On 21 December 2011, the High Court handed down judgments in two separate, high profile and potentially important cases relating to indemnities agreed by News Group Newspapers with individuals formerly associated with its now closed newspaper, the News of the World. It was held that former News of the World editor Andy Coulson was not entitled to payment of his legal costs in relation to criminal enquiries under an agreement he had reached with his former employer. Meanwhile, in a separate judgment handed down on the same day, Glenn Mulcaire, a private investigator formerly engaged by the News of the World, succeeded in his claim to enforce an indemnity he had agreed with the same organisation. This OnPoint reports on these two decisions which are significant for those drafting and negotiating indemnities for employees and directors in a variety of situations.
Andy Coulson's claim
Mr Coulson brought proceedings against his former employer for reimbursement of legal costs incurred in taking advice with regard to potential criminal proceedings against him relating to the ongoing phone hacking controversy. An indemnity for legal costs had been agreed shortly before the termination of his employment which provided that, to the extent lawfully permitted, the employer would cover Mr Coulson in respect of fees arising rom his having to defend or appear in any "administrative, regulatory or quasi-judicial proceedings" as a result of having been Editor of the News of the World.
The dispute which the court adjudicated concerned whether this indemnity extended to legal costs incurred by Mr Coulson in relation to his arrest and interview under caution in connection with allegations of conspiracy unlawfully to intercept communications contrary to section 79 of the Regulation of Investigatory Powers Act 2000 and making unlawful payments to police officers contrary to section 1 of the Prevention of Corruption Act 1906.
The court considered a variety of arguments about the interpretation of the indemnity including the contention that the indemnity could only have been intended to protect Mr Coulson in respect of his lawful activities as Editor. Ultimately the court rejected Mr Coulson's claims on two grounds. First, in terms of its proper scope, the indemnity was found not to apply in relation to criminal proceedings against Mr Coulson personally. Second, at the stage where Mr Coulson had been arrested and bailed but not charged, no "proceedings" had been commenced so the indemnity (which was explicitly based on proceedings commencing) did not engage on the basis of its specific drafting.
Glenn Mulcaire's claim
Mr Mulcaire had agreed a different form of indemnity with his former employer. Conditional on various specific matters such as the provision of information, continued co-operation and confidentiality, Mr Mulcaire was indemnified in respect of legal costs dealing with or defending proceedings in which he and News Group Newspapers were joint defendants. The dispute arose because News Group Newspapers sought to terminate the indemnity following discussion about its existence during an appearance by senior executives before a House of Commons select committee.
Mr Mulcaire succeeded in establishing that a binding contractual obligation had been entered into by News Group Newspapers with him despite the fact that he had never countersigned the original indemnity letter. The court held that the indemnity was contractually binding by reference to the various discussions between Mr Mulcaire's solicitor and News Group Newspapers at the time and indeed the conduct of those concerned, such as payment of fees and provision of information, which was consistent with there being a binding indemnity. Also, in the absence of an express provision allowing termination on notice, News Group Newspapers failed to persuade the court that there was a power to terminate the indemnity on notice. A carve out which made the indemnity subject to any conflict of interest was also of no assistance to News Group Newspapers as no conflict of interest had actually arisen in the technical legal sense between Mr Mulcaire and News Group Newspapers who the judge described as being "....as they always were, in it together".
The issue of whether the indemnity was void as contrary to public policy was also addressed. As a general proposition, an indemnity against civil or criminal liability resulting from a deliberate commission of a crime by the person to be indemnified is not enforceable by the individual in question or his representatives. However, this principle was held not to apply in circumstances such as these where the relevant agreement was concluded after the criminal event in relation to which civil proceedings had arisen.
Conclusions
These two cases illustrate the importance of considering both the structure and drafting of an indemnity for an existing or departing employee very carefully. This is the case whether the indemnity relates just to legal costs or to wider liabilities, and also whether the indemnity is given in the context of potential criminal proceedings relating to the performance of the individual's duties whilst employed (as was the case in these two cases) or other concerns - such as a claim in the employment tribunal of unlawful harassment or discrimination to which the individual has been joined as a party or indeed in respect of potential allegations of breach of fiduciary duty or restrictive covenants in relation to team moves or recruitment of significant producers of business.
Leaving aside the presentational and other issues which agreeing indemnities can present, depending on the nature of the dispute in question, the beneficiary of the indemnity will want clarity and the widest permissible protection as well as to ensure that the indemnity is legally binding. The employer agreeing the indemnity will want to ensure appropriate procedural safeguards to address cost, liability and reputation management issues.
The position is further complicated if the individual is a director. Broadly speaking, UK companies legislation does not permit indemnification in cases where the director is in breach of duty. In those circumstances, indemnities with regard to legal costs may need to be structured by way of loan and to provide for repayment of sums already advanced and for cessation of the indemnity where the director's defence of his position is unsuccessful before a court. Also, where relevant, the position under any applicable directors' and officers' liability insurance, as well as the articles of association of the relevant company, may also need to be assessed or re-assessed to ensure that such policies do in fact provide cover for executives in the very situations when they may most need it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
