Thursday, November 29, 2012

Indemnity clauses and criminal proceedings

Earlier this week, the Court of Appeal decided another interesting case involving contractual interpretation – this time interpreting and determining the scope of an indemnity clause. The case was one of the many fall-outs of the ongoing News of the World (“NOTW”) saga, and involved a claim brought by Mr Coulson, former editor of NOTW, against his former employers.


On the termination of Mr Coulson’s employment in 2007, News Group Newspapers Limited (“NGN”) and Mr Coulson had entered into an agreement which included the following clause:

To the extent that it is lawfully able to do so, [NGN] will pay any reasonable professional (including, without limitation, legal and accounting) costs and expenses properly incurred by [Mr Coulson] after the Termination Date [viz. 28 February 2007] which arise from his having to defend, or appear in, any administrative, regulatory, judicial or quasi-judicial proceedings* as a result of his having been the Editor of the News of the World.


In 2011, Mr Coulson was arrested as part of the investigations into NOTW; and he sought to recover from NGN the costs of defending the criminal proceedings brought against him. NGN agreed to indemnify him for costs incurred on account of the civil inquiries, but argued that the costs incurred in defending criminal proceedings were not recoverable under the indemnity clause. In his subsequent claim, Mr Coulson failed in the High Court, but succeeded on appeal in Andrew Coulson v News Group Newspapers Limited.


NGN denied liability to indemnify Mr Coulson for the costs incurred in defending the criminal proceedings on the principal ground that criminal proceedings fell outside the scope of the indemnity clause.

First, NGN argued that since illegal/criminal activities were not within the scope of Mr Coulson’s employment as editor, the criminal proceedings were not ‘a result of his having been the Editor of the News of the World’. Therefore, the costs and expenses of defending these proceedings were not recoverable pursuant to the clause.

Secondly, NGN contended that the clause only allowed the recovery of costs and expenses which were ‘reasonable’ and ‘properly incurred’. The costs incurred in defending criminal proceedings did not satisfy these requirements.


McCombe LJ, delivering the decision of the Court, rejected both these contentions. He observed that there was “nothing inherently objectionable” in a clause which applied to the defence of criminal proceedings; the applicability of the clause depended instead on the nexus between the employment and the subject matter of the criminal proceedings. The relevant question was “whether the criminal allegations arise out of how the employee went about the performance of his job or whether they arise out of some act having nothing whatever to do with performing the job”.


The Court of Appeal disagreed with the the judge at first instance that since Mr Coulson’s duties as editor comprised only lawful duties, it cannot have been intended that activities outside his lawful responsibilities would be covered by the indemnity. If that were true, the clause would also not apply to libel or contempt of court proceedings, which would certainly be expected to fall within the scope of an indemnity granted to the editor of a newspaper. Admittedly, if the charge arose out of conduct which had nothing whatever to do with Mr Coulson’s job or its attempted performance, the clause would not apply. However, the charges here arose “out of the allegedly criminal manner of his performance of his role as editor” and therefore were covered by the clause.


As to whether the costs were ‘reasonable’ and ‘properly incurred’, the Court held that ‘reasonable’ refers only to the quantum claimed and not the circumstances in which the costs were incurred. The phrase ‘properly incurred’ posed the question whether Mr Coulson could claim the costs only if his defence was successful, or whether even costs incurred in unsuccessfully defending the criminal proceedings could be recovered. Applying the principles laid down in Investor Compensation Scheme, the Court held that given the circumstances at the time of the agreement, the costs of defending criminal charges cannot have been outside the contemplation of the parties. It would be “artificial in such circumstances to have expected that the indemnity would be subject to a scrutiny of the nature or merits of the intended defence to the charges or subject to the outcome of the trial itself … ‘properly incurred’ in this contract simply means costs of a nature properly to be regarded as required in the defence of the particular proceedings in question”.


In addition, NGN relied on the common law maxim ex turpi causa non oritur actio, which states that a claim cannot be founded on a criminal/illegal act. This is a controversial area in English law, with conflicting decisions on the strength of the nexus required between the illegality and the claim. However, in this case, the Court of Appeal (and the judge at first instance) rightly held that “there is nothing contrary to public policy in one person providing funds to another for that other to defend himself against a criminal charge”. If the claim had sought to recover a fine imposed for an illegality, the maxim would apply. It did not, however, have the effect of precluding a claim for recovering costs incurred in merely defending criminal proceedings.


This decision is of significance for indemnity clauses in employment or retainer contracts and even for D&O (directors and officers) insurance policies. Many such contracts contain indemnity clauses which are similarly widely drafted. Admittedly, the special circumstances of this case meant that criminal proceedings were certainly in the contemplation of the parties at the time of the agreement. It is also important to note that the Court of Appeal relied on the fact that this indemnity clause was wider than the clause in Mr Coulson’s employment contract, which indicated that it was intended to have a wider scope. However, notwithstanding these distinguishing aspects of the case, some important lessons to take away are:

• The alleged criminality of the conduct does not necessarily take it outside scope of employment- if the charge arises from the criminal manner of performing the job, it can fall within the indemnity clause;

• ‘Reasonable costs’ usually refers to the quantum of the costs and not the purpose for which they have been incurred;

• ‘Properly incurred’ does not require that the criminal proceedings be defended successfully. (However, it is not clear to what extent the Court’s conclusion on this point was influenced by the peculiar circumstances of this case); and

• The ex turpi causa maxim cannot be applied to reject a claim to recover the costs of defending criminal proceedings.


* The interpretation of 'proceedings' (and whether this required the bringing of a charge) was also an issue in this case. However, given its procedural nature, this issue is of limited relevance for present purposes.

1 comment:

Anonymous said...

Impromptu >
In the write-up certain portions /words have been underlined; and it appears to have been so done to highlight that those are the key words / expressions giving rise to the issues, requiring interpretation. If closely looked at, and viewed from a wider perspective, though on a selective basis, it appears, there could be several others responsible for giving rise to the reported court litigation.
To broadly demonstrate, one may pinpoint the portions additionally marked below, in bold font:
“To the extent that it is LAWFULLY ABLE TO DO SO, [NGN] will pay any reasonable professional (including, WITHOUT LIMITATION, LEGAL and accounting) costs and expenses properly incurred by [Mr Coulson] after the Termination Date [viz. 28 February 2007] which arise from his having to defend, or appear in, any administrative, regulatory, judicial or quasi-judicial proceedings* as a result of his having been the Editor of the News of the World.”
“First, NGN argued that since ILLEGAL/CRIMINAL ACTIVITIES were NOT WITHIN THE SCOPE of Mr Coulson’s employment as editor, the criminal proceedings were NOT ‘A RESULT OF HIS HAVING BEEN THE EDITOR of the News of the World’. Therefore, the costs and expenses of defending these proceedings were not recoverable pursuant to the clause.”
It needs to be appreciated that, in drafting the indemnity clause, necessary care, as would have been reasonably expected, in the interests of both the parties, has not been taken. So as to make the ‘intention’ of the parties as clear or explicit as feasible. And thereby try and ensure that there is the least scope left for dispute or court litigation. On the contrary, it is noted to have been couched in a language, unwittingly or otherwise, with many of the words/expressions unclear, also dubiously vague enough to lend scope for ‘interpretation’. In short, the indemnity clause cannot be rightly claimed to have been so mindfully drafted, and in a strictly legal manner, as to bring out in so many words the ‘intention’ of either, much less of both the parties.
Be that as it may, the point worth deliberating is, in brief, this: - Is not, in all such like or similar situations, the preferred course, from the viewpoint of both the parties, should be to reach an amicable solution by resorting to the other available but better alternative of ‘arbitration’; instead of court litigation. But then, that is possible, depending on the willingness of both the parties to come to a mutual settlement, without getting into the trap of litigation. In one’s independent opinion, based on a longstanding conviction, that should be a possible course or solution, hence worth exploring; regardless of whether, OR NOT, in any given contract agreement there is any specific arbitration clause.
Last but not least, it requires a special noting, issues have arisen and been taken to court, notwithstanding that, purportedly, it was a ‘compromise agreement’ that the warring parties proposed and entered into.
Over to the experts for a well considered view!
(Recommended to do so in the light of the several articles and comments thereon, previously published on this site; also elsewhere e.g.
o @ Indemnity for Penal Sanctions, Reasonableness and ... AND
Liability And Indemnity Clauses: The Need For Careful...)

V Swaminathan