A legal costs indemnity in a compromise agreement may not cover all types of legal costs incurred by an ex-employee

17.1.2012

In Coulson v Newsgroup Newspapers Limited [2011] EWHC 3482 (QB) the High Court was asked to assess whether the wording of a legal fee indemnity obliged the employer, News Group Newspapers Limited (NGN), to pay an ex-employee’s legal expenses. These expenses arose in relation to a criminal investigation into the ex-employee, Mr Coulson, which consisted of him being arrested and interviewed by police. This followed allegations that he had unlawfully made payments to police officers and intercepted communications during his employment as News of the World Editor. Mr Coulson denied all allegations and was bailed, and never charged. Mr Coulson then claimed payment of his legal expenses from NGN, referring to the indemnity in the compromise agreement which he signed on termination of his employment.

The indemnity in question provided that NGN would pay Mr Coulson’s reasonable legal costs and expenses incurred after his Termination Date which were to arise from him having to defend, or appear in, “any administrative, regulatory, judicial or quasi-judicial proceedings” as a result of being the former Editor of the News of the World. After NGN refused to pay his expenses, Mr Coulson sought a declaration from the Courts as to the effect and scope of the indemnity in question. Although the indemnity was found to be wide ranging, it was held that the wording in question did not cover investigations by the police or criminal proceedings based on Mr Coulson’s own alleged personal wrongdoing. The High Court gave various reasons for this.

Firstly, as Mr Coulson was required to act lawfully as Editor of the News of the World, it could not have been intended that the indemnity would cover unlawful activity, especially serious criminal activity. This finding was supported by the existence of another clause in the compromise agreement which provided that the indemnity did not cover expenses arising from “fraud committed by the employee”. Secondly, the High Court held that “judicial proceedings” did not exclude all criminal proceedings, only those proceedings with an element of personal misconduct. Therefore it may have been acceptable for Mr Coulson to claim expenses where he had been drawn into criminal proceedings as a witness in a case directed against another employee. Mr Coulson might reasonably be expected to appear as a witness in such cases due to his seniority and the fact that he would have had supervisory responsibility. Thirdly, and in the alternative, it was held that the indemnity itself had not actually been engaged. This is because, following its wording, no “proceedings” had been commenced. Mr Coulson had just been questioned by police and bailed. He had not even been charged. As the wording of this indemnity is often inserted as standard into most compromise agreements, the High Court’s interpretation is likely to be welcomed by many employers. This decision also emphasises the need to ensure that indemnities in compromise agreements are clearly drafted to ensure clarity.