Remuneration Committees and Boardroom Pay

In a decision which is likely to be compulsory reading for corporate and employment lawyers, the Court of Appeal has tackled the twin thorny issues of boardroom pay and the responsibilities of remuneration committees populated by non-executive directors.

Newcastle International Airport Limited (NIAL) argued that a leading law firm was to blame for ‘excessive’ awards of multi-million-pound bonuses to its former chief executive and finance director. The Court accepted that the law firm had breached its duty of care in one respect but awarded the company only £2 nominal damages after ruling that that default had not caused any substantial loss.

NIAL, which is majority owned by various local authorities, took legal action after amendments to the contracts of the two senior executives entitled them to bonuses totalling £8 million on achieving a £337 million re-financing deal for the airport. The company was shocked by the size of the payouts and sued one executive and the estate of the other, who had died. Those claims were settled confidentially.

In subsequent proceedings, NIAL sued the law firm that regularly advised it, claiming that it had been negligent in taking instructions from the executives when it should have known that the pair were ‘bargaining for themselves’ and that their private interests lay in obtaining the most generous contract terms possible.

NIAL’s claim failed at the High Court on the basis that the law firm had acted in good faith and had had no reason to doubt that the executives were properly authorised to give instructions on the company’s behalf in respect of the drafting of their contracts.

Ruling on the company’s appeal, the Court of Appeal upheld the law firm’s case that the executives did have authority from NIAL’s remuneration committee – which was entirely made up non-executive directors – to negotiate their own contracts. However, the Court found that the law firm had breached its duty of care by failing to provide the committee’s chairwoman with a memo explaining, ‘in user-friendly language’, what the changes to the executives’ contracts meant in practice.

NIAL insisted that, had the chairwoman received a clear explanatory memo in plain English, she would have carefully read and understood it and would have convened a meeting of the committee to look at the contracts in detail. However, the Court ruled that, even had such a memo been provided, the chairwoman, an eminent economist, would probably not have read it properly or understood its contents.

Commenting on the chairwoman’s ‘unusual method of working’, the Court noted that she had exhibited ‘carelessness of an unusual degree’ and had ‘consistently misread, missed or misunderstood’ important documents that did not fit her ‘preconceived understanding of their meaning and effect’. She had shown a ‘special distaste for documents produced by lawyers’, viewing them as ‘legalese’, and had played a central ‘role in the history of this debacle’. There was evidence of her ‘reluctance to read documents that were material to the tasks she faced and a surprising inability to understand them’. Until the dispute developed, she had laboured under the mistaken belief that the bonuses were ‘discretionary’.

In those circumstances, the Court concluded that, even if the law firm had sent a suitable memo to the chairwoman, contracts would probably still have been signed that contained the same bonus entitlements. The law firm’s breach of duty was therefore ‘not causative of substantial loss’ to NIAL.