not appreciate that it provided for a minimum payment to the executive directors. However she accepted that there was no other way in which it was possible to read clause 8.1 and that there was nothing in the clause she could and would not have understood if she had given the matter any thought. If she read documents at all, she only skim-read them. She said she had read clause 3.4 of the draft contracts but not clause 3.3. However her attempt to explain how she understood a change of control clause to apply to the refinancing bonus was tortuous. She said that she never read definitions in contracts and did not appreciate that phrases with capital letters were defined terms. She did not acknowledge that she would or should want to ensure that notes of meetings were accurate in relation to important points. She seemed to think it was not her job to read any documents which could be categorised as legal documents.

On very many occasions Miss Radcliffe said that she did not bother to open, let alone read, attachments. One of those attachments was Ms Lightfoot’s summary of the changes referred to above. Another was Appendix A to PwC Monks’s letter of 12 January 2006. A third was Counsel’s Opinion attached to the Eversheds’ report sent on 13 December 2006. Mr Patten QC produced a long list of documents which, on Miss Radcliffe’s own evidence, she either did not read at all or read in such a superficial manner that she failed to understand them.

Miss Radcliffe consciously left all matters of detail relating to their new contracts to Mr Parkin and Mr Friis (whom she now firmly believes acted dishonestly, certainly in the case of Mr Parkin) but she did not tell either them or Eversheds that she was not applying any independent judgment to such matters. She has little recollection of the discussions which she had at the meeting of 10 January 2006 of the two relevant areas, namely the minimum amount of the refinancing bonuses and the restrictive covenant.

Miss Radcliffe gave consistent evidence that she thought that the refinancing bonuses were entirely discretionary and that she continued to hold that belief until as late as 21 December 2006. As I find that she acted honestly I can only assume that her grasp of what was happening was foggy and that she thought that her role as a non-executive director was much more constrained than in fact it was. She has therefore had to re-write history, as much apparently for her own amour propre as to convince others. I say that because her belief as to the discretionary nature of the bonuses is impossible on any other basis to reconcile with what actually happened.

Thus she personally redrafted the refinancing bonus provision in the Proposals Paper and could give no satisfactory explanation as to how she could have ignored the clear reference to a minimum entitlement. She says she reviewed that part of the draft contracts which set out the provisions about the refinancing bonuses in different language and read clause 4.2. She failed to react adversely in December 2006 to the documents which made it plain that the bonuses were substantial and non-discretionary, even an email from Mr Christiansen of 18 December 2006 saying in terms that there was to be a minimum payment and an email from Mr Parkin mentioning the quantum of refinancing bonuses. Instead, she told Eversheds that no-one should have been surprised by the size of the bonuses. She failed to express any concern about the bonuses at all until other non-executive directors began to criticise her conduct. Tellingly, she failed to say that she thought that the bonuses were wholly discretionary until she made her witness statement in the previous proceedings. She seemed vague about the whole question of release of the restrictive covenants.

As I have said, although she acted honestly she was also defensive and, probably as a result, occasionally evasive. It was not always possible to understand her evidence which could be internally inconsistent, for example as to her conversations with Ms Rayner and what she had and had not asked PwC Monks. Eventually she admitted that she knew that Ms Rayner had not advised on the percentage bonuses but was unable to explain why she did not tell this to the Remuneration Committee even as late as the meeting of 27 February 2007. What is crystal clear is that Miss Radcliffe did not think at all about what the refinancing bonuses might entail. She apparently did not realise at the relevant time that they were non-discretionary, she did not do the simple arithmetic to arrive at actual figures and she did not even realise that they were likely to be very substantial in amount.

Mr Binger and Mr Boserup are both very experienced and sophisticated businessmen. Their evidence was guarded and I have already expressed my views as to why they did not consider it appropriate to raise with the Remuneration Committee their objections to the terms of the new contracts or the fact that they had not agreed those terms.

Mr Christiansen said that the percentages he had in mind were 0.1% and 0.2% only. He also said that he believed until December 2006 that the definition of refinancing proceeds was equated with the amount of value to be returned to the shareholders. However, although he knew that the percentages were ten times higher than he had intended, because Miss Radcliffe had signed contracts which Mr Boserup and Mr Binger had intended only to be produced in draft, he also kept quiet on 16 February 2006. Moreover in the apparent belief that his superiors would have the opportunity of discussing the percentages before the contracts were executed, he had not challenged the figures earlier in the Proposals Paper although he had read it and was unhappy with it. My impression was that his silence was maintained on the instructions of Mr Binger. He said that he reminded Mr Binger to raise the issue of the refinancing bonuses at the meeting on 16 February 2006 and was surprised when Mr Binger did not do so.

Although Cllrs Malcolm and Ross were experienced in local government, they did not have expertise in the running of airports. Cllr Malcolm did not understand the principle of refinancing save in the most general terms. They both wrongly believed that advice on the refinancing bonus had been obtained from PwC Monks and it is obvious that it was important to them that such advice should have been obtained. There is no doubt that, as he put it, Mr Malcolm “nearly had a fit” when he discovered the size of the bonuses.

His evidence was that he did no more than scan the Proposals Paper, he believed that PwC Monks had approved the whole of the remuneration package (although he did not read any of the documents produced by PwC Monks) and it did not even cross his mind that the executive directors would be entitled contractually to any large refinancing bonuses.

His overall approach was clear: he did not regard it as part of his duties to consider anything in the Proposals Paper unless somebody else drew his attention to it. In his view the blame rested with Miss Radcliffe for not doing so and as a result there were heated exchanges at the meeting of the Remuneration Committee on 21 December 2006.

Mr Parkin was in a difficult position. On the one hand, NIAL’s claims against him have been settled. On the other, he remains exposed to action by Eversheds should it fail in these proceedings. I received the impression that to some extent his evidence was tailored to suit his present interests. For example he did not provide a satisfactory account as to how his developing involvement with Bridgepoint Ltd was consistent with his obligations to NIAL.

I accept that in general terms the instructions he had given to Eversheds were in accordance with what had been discussed and agreed with Miss Radcliffe on 10 January 2006. That said, in cross-examination Mr Parkin himself agreed that some of the instructions, in particular matters such as the definition of refinancing proceeds, had not been agreed. Again, he seemed to say that at the meeting Miss Radcliffe told him to seek advice from Eversheds about the effectiveness of the restrictive covenants, whereas he told Eversheds that it had been agreed that they should be released. That is a grey area because Miss Radcliffe undoubtedly went along with the suggestion that some of the airports fell outside the area of true competition. Nevertheless in those two respects (definition of refinancing proceeds and release of the restrictive covenants) I find that Mr Parkin and Mr Friis exceeded the scope of their actual authority.

As I have said, I found Mr Scott and, in particular, Mr Slater, impressive witnesses. They both fully understood that the LA7 authorities took a very cautious approach to risk, that large bonuses were not acceptable (and that the costs of a refinancing generally needed to be justified) and that the LA7 authorities took a competitive, indeed Mr Slater described it as combative, approach to the activities of other airports. Accordingly, he was shocked when he discovered in a telephone conversation with Mr Malcolm on 20 December 2006 that the bonuses were enormous and appalled when he subsequently discovered that the restrictive covenants had been relaxed.

I have no doubt at all that the evidence of the witnesses from Eversheds was entirely honest. They all accepted that they took instructions directly from Mr Parkin and they all said that they saw nothing wrong in so doing and would do so again in similar circumstances. The issue is therefore whether they were justified in accepting Mr Parkin and Mr Friis as the authorised representatives of NIAL. NIAL alleges that they were not; Eversheds that they were.

I would however add that to my mind Mr Davidson QC made considerable headway in cross-examining these witnesses on the subject of their understanding of the proportionate liability clause and the monetary cap contained in the Eversheds Protocol (as to which see below) and Eversheds’ capacity to offer any appropriate explanation of limitation of liability imposed by the Eversheds Protocol to Mr Friis.

NIAL relied principally on Penn v. Bristol and West [1995] 2 FLR 938 (affd [1997] 1 WLR 1356), Criterion Properties v. Stratford UK Properties LLC [2004] UKHL 28 [2004] 1 WLR 1846, Hopkins v. TL Dallas Group plc [2005] 1 BCLC 543, British Bank of the Middle East v. Sun Life Co of Canada (UK) Ltd [1983] 2 Ll Rep 9. NIAL cited the duty set out by Robert Walker J in Titanic Investments Ltd v. Macfarlanes [1997] NPC 105 (at transcript p.26), Lawrence Collins J in Marplace (Number 512) Ltd v. Chaffe Street [2006] EWHC 1919 (Ch) at [407] and Rimer J in Summit Financial Group Ltd v. Slaughter & May (1999)(Unrep) at p.52. Eversheds cited Midland Bank v. Hett Stubbs & Kemp [1979] Ch 384, Freeman & Lockyer (A Firm) v. Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, Hely-Hutchinson v. Brayhead Ltd [1968] 1 QB 549, Lloyd v. Grace, Smith & Co [1912] AC 716, Morris v. Kannssen [1946] AC 459, Rolled Steel Ltd v. British Steel Corpn [1986] 1 Ch 246, Armagas v. Mundogas SA (The Ocean Frost) [1986] AC 717, Lexi Holdings Plc v. Pannone & Partners [2009] EWHC 2590, the review of the authorities by Lord Neuberger of Abbotsbury in the Hong Kong case of Thankakharn Kasikorn Thai Chamkat (Mahachorn) v. Akai Holdings [2010] 13 HKCFAR and Quinn v. CC Automotive Group Ltd t/a Carcraft [2010] EWCA Civ 1412. I was also for completeness sake referred by both parties in subsequent correspondence to the recent decision of the Privy Council in Kelly v. Fraser [2012] UKPC 25.

The underlying issue is one of authority. Mr Patten QC for Eversheds reduced his submissions on authority to four basic propositions culled from Freeman & Lockyer, Thankakharn and Quinn, as follows:

The starting-point is the statement in Midland Bank v. Hett Stubbs & Kemp that the extent of a solicitor’s duty depends upon the terms and limits of his retainer and any duty of care to be implied must be related to what he is instructed to do. Oliver J said at 402-3,

“The test is what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession, and… the duty is directly related to the confines of the retainer.”

Mr Patten QC argued that NIAL’s case conflates two distinct duties: the contractual duty not to act outside the scope of authorised instructions and the contractual and tortious duty of care to perform those instructions with reasonable skill and care. Thus there is a duty to act within the scope of apparent authority and the duty to perform apparently authorised instructions to the requisite standard. Where there is apparent authority solicitors are not obliged to give advice or information to anyone other than the agent concerned.

Mr Davidson QC argued however that there was no apparent authority. It was too simplistic an analysis to say that Eversheds was merely instructed to draft certain documents and that NIAL through Miss Radcliffe had held Mr Parkin and Mr Friis out as authorised to give instructions to produce the drafts. There were many matters which needed clarification (for example as to the definition of “refinancing proceeds”) and it was not for the executive directors to give such clarification.

NIAL’s case is that there cannot be apparent authority in circumstances where, as Eversheds knew, the Remuneration Committee had been set up for the very purpose of providing independent analysis of the position of the executive directors. Advice had to be given to Miss Radcliffe and not to those directors. Making submissions on the terms of his contract was not within the class of acts which an employee in his position is usually authorised to do: see Lord Keith in The Ocean Frost at 783.

However in my judgment this is a case where there was a representation which created apparent authority within Diplock LJ’s definition in Freeman & Lockyer (at 503). This does not arise from the mere position of Mr Parkin and Mr Friis as executive directors of NIAL. On her own case, Miss Radcliffe (whom NIAL accepts had actual authority in the matter) authorised them to deal with Eversheds and Eversheds was induced by the representation constituted by such authorisation to do so.

Miss Radcliffe caused Mr Parkin and Mr Friis to instruct Eversheds. She held them out as authorised to give instructions to prepare the draft contracts. This necessarily meant (because they were entrusted with the conduct of those instructions in circumstances where the terms agreed by the Remuneration Committee were expressed in general wording) that they had apparent authority to give instructions on the contents of the contracts.It is important to appreciate that Mr Parkin and Mr Friis had actual authority to instruct Eversheds, notwithstanding that they (innocently or otherwise) exceeded that actual authority in the definition of refinancing proceeds and the release of restrictive covenants.

Once apparent authority has been established no further duty of care is imposed to ascertain whether the agent has authority in the first place. While each case must depend on its own facts I see no justification to qualify the ordinary law of agency in this regard.

I observe that Eversheds’ evidence suggested that it is the commonplace practice of remuneration committees to instruct solicitors through their executive directors, even as to the detail of their own contracts. That being so, there was nothing abnormal or unusual in the concept of giving authority in such circumstances.

NIAL contends that Eversheds’ knowledge of the Combined Code and the existence and terms of reference of the Remuneration Committee should have indicated to Eversheds that Mr Parkin and Mr Friis could not have had authority. However there is nothing in the Combined Code which prevents executive directors from instructing solicitors on behalf of the company. If anything, the existence of the Combined Code entitled Eversheds to assume that Mr Parkin and Mr Friis adhered to its terms. In other words, when considering the first stage of the test as to apparent authority (leaving aside the issue of notice) Eversheds was entitled to assume that:

Mr Davidson QC made much of the fact that Eversheds did not inform itself about the qualifications or understanding of the members of the Remuneration Committee. However it does not seem to me that a solicitor is required in a commercial context to investigate the competency of his client, where he is not put on notice of any lack of competency.

Again, once apparent authority has been established, there was no duty of care to advise Miss Radcliffe as to the meaning and effect of draft changes since provision of advice to the agents themselves would have discharged the duty: see Farrer & Anor v. Copley Singletons (a firm) [1998] PNLR 22. The obligation of a solicitor to consult with his client on all questions of doubt which do not fall within the express or implied discretion left to him (see e.g. Groom v. Crocker [1939] 1 KB 194 at 222) begs the question of who is the client. In my view that question can only be addressed on the basis that the normal law of agency applies.

It must also be remembered that (unlike the facts of Thankakhorn for example) Eversheds did not in fact leave the final approval of the contracts to the executive directors. The drafts were sent to Miss Radcliffe for approval and signature. Eversheds therefore assumed that she knew and approved of the changes, in other words, that they had been properly agreed. There was no question of a secret advantage to Mr Parkin or Mr Friis.

Thus in my view the first stage of the test for authority is satisfied as there was the relevant holding out coupled with the relevant reliance. The outstanding issue is whether Eversheds was put on notice that one or more of their instructions was or were unauthorised.

It is of critical commercial importance that solicitors should be able to rely on the apparently authorised agents of a company. In Thankakhorn (at 52), Lord Neuberger said,

“In a commercial context, absent dishonesty or irrationality, a person should be entitled to rely on what he is told: this may occasionally produce harsh results, but it enables people engaged in business to know where they stand.”

He went on to say (also at [52]),

“As to principle, apparent authority is essentially a species of estoppel by representation (see per Diplock LJ in Freeman & Lockyer [503] and per Brennan LJ in the High Court of Australia in Northside Developments Pty Ltd v. Registrar-General (1989-1990) 170 CLR 146, 173-4). In the field of misrepresentation, it is clear that ‘it is no defence to an action for rescission that the representee might have discovered its falsity by the exercise of reasonable care’- per Chitty on Contracts (30^th edition) para 6-039 and the cases cited in footnote 190. Even more in point, there is this passage in Halsbury’s Laws (4^th edition reissue) Vol 16(2), para 1072, dealing with estoppel by representation:

‘If [the party contending that he relied on the representation] really has relied upon its truth, it is no answer to say that, if he had thought about it, he must have known that it was untrue; the representation itself was what put him off guard. If the representation is clear and unequivocal…he is under no obligation to make investigation or inquiry to ascertain whether it is true.”

Constructive notice is insufficient: see Millett J in Macmillan Inc v. Bishopsgate Investment Trust plc [1995] 1 WLR 978 at 1014 G-H and Manchester Trust v. Furness [1895] 2 QB 539 at 545. So what is the test that takes a transaction outside the scope of apparent authority? I adopt Lord Neuberger’s analysis of the authorities in Thankakhorn (at [49]-[62]) culminating in the statement:

“I conclude that it is open to the Bank to rely on Mr Ting’s apparent authority…unless the Bank’s belief in that connection was dishonest or irrational (which includes turning a blind eye and being reckless).”

Thus the court analyses the facts of each case to determine whether apparent authority is displaced. This occurs not only where the person seeking to rely on it knows of or turns a blind eye to lack of actual authority but also where the circumstances are such that it would be irrational to contend that he relied upon it.

So in Thankakhorn itself, it was held that there was no apparent authority. There Mr Ting, the chief executive officer of a company entered into a series of transactions on behalf of the company creating a liability in the company to repay a Bank the sum of US$30m plus interest, previously the liability of another company, and to give the Bank security in the form of shares owned by the company. In deciding that there was no apparent authority Lord Neuberger took into account the facts that the execution of securities for another’s liabilities, not being for the purpose of a company’s business nor otherwise for its benefit, was not ordinarily within the authority of its directors so that allegations of apparent authority had to be scrutinised with particular care. It was important that the transaction was one from which the Bank benefited very substantially.

The present case is very different. Miss Radcliffe had given the executive directors actual authority to instruct Eversheds to draft contracts and in evidence she confirmed that she had done so. Thus it is not a case where the executive directors sought to clothe themselves with authority merely by reason of their position in the company. The unchallenged evidence was that it is commonplace for directors to deal with solicitors in the drafting of their contracts. There was no manifest advantage to Eversheds in the arrangements and no manifest disadvantage to NIAL in the arrangements. It was not the function of Eversheds to advise NIAL as to the merits or wisdom of the contracts.

Most importantly of all, there is no conflict of interest between a director and his company when there has been full disclosure to the company, in this case the Remuneration Committee. There was nothing secretive about what was being proposed; on the contrary, the draft contracts were to be (and were) provided to Miss Radcliffe and the Remuneration Committee and could not be executed without the agreement of its members.

NIAL’s conflict of interest argument is in essence that Eversheds should have realised that Mr Parkin and Mr Friis were, as they were entitled to do, bargaining for themselves and therefore that they could not give proper instructions. However it is my judgment that Eversheds was entitled to act on the basis that both Mr Parkin and Mr Friis were acting properly. Unless presented with clear evidence to the contrary it was entitled to assume that they were truthful and honest.

However, NIAL’s argument goes one stage further. Mr Davidson QC accepted that bare instructions can be given by the directors. However he submitted that any issue requiring clarification indicates a lack of authority because it follows that Eversheds ought to have known that there was no agreement on that issue. However there is a logical flaw in that submission: Eversheds was in my judgment entitled to think that it was being instructed as to clarification of what had been agreed. There was no reason for it to think that it was receiving instructions from Mr Parkin acting on his own behalf.

In my view it was not irrational or unreasonable on the facts of this case for Eversheds not to have doubted whether what it was being told was true. To suggest otherwise brings in the constructive notice argument by the back door. Life would be very difficult for commercial solicitors if they were required to check the word of apparently authorised agents against the minutiae of all the documents in the case.

That is particularly true where the solicitor’s work is to be subjected to scrutiny by other independent persons. As Mr Patten QC submitted, it is a striking feature of the claim that NIAL seeks to make Eversheds liable for the lack of wisdom shown, and possible breaches of duty committed, by its directors, executive and non-executive.

Eversheds submits that in any event NIAL’s case fails on causation grounds. Miss Radcliffe, Cllrs Malcolm and Ross all approved the principle of a refinancing bonus in December 2005 without any consideration of the refinancing itself. If any of the questions suggested by Mr Slater and Mr Scott had been asked, there would have been some discussion of the principle; Mr Binger would have had to have revealed that the new debt was going to be several times the amount of EBITDA so that the sum released to shareholders was likely to be in excess of £100m. On this basis it is inconceivable that percentages of the order of 3% (even of the return to shareholders) would have been agreed.

Then there is the whole question of the Proposals Paper. Miss Radcliffe considered it and amended it. The other members of the Remuneration Committee approved it. Miss Radcliffe did not circulate Mr Parkin’s shopping list email of 29 November 2005, nor did she tell the other members of the committee that the percentages of 2% and 1% had been proposed by Mr Parkin and Mr Friis. She implied that PwC Monks had approved the refinancing bonus. However she had not read Appendix A to the PwC Monks update letter. If she had she would have realised that no advice had been given about the refinancing bonus. The comfort provided by PwC Monks was an important, not to say a crucial, factor for the representatives of the LA7 authorities and it is clear that PwC Monks would have been required to provide a report on the matter. It is inconceivable in such circumstances that the contracts would have been completed as they were.

Again, the LA7 authorities’ members of the Remuneration Committee did not read the Proposals Paper carefully. The proposal as to minimum bonuses totalling 3% was clear. No special expertise was needed to understand it. Further the members of the Remuneration Committee could only have considered the issue in accordance with their duties as non-executive directors by asking to what base figure the percentages were to be applied and what was the likely size of the refinancing.

I accept Mr Slater’s evidence that if he had been aware of the likely scale of the refinancing he would have been concerned at the reputational impact on the LA7 authorities and would have communicated his concerns to Cllrs Malcolm and Ross. I accept his evidence that if he had seen Mr Parkin’s shopping list he would have briefed Cllrs Malcolm and Ross to clarify what was meant by refinancing. I also accept that if the Copenhagen directors had expressed the view that the refinancing bonuses were too high by a factor of 10, rather than “fully” supporting the Proposals Paper, the contracts would not have been executed in the form in which they were in fact executed.

Again, Miss Radcliffe did not review the contracts properly before signing them. As she accepted, she did not require any legal advice or specialist knowledge to understand how the refinancing bonus clauses operated. She simply did not read them other than cursorily. If she had, she would either have deliberately signed the contracts in full knowledge of what they contained, in which case Eversheds cannot be liable for the loss, or she would have referred the contents back to the Remuneration Committee, in which case the loss would not have occurred.

Even after the contracts were signed, it was not too late to avoid the loss. On 16 February 2006, Miss Radcliffe still did not discuss the schedule of changes with the other members of the Remuneration Committee. Cllr Malcolm says that if such a schedule had been available, he would have read it. Mr Slater and Mr Scott both said that they would have considered such a schedule and that they would have investigated the matter in some depth. Mr Binger and Mr Boserup said that they would also have read the summary of changes and it would have alerted them to the relaxation of the restrictive covenants. The LA7 authorities would inevitably have found out about the extent of the refinancing bonus. I accept Cllr Malcolm’s evidence that he would have been horrified at the figures. It is plain that refinancing, which was then only at a very early stage, would not have progressed until the matter had been satisfactorily dealt with.

The evidence shows that until 12 October 2006 it would have been possible to halt refinancing without detriment to NIAL. On that basis I find that if the matter had been raised at the meeting of 16 February 2006 there was no prospect of continuing with the refinancing unless the refinancing bonuses had been removed or at least renegotiated. NIAL would have had grounds to argue (although I make no findings as to the likely success of any such argument) that the contracts could be set aside for mistake; it would have had grounds to allege (as it subsequently did) breach of fiduciary duty and deceit against the executive directors.

As I have said, the knowledge that the LA7 authorities would oppose any refinancing was an important reason why the Copenhagen directors did not say at the meeting that Miss Radcliffe did not have authority to sign the contracts. Mr Binger was aware that the combined bonuses were likely to be in excess of £3m, that bonuses of this size were not in the best interests of NIAL and that the representatives of the LA7 authorities were unaware of the amounts involved.

However NIAL’s case is that Eversheds had an independent duty to advise Miss Radcliffe and if she had been advised in the terms of the summary attached to the Particulars of Claim, or in the form of the letter proffered by Mr Davidson QC during argument, the loss would not have arisen. There was no break in the chain of causation because it was the very failure to advise which caused the Remuneration Committee to proceed as it did.

However, for the reasons I have given, Eversheds was not subject to the duty alleged. Even if it was subject to a duty, it was not in my judgment required to give advice in the form of the Appendix to the Particulars of Claim or to send the letter, but only to advise as to any clause in the contracts which were unusual or required explanation.

Miss Radcliffe says that she would have read such advice and that it would have caused her to act in a different way. However, as Colman J said in North Star Shipping v. Sphere Drake Insurance [2005] 2 Ll Rep 76 at 254,

“it is important to keep firmly in mind that all their evidence is necessarily hypothetical and that hypothetical evidence by its very nature lends itself to exaggeration and embellishment in the interests of the party on whose behalf it is given. It is very easy for an underwriter to convince himself that he would have declined a risk or imposed special terms if given certain information. For this reason, such evidence has to be rigorously tested by reference to logical self-consistency, and to such independent evidence as may be available.”

Miss Radcliffe’s conduct can only be judged by what she actually did. She did not feel that she needed a schedule of changes in order to enable her to review the contracts and she did not ask for such a document. She did not read documents which she had requested and which she knew were important; it is therefore unlikely that she would read a document which she had not requested. She had a special distaste for documents produced by lawyers. Her evidence was that she regarded these as necessary formalities, ‘legalese’, not something she was required to read. Even when she opened such documents she only skim-read them. However she consistently misread, missed or misunderstood contents which were inconsistent with her preconceived understanding of their meaning and effect.

I know that it is easy to be wise after the event and I do not mean to sound unnecessarily harsh in my judgment of the members of the Remuneration Committee. However the facts remain that, (a) if the Remuneration Committee had picked up on the terms of the new contracts they would not have been executed and (b) the members of the Remuneration Committee had both the opportunity and the ability to do so.

In all the circumstances of this case, it is fair to assume that if Miss Radcliffe had received advice from Eversheds directly and as a result had noticed anything unusual about the contracts, it would only have been the relaxation of the restrictive covenants. Her own evidence was that if this had been drawn to her attention she would have asked Eversheds to get on with drafting the rest of the contract. She said that notification from Eversheds on that point would not have caused her to instruct Eversheds to cease drafting the contracts in every other regard or caused her to make enquiries about any other aspect of the instructions.

Accordingly (even if I am wrong and there was a breach of duty causing loss to NIAL), NIAL’s own conduct broke the chain of causation. Eversheds sent the draft contracts to Miss Radcliffe. She failed to read them properly or to understand the meaning and effect of the refinancing bonus; she failed to read the schedule of changes at any time, she failed to circulate it to the other members of the Remuneration Committee, Mr Binger and Mr Boserup failed to disclose their true position until 12 October 2006 and none of the non-executive directors investigated or appreciated the meaning and significance of the refinancing bonuses until 12 October 2006.

I therefore agree that the loss which was undoubtedly sustained arose not out of any breach of duty by Eversheds but as a result of failings on the part of others for whom NIAL is responsible: see Borealis AB v. Geogas Trading SA [2010] EWHC 2789, Lambert v. Lewis [1982] AC225, Schering Agrochemicals Ltd v. Resibel [1992] WL 1351400 and County Ltd & Anor v. Girocentrale Securities [1996] 3 All ER 834.

By 16 February 2006 Mr Binger and Mr Boserup knew that NIAL had made a mistake. They knew that the contracts provided for large non-discretionary refinancing bonuses to which the members of the remuneration committee had not applied their minds. They knew that the LA7 authorities were unaware of the significance of the bonuses. They therefore knew that loss had been suffered but failed to mitigate that loss by making the position known. In my judgment the loss could therefore have been mitigated entirely.

On the facts before me I do not see any scope for contributory fault as it is my view that even if Eversheds was at fault the whole of the loss was caused by NIAL.

In order to limit their liability Eversheds rely on two contractual clauses in the Eversheds Protocol. They are, first, a liability cap (“the Liability Cap”) expressed in the following terms:

“In common with many professional advisers, it is our policy to cap our liability on matters on which we are instructed. Our aim is to agree with you on each matter a fair and reasonable cap according to the circumstances as part of the instruction procedure. In the absence of such agreement, a cap of £3m per matter will apply.”

Then Appendix 1 (“Terms and Conditions”) contains the following:

“Our total liability to you in respect of our engagement for any loss, liability or damage, howsoever caused, whether in contract (by way of indemnity or otherwise), tort, (including negligence), misrepresentation, restitution or otherwise (in each case whether caused by negligence or not) and whether related to any act, omission, services provided to you or not provided to you or failure to act or delay in acting by Eversheds LLP will be limited to an amount recorded in writing (“the Liability Cap”)…. The Liability Cap…in respect of loss or damage [other than to tangible property] is as set out in the Engagement letter. If the Engagement Letter does not address the Liability Cap (and we have not otherwise agreed with you in writing), the Liability Cap in respect of all other loss or damage is £3 million.”

The Appendix goes on to provide (“the Net Contribution Clause”):

“The extent to which any loss or damage will be recoverable by you from us will also be limited so as to be in proportion to our contribution to the overall fault for such loss and damage, taking into account any contributory negligence by you, your other advisers and/or any third party responsible to you and/or liable in respect of such loss.”

Eversheds accept that the Liability Cap falls to be applied after the Net Contribution Clause. Thus, on the hypothesis of a loss of £10m and contributory negligence of 50% the liability is £3m. The Liability Cap is not applied first so that in such circumstances the liability is limited to £1.5m. The interaction of the two clauses is probably now an arid debate since Eversheds has abandoned any claim that NIAL is responsible for negligence by PwC Monks. It is now accepted PwC Monks were not asked to advise in relevant respects and they cannot have any liability for which NIAL is responsible.

The issues before me were whether either the Liability Cap or the Net Contribution Clause was incorporated into the contract of retainer between NIAL and Eversheds. If so, whether the provisions of the Unfair Contract Terms Act 1977 apply: was NIAL a “consumer” for the purposes of the Act and did the Protocol comprise “written standard terms of business”? What about claims in tort as opposed to claims in contract? Does either clause meet the requirement of reasonableness imposed by section 11 of the 1977 Act? NIAL says that they do not. First, the amount of Eversheds’ insurance far exceeds the £3m of the Liability Cap. Eversheds ripostes that the Liability Cap does not apply to property transactions and in any event is only a default provision. It is always open to the parties to agree a higher cap tailored to the circumstances of the task in question. Secondly, NIAL relies on the fact that no appropriate explanation was given as to the operation of the Net Contribution Clause which Ms Connorton herself apparently failed to understand.

NIAL alleges that the Net Contribution Clause infringes the Solicitors’ Code of Conduct. Eversheds relies on the Scottish decision of Langstane Housing Association Ltd v. Riverside Construction Ltd (2009) CSOH 52 as authority for the clause being neither unusual nor onerous. NIAL says that the case is distinguishable on a number of grounds, not least that the clause in question was held not to restrict liability whereas in the present case it is intended to do so. Eversheds alleges that the Net Contribution Clause is to ensure that the firm is only held liable for any damage that is not caused by others. NIAL says that it is unfair and unreasonable to require NIAL to sue others and to put the risk of their insolvency onto NIAL, particularly in circumstances where this effect was not drawn to NIAL’s attention.

Eversheds relies on the fact that both NIAL and Eversheds were commercial organisations and that they were not of unequal bargaining power as NIAL could have used any one of a significant number of law firms. Both parties were well-placed to obtain insurance cover in relation to potential liabilities. Eversheds referred to the policy articulated by Lord Wilberforce in Photo Productions v. Securicor Transport Ltd [1980] AC 827, to the effect that in such circumstances Parliament’s intention in enacting the Act seemed to be one of “leaving the parties to apportion the risks as they think fit…and respecting their decisions”: see also the observations of Chadwick LJ in Watford ElectronicsLtd v. Sanderson CFL Ltd [2001] EWCA Civ 317 at [55].

Clauses limiting liability are widespread among solicitors and it does not seem to me to be right to make findings of law which are (because of my primary findings) purely obiter. I do not therefore propose to do so. However, in case this case goes to a higher court or courts I do propose to make relevant findings of fact.

An earlier Client Care Protocol was in place between NIAL and Eversheds in about October 2003. The clauses about the Liability Cap and Net Contribution are identical save that the default amount is £1m not £3m. The proposed 2006-7 Protocol was sent to Mr Friis by Ms Connorton under cover of a letter dated 2 December 2005. Ms Connorton then had a meeting with Mr Friis on 4 January 2006. Her note of the meeting shows that an annual retainer was agreed at that meeting. On 20 January 2006 she circulated an email to all Eversheds personnel stating that the Protocol had been agreed and was in force between the parties.

I find that Ms Connorton did not however explain the Net Contribution Clause in any way to Mr Friis at the time or subsequently. He would however have been aware of the Liability Cap although not of how it operated in conjunction with the Net Contribution Clause.

NIAL submits that the Liability Cap plainly operated in such a way that it would be applied independently to the contracts of Mr Parkin and Mr Friis so that the total cap was £6m instead of being £3m. Again I make no finding about this conclusion which is one of construction. I merely observe (without, as I have said, making a finding to that effect) that it does not seem to me to be correct where the “act, omission [and] services provided” were common to both contracts.

Questions of quantum do not arise but in my judgment even if NIAL had been successful in making out a claim in liability against Eversheds various heads of costs cannot be recovered against Eversheds as either they were not caused by any breach of duty on its part or they were simply too remote. I would identify the following:

I therefore accept Eversheds’ submissions that Eversheds acted in good faith on the basis of instructions which it was entitled to accept. I accept that this was not a case where Eversheds treated Mr Parkin in his personal capacity as the client. It followed his instructions because he was clothed with apparent authority and Eversheds had no reason to believe that any of his instructions were unauthorised.

Even on NIAL’s case as to duty of care, any advice which Eversheds might reasonably have been expected to give Miss Radcliffe would not have been heeded as she did not read legal advice.

The real reason that NIAL suffered loss was because its non-executive directors failed to carry out their obligations to NIAL.

The claim therefore fails.