The Court of Appeal has dismissed the appeal of a bank employee, finding that the bank did not owe a novel duty to take reasonable care to avoid the risk of the employee being convicted, and that there was no implied term of the employment contract that the bank would indemnify the employee against loss of future earnings suffered as a result of his conviction: Benyatov v Credit Suisse (Securities) Europe Ltd [2023] EWCA Civ 140. In doing so, the Court of Appeal upheld the decision of the High Court for essentially the same reasons.
The Court of Appeal refused to draw an analogy with the audit duty found in Rihan v Ernst & Young Global Ltd [2020] EWHC 901 (QB) (see our banking litigation blog post). In Rihan, the established duty on the defendant auditor was to conduct the audit ethically and without misconduct. In the view of the Court of Appeal, this had no application to the circumstances of the present case, where the duty alleged had nothing to do with the bank avoiding wrongdoing, but was an alleged duty to protect the claimant against the wrongdoing/unjust acts of another third party.
The decision demonstrates the court’s conservative approach to establishing a novel duty of care, providing some helpful analysis on the correct approach in law. The Court of Appeal applied well-established principles, taking the incremental approach endorsed in Robinson v Chief Constable of West Yorkshire Police [2018] UKSC 4. This will involve consideration of the three-stage Caparo test (namely, (i) foreseeability, (ii) proximity, and (iii) fairness, justice and reasonableness) to the extent that those factors are in issue. The Court of Appeal 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.
In relation to the contractual indemnity argument, 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. It commented that a general 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”.
We consider the decision in more detail below.
Background
The claimant joined the defendant bank (Bank) in 1997, and from 2005 he worked on a project advising a company about the purchase of a state-owned electricity company in Romania. In 2006, while he was on a visit to Romania, the claimant was arrested on suspicion of criminal wrongdoing in connection with the privatisation, subsequently charged and found guilty by the Romanian court in 2013. The claimant made a partially successful appeal to the Romanian Appeal Court and subsequently applied to the European Court of Human Rights, where he is still awaiting an admissibility decision.
It was common ground that the Romanian conviction was, in practice, an insuperable obstacle to the claimant’s ability to work as a regulated financial professional either in the UK or elsewhere. The claimant’s employment by the Bank was terminated in 2015.
In 2018, the claimant issued proceedings against the Bank, claiming that the Bank was liable to compensate him for the loss of earnings that he has suffered as a result of his conviction. He originally estimated that loss at over £66 million and proceeded on two alternatives bases:
- That it was an implied term of his contract of employment that the Bank would indemnify him against a loss of the kind suffered (the indemnity claim); and
- That the Bank was in breach of a duty to take reasonable care to avoid the risk of him being convicted, and that he is entitled to damages for that breach (the negligence claim).
The proceedings were conducted throughout by both parties on the basis that the claimant was indeed wrongfully convicted (save for in relation to one point, which was ultimately rejected by the court and is not considered further in this blog post).
High Court decision
The High Court dismissed the claim in its entirety.
Negligence claim
The claimant argued he was owed a duty of care not to expose him to criminal conviction in the performance of his duties for the Bank. In particular, the claimant argued that the Bank had a continuing duty to take reasonable care to protect him from criminal conviction, and the resulting losses in the performance of his duties.
The High Court approached the case as a “novel situation” (i.e. one where the existence of a duty of care has not been recognised in previous authority), with the result being that the High Court should proceed incrementally and by analogy with established authority, identifying the legally significant features of the situations (per Caparo Industries plc v Dickman [1990] 2 AC 605, as explained further in Robinson).
The High Court found that the claimant was unable to prove the basis of the pleaded duty, and failed to prove that (in the circumstances of the case) it was reasonably foreseeable that he would be exposed to a conviction in the performance of his duties for the Bank. The High Court took a number of factors into account in reaching this conclusion, including the facts showing that (during the relevant period) Romania was not regarded as a high-risk country, and that the privatisation transaction was not regarded as a high-risk transaction.
The High Court’s conclusion that the Bank did not owe the claimant the alleged duty meant that there was no need to consider the issue of breach. In any event, the High Court found that the claim was brought outside of the statutory limitation period.
Contractual indemnity claim
The claimant submitted that various terms were implied into the claimant’s employment contract as a matter of law, fact or business efficacy, including that (at all material times) the Bank owed to the claimant a duty to indemnify him in respect of “all losses, costs, expenses and claims he has suffered arising from or in consequence of faithfully, diligently or properly performing his duties on its behalf” (referred to as the “general indemnity”).
Considering implication as a matter of law, the High Court rejected the claimant’s claim that the general indemnity was a necessary incident of the employment relationship. It disagreed with the suggestion that there was 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. Bearing in mind that the loss (allegedly) suffered by the claimant in this case was predominantly loss of future earnings, the High Court commented that:
“… there is not a single case in which an indemnity implied into an agency or employment contract has permitted the agent or employee to recover lost income. Rather, in every reported case where an indemnity was ordered it was for payments that the agent or employee had made, or was liable to make, to a third party.”
The High Court also rejected the implication of the indemnity as a matter of fact, i.e. because of the particular circumstances of the case, such as the allegedly high-risk nature of the claimant’s work. The High Court’s findings in relation to the negligence claim meant that none of the risk factors relied on had been established, and so the alleged indemnity was not made out.
The claimant appealed this decision.
Court of Appeal decision
The appeal was dismissed unanimously by the Court of Appeal, with Underhill LJ giving the leading judgment and Bean LJ and Singh LJ in agreement.
Negligence claim
The claimant challenged the dismissal of his negligence claim on three grounds:
- Errors of law. The High Court took the wrong approach in law to the question of whether the alleged duties of care arose.
- Errors of fact. A challenge to the High Court’s decision on the facts relied on as establishing a duty of care, alleging that the High Court failed to take into account relevant evidence and/or reached a perverse conclusion on the basis of the evidence adduced.
- Limitation.
All three grounds were dismissed. In this blog post, we focus on the Court of Appeal’s reasoning in respect of the alleged errors of law, which is most likely to be of interest and application in future cases.
In summary, the Court of Appeal found that there was no error of law in the approach taken by the High Court to the question of whether a duty of care arose. The claimant’s criticisms fell broadly into three categories, although there was some degree of overlap, each of which is considered further below.
(a) Reliance on the Bank’s subjective understanding
The claimant submitted that the High Court applied the wrong test, by focusing on the subjective understanding of the defendant Bank as to whether there was a reasonable foreseeability of the claimant being exposed to criminal conviction. He said that the correct approach in law required an objective determination of whether the Bank had an implied assumption of responsibility.
In the view of the Court of Appeal, the High Court had correctly adopted an objective approach to the foreseeability of the risk to the claimant, considering the information “reasonably available” to the Bank at the time of the alleged negligence – that is, not only what the Bank actually knew, but what it should have known.
(b) Assumption of responsibility
The claimant suggested that the High Court’s analysis was “fundamentally flawed” because it did not approach it “through the lens” of the concept of assumption of responsibility.
The Court of Appeal confirmed that the correct course to assessing whether a duty of care should be recognised in a novel situation is to take the incremental approach endorsed in Robinson. That will involve consideration of the three-stage Caparo test (namely, (i) foreseeability, (ii) proximity, and (iii) fairness, justice and reasonableness), to the extent that those factors are in issue. The Court of Appeal said that the question of assumption of responsibility may be a useful analytical tool, particularly in considering the factors of proximity and/or fairness, justice and reasonableness, but its usefulness will depend on the issues in the particular case.
Applying that approach in the present case, the Court of Appeal found that it was quite unnecessary for the High Court to make any reference to the concept of assumption of responsibility, as the main point that was decisive in the High Court’s reasoning was foreseeability. Reference to assumption of responsibility added nothing on that question: the Bank could not have assumed responsibility for risks that were not reasonably foreseeable.
(c) Rihan v Ernst & Young Global Ltd
Finally, the claimant submitted that the High Court erred in failing to draw an analogy from the audit duty found in Rihan. In that case, the court found that there was a duty on Ernst & Young to take reasonable steps to prevent the claimant suffering financial loss by reason of their failure to conduct the audit ethically and without professional misconduct, and that the duty had been breached.
In the view of the Court of Appeal, the reasoning in Rihan had no application to the circumstances of the present case. In the first place, the court in Rihan found that the loss complained of by the claimant was foreseeable, whereas, the High Court in this case made the opposite factual finding. Secondly, the essence of the duty found in Rihan was that Ernst & Young should conduct the audit ethically and without misconduct. The duty alleged in the present case had nothing to do with the Bank avoiding wrongdoing – it was a duty to protect the claimant against the wrongdoing/unjust acts of others. That being so, the complaint that the High Court in the present case failed to “draw an analogy” with the finding of the audit duty in Rihan was misconceived.
As a matter of prudence, the Court of Appeal made it clear that it expressed no view either way about the correctness of the decision in Rihan about the audit duty (where permission to appeal was given but an appeal was not in the event pursued).
Accordingly, the Court of Appeal upheld the High Court’s dismissal of the negligence claim.
Contractual indemnity claim
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. The issue raised by the appeal was whether the forms of harm covered by the indemnity extended to a loss of earnings caused by the acts of a third party, and without the need to establish any fault on the part of the Bank.
Following a “regrettably prolonged trawl through the case law”, the Court of Appeal reached the view that there was no support in the English authorities for a general principle, reflected in the agency and employment cases, 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. This was the same conclusion as the High Court.
Notwithstanding the absence of authority, the Court of Appeal considered whether the general indemnity should – as a matter of principle – extend to cover all losses, of any kind, suffered by an employee as a result of doing their job, and more particularly, a loss of earnings of the kind suffered in this case, irrespective of any fault on the part of the employer.
The Court of Appeal concluded that the implication of this sort of indemnity would not be reasonable or fair, nor would it balance the competing policy considerations. The Court of Appeal went further and said that a general indemnity of the kind contended for would “wholly subvert the way in which both the common law and legislation have addressed the issue of the obligations of employers”. lt emphasised that an employer should not be liable simply because a serious misfortune or injustice at the hands of a third party has occurred in consequence of an employee doing their job, noting that the court is wary of imposing liability in the absence of fault.
The Court of Appeal also rejected the claimant’s challenge based on implication of the general indemnity as a matter of fact.
Accordingly, the Court of Appeal also upheld the High Court’s dismissal of the contractual indemnity claim, dismissing the appeal in full.
For further information, please contact:
Ajay Malhotra, Partner, Herbert Smith Freehills
ajay.malhotra@hsf.com
