UK: Court of Appeal confirms limits on implied contractual indemnity and employer duty of care in relation to loss caused to employee by third party

Update 21 July 2023: permission to appeal to the Supreme Court has been refused.

Employers will welcome the Court of Appeal decision in Benyatov v Credit Suisse (Securities) Europe Ltd confirming that, as a matter of law, there is no implied contractual indemnity on an employer covering an employee for all losses suffered during the performance of their duties.  Employees will generally be entitled to repayment of any costs and expenses reasonably incurred, but not the loss of earnings caused by the wrongful or unjust acts of a third party without any fault on the part of the employer.

In this case, the claimant suffered a loss of future earnings as a result of his conviction by a Romanian court for alleged criminal wrongdoing in connection with a privatisation.  Although both parties contended that the conviction was wrongful, it presented an insuperable obstacle to the claimant's ability to work as a regulated financial professional.

It was common ground that it was an implied term of the claimant’s employment contract that the bank would indemnify him against some forms of harm suffered in doing his job.  However, in the Court of Appeal’s view, there was no support in the English authorities for a general principle that if a person acts on the instruction of another, they are entitled to be indemnified against all losses, of any kind, suffered as a result of doing so, irrespective of any fault on the part of the employer.  A general implied indemnity of this kind would “wholly subvert the way in which both the common law and legislation have addressed the issue of the obligations of employers”.  Further, no such indemnity could be implied as a matter of fact on the particular facts of the case. (This leaves open the possibility that in some cases an indemnity might be expressly agreed, or implied by fact where the employer has actual or constructive knowledge that the employee's work is high-risk.)

The Court of Appeal also found that the bank did not owe a novel duty to its employee to take reasonable care to avoid the risk of the employee being convicted.  The High Court had found as facts that Romania was not regarded as a high-risk country during the relevant period and that the privatisation transaction was not regarded as a high-risk transaction.  The Court applied well-established principles, taking the incremental approach endorsed in Robinson v Chief Constable of West Yorkshire Police and considering the three-stage Caparo Industries Plc v Dickman test (namely, (i) foreseeability, (ii) proximity, and (iii) fairness, justice and reasonableness) to the extent that those factors are in issue.  The Court acknowledged that assumption of responsibility may be a useful analytical tool, but its usefulness will depend on the issues in the particular case.  The most decisive factor in the present case was foreseeability, and assumption of responsibility added nothing, because the bank could not have assumed responsibility for risks that were not reasonably foreseeable.  The Court of Appeal therefore upheld the earlier decision of the High Court for essentially the same reasons.

For further details on this case, please see our Banking Litigation Notes blog post here.