Alleged criminal behaviour and indemnities

In a successful appeal to the Court of Appeal against an earlier High Court ruling, Andy Coulson has established that News Group Newspapers are bound to meet, and indeed to continue to meet, his legal fees relating to criminal investigations into alleged illegal activity during the period when he was editor of the News of World.

The Coulson decision demonstrates, depen-ding of course on the drafting, that the fact that an employee’s conduct might be alleged to be criminal does not necessarily take that conduct outside the scope of an indemnity covering the employee in respect of liabilities arising from the performance of his duties. It is also a valuable reminder of the need carefully to detail the precise scope of any indemnity which an employer gives to a current, former or future employee.

‘Properly incurred’

In Coulson’s case the agreement in question identified very precisely the scope of the indemnity agreed to by News Group Newspapers. It agreed to pay any reasonable professional costs “properly incurred” by Coulson arising 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”.

Coulson argued that this meant that NGN was obliged to pay the professional costs and expenses which he properly incurred in defending 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 the Prevention of Corruption Act 1906 in respect of which he had been arrested on 8 July 2011. Indeed he also contended that the indemnity extended to proceedings commenced since the original proceedings to enforce the indemnity were commenced.

NGN argued that it was not obliged to meet Coulson’s costs on the basis, among other arguments, that they were not incurred “as a result of his having been editor” but because of his own personal misconduct outside the lawful duties of an editor. NGN also argued that there were no relevant “proceedings” on foot, since Coulson had only been arrested but not charged with any offence at the time he started these proceedings.

Editor’s activities

The court was very clear that the indemnity extended to Coulson’s legal costs in these circumstances. Examples of proceedings which this sort of indemnity would be expected to be covered in respect of a news-paper editor’s activities included the defence of criminal charges arising from publication of allegedly obscene material or from publication of an article said to amount to incitement to racial hatred.

The costs of defending criminal proceedings arising from Coulson’s performance of his duties as editor, which the indemnity should cover, was contrasted with conduct outside the scope of the editor’s role such as a fraudulent claim for expenses where the claim to an indemnity would have nothing whatever to do with his performance or attempted performance of his job but would simply have been a fraud.

Even though the conduct which led to the relevant proceedings was alleged to be criminal that did not disapply the indemnity which would still apply to the allegedly criminal manner of Coulson’s performance of his role as editor.

McCombe LJ rejected the view held by the High Court judge which said that because Coulson’s duties as editor comprised only lawful duties, it could not have been intended that activities outside his lawful responsibilities would be covered by the indemnity. Were that the case, that would, as McCombe LJ put it, “surely deprive the indemnity of all practical use” as, for example, it would not even cover the editor for the costs of defending proceedings arising out of the publications of alleged libels or publications said to constitute a contempt of court.

The argument also failed that the indem-nity did not extend to costs incurred prior to any criminal charge being laid. Advice and representation in relation to proceedings at a police station where a person is suspected of a criminal offence were seen to be, for these purposes, part and parcel of the criminal process and therefore the “judicial proceedings” referred to the indemnity itself and could not be separated from events after charge. The court also 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 as was done here. That the indemnity provision referred to reasonably and properly incurred costs was seen only as limiting the quantum of recoverable costs to those which could be justified rather than disapplying the indemnity where the conduct complained of was allegedly improper.

Procedural safeguards

This decision is important for those negotiating and seeking to enforce indem-nities agreed with their current, former and even, particularly in the context of team moves, prospective employers. The devil is of course often in the detail and both sides will wish to protect themselves in the drafting, the bene?ciary of the indemnity seeking the widest permissible protection and the employer seeking appropriate procedural safeguards to address costs, liability and reputational issues.

The position is further complicated if the individual is a company law director, in which case various provisions of the Companies Act 2006 will need to be considered. The ‘qualifying third party indemnity provisions’ permitted to be agreed with company law directors under section 234 of the 2006 Act cannot extend to ?nancial penalties imposed in criminal or regulatory proceedings or to liabilities from defending civil or criminal proceedings or seeking relief where directors are found guilty, have judgment given against them or fail with an application for relief. Consequently, indemnities against legal costs may need to be structured as a loan and to provide for repayment of sums already advanced and for cessation of the indemnity where the director’s defence is unsuccessful before a court.