A leading law firm has been cleared of allegations that its negligence led to the unauthorised award of multi-million-pound bonuses to two former directors of Newcastle International Airport Ltd (NIAL).
A High Court judge ruled that responsibility for the loss suffered by NIAL lay not with Eversheds LLP but with non-executive directors sitting on the company's remuneration committee who failed properly to understand the terms of John Parkin and Lars Friis' employment contracts.
New contracts signed by the pair in 2006, after advice was taken from Eversheds, entitled Mr Parkin and Mr Friis, who died of cancer later that same year, to bonuses totalling £8m on achieving a £337 million re-financing deal for the airport.
At the High Court, NIAL accused Eversheds of acting negligently in taking instructions from Mr Parkin and Mr Friis when it should have known that the pair were ‘bargaining for themselves’ and that their interest lay in obtaining the most generous contract terms possible.
However, in exonerating Eversheds, Mrs Justice Proudman ruled that the firm had acted honestly and in good faith and had had no reason to doubt that Mr Parkin and Mr Friis were properly authorised to give instructions on NIAL's behalf.
The judge went on: ‘The real reason that NIAL suffered loss was because its non-executive directors failed to carry out their obligations to NIAL’.
The members of the remuneration committee had not properly understood that Mr Parkin and Mr Friis' new contracts entitled them to such large, non-discretionary, bonuses or that Mr Parkin was to be released from a condition restraining him from working at or for Leeds/Bradford Airport, the judge said.
However, observing that it is commonplace for directors to deal with solicitors in the drafting of their employment contracts, the judge said that the company’s chairman had given Mr Parkin and Mr Friis ‘actual authority to instruct Eversheds’ and there was ‘nothing secretive’ about what was being proposed.
Eversheds was ‘entitled to act on the basis that Mr Parkin and Mr Friis were acting properly. Unless presented with clear evidence to the contrary it (Eversheds) was entitled to assume that they were truthful and honest’, said the judge.
The remuneration committee members had simply ‘not applied their minds’ to the bonus packages and the judge concluded: ‘The loss which was undoubtedly sustained arose not out of any breach by Eversheds but as a result of failings on the part of others for whom NIAL was responsible’.