Legal Costs Indemnity in Compromise Agreement did not Cover Criminal Investigation


3 mins

Posted on 19 Jan 2012

A legal costs indemnity provided by an employer under the terms of a compromise agreement did not cover investigations by police into the employee’s alleged criminal behaviour. 

In Coulson v Newsgroup Newspapers Ltd, C, the former Editor of the News of the World, sought a declaration that a legal costs indemnity provided by his employer under the terms of his compromise agreement covered his legal expenses incurred in connection with a criminal investigation into his actions whilst Editor. 

In July 2011, C was arrested and interviewed by police in connection with phone hacking allegations at the News of the World.  The terms of his legal costs indemnity provided that his former employer agreed to pay "any reasonable professional ….. costs and expenses properly incurred ….. after the Termination Date 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 Editor."  He sought a declaration that the legal costs incurred in connection with the criminal investigation were covered by the indemnity. 

The High Court held that they were not. As Editor he was required to act lawfully and so the reference to Editor in the indemnity had to be to someone performing the lawful duties of Editor. It could not have been intended that activities outside the scope of his lawful duties as Editor would be covered by the indemnity, particularly serious criminal activities for which he was alleged to be personally responsible. Although the term "judicial proceedings" was wide enough to cover criminal proceedings, personal wrongdoing was not within the intention of the clause. The words "having to defend, or appear in" envisaged him being drawn into judicial proceedings due to his responsibility for content or because of his supervisory responsibility. They did not cover participation in criminal proceedings brought against him arising from his own alleged personal misconduct.  The words were not a natural way of expressing the concept of defending oneself. 

Indemnities of this nature are common in the compromise agreements of senior employees. The decision in this case demonstrates the importance of drafting these provisions carefully to ensure that they accurately reflect the parties’ intentions. If the intention is to cover an employee for costs incurred as a result of being accused of criminal wrongdoing, then this should be expressly stated. 

The Government said in its Response to its Resolving Disputes Consultation that it would consider developing a standard text for compromise agreements. However, a standard text is only likely to cover the key requirements for compromise agreements and would therefore be unlikely to include indemnities of this nature. Legal advice should always be sought if in any doubt over the scope of an indemnity of this nature.

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