Advice and contracts must be read properly

Picture: Ian Rutherford

Picture: Ian Rutherford

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Be aware of your duty of care as an agent, says Pamela Abbot

January is the month of good intentions, with diets, detoxes, decluttering and drive to achieve. In December, without realising it, most of us have been acting as agents – agents of Mr S Claus himself, buying presents and spreading Christmas cheer on his behalf. The acts of the agent bind the principle being acted for. Now, if any of us failed in our agency to Santa, there was no real harm done (other than perhaps being bestowed with the title of “Scrooge”). However, back in the real world, operating within the realms of the agency relationship is crucial.

This time of focus and forward planning is a sensible time to review the agency concept, which permeates many business relationships – and to be reminded to actually read documents and contracts rather than skim them. A decision from England at the end of last year, which would also have relevance here, highlights why.

The law of agency is fairly complex but, in a nutshell, agency is a relationship where one party, the principal, grants authority for another party, the agent, to act on behalf of and under the control of the principal to deal with a third party. The agent owes his principal a duty of care. Some professions are built on a foundation of agency law – solicitors, accountants, estate agents and travel agents, for example. Directors can act as agents of their companies and employees as agents of their employers.

Newcastle International Airport Limited (NIAL) was the owner and operator of Newcastle Airport. It had two executive directors and five non-executive directors, all of whom were members of the company’s remuneration committee. The committee was to act on behalf of the board in establishing the company’s policy on senior executive remuneration.

Against that background NIAL hired E, a firm of solicitors, to draft new service contracts for the two executive directors. The solicitors took their instructions from one of the executive directors. Once the contracts were complete, the company and the two executives signed. The service contracts included a large aggregate bonus payable to the executives and released them from provisions in their previous contracts which prevented them from working at or for one of the company’s competitor airports. Neither the board nor its remuneration committee had understood that the service contracts would have such effect.

The company alleged that E had been in breach of its duty of care, acting as agent for the company, in failing to provide the board or its remuneration committee with a written summary of the effects of the service contracts before they were signed.

The solicitors had received all their instructions from one of the executive directors. The final draft was, however, reviewed by the remuneration committee and signed off. Yet, the solicitors had given no advice to the board or the remuneration committee, taking the view that the advice given to the executives could be treated as advice given to the company.

The Court of Appeal accepted that in a conventional case where a company has authorised one of its executives to instruct a solicitor ,there would be no need for the solicitors to give separate advice to anyone other than the executive. However, here, where 1, there was an alleged conflict between the interests of the executive providing the instructions and the interests of the company; and 2, the solicitors owed a duty of care to the company which instructed it, separate advice should have been given explaining the terms and effect of the service contracts.

The company’s case failed as the court believed that even if the solicitors had provided a written advice memorandum on the effects of the new service contracts, the chair of the remuneration committee would not have read it and it would have been signed in much the same form.

There are clear messages here to bear in mind – 1, when acting as agent it is crucial to make sure you understand who you are acting for, you owe the principal a duty of care; and; 2, always read advice and contracts you are given, don’t view them as a “formality” – had the company demonstrated that it would have read or acted on a memorandum given by the solicitors explaining the contracts, its case may have succeeded.

• Pamela Abbott is a solicitor with CCW Business Lawyers www.ccwlegal.co.uk

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