High Court dismisses former banker’s claim for future loss of earnings

The case explores the interplay between standard employer’s duties under contract, statute and in regulations with those imposed by common law. If Mr Benyatov had succeeded with his innovative argument that there was an implied contractual indemnity to protect him from future loss of earnings, this could potentially have undermined principles established in tort as to when there is a duty of care to safeguard against another’s pure economic loss.

The High Court in Benyatov v Credit Suisse held that there is no general duty of care to protect an employee from future economic loss and Mr Benyatov’s claim, that there was a specific duty to prevent his arrest and subsequent losses, failed on the facts. However, the door is not permanently closed: a duty to take reasonable care to protect employees from certain economic losses could exist in certain circumstances, according to the High Court. Further, although an indemnity can be implied into a contract to cover expenses and liabilities reasonably incurred by an employee or agent in the course of carrying out their duties and in the scope of their authority, this does not extend to consequential losses suffered.

The potential for such liability to arise on other facts will have risk management implications for many financial services and other companies posting staff internationally and may require changes to HR, Legal and Compliance procedures to ensure the relevant information, training and D&O insurance is in place to manage the risks.

Overview

Mr Benyatov claimed career loss of earnings equivalent to £66m (in his amended particulars of claim) pursuant to various implied duties in contract and tort.

The High Court held:

• No duty of care in tort. On the basis of the facts of the case, Credit Suisse did not owe Benyatov a duty of care in tort not to expose him to criminal conviction and resulting losses in the performance of his duties. There was, in any event, no breach of any duty of care by Credit Suisse. N.B. Mr Benyatov did not assert that Credit Suisse owed him a general duty of care to protect him from future economic loss but framed his claim in specific terms by reference to risks arising in relation to him personally, being a Russian speaker operating in Romania at a time when state operated industries, such as telecoms, gas and electricity, were being privatised, undertaking specific work and the foreseeability of harm that could befall him.

• No implied contractual duty to indemnify for loss of earnings. Credit Suisse did not owe Benyatov a contractual duty to indemnify him in respect of loss of earnings arising from the performance of his duties.

Importantly, the court did not close the door on the law evolving incrementally: a duty to take reasonable care to protect employees from certain economic losses could exist in certain circumstances.

Facts

Mr Benyatov was employed as a Managing Director of Credit Suisse. Mr Benyatov was born in Azerbaijan in the former Soviet Union and was fluent in Russian. He moved to the US in his teens and was also a US citizen. During his investment banking career, he had been based in Moscow before moving to London in 2000 where he worked on transactions in various countries including Bulgaria, Poland, the Philippines, Russia, Slovakia and Ukraine. Mr Benyatov worked on privatisation projects in Romania for the government including the sale of the principal oil and gas company in 2002-2004.

Whilst conducting business in Romania in November 2006, he was arrested and had to spend 56 days in jail, remaining in Bucharest until August 2007. In 2013 a trial was held and he was convicted in absentia for crimes under Romanian law and sentenced to 10 years imprisonment. At an appeal in 2015 his sentence was varied to 4.5 years. Following his conviction in 2013, the FCA revoked his status as an Approved Person. Mr Benyatov was made redundant in 2015 and fearing the imposition of a European Arrest Warrant he went to live in the US in 2015. (NB Notwithstanding that Mr Benyatov was notified of his potential redundancy in October 2013, and placed on garden leave, the bank continued to pay his £450,000 salary until his employment was terminated for redundancy in June 2015.)

In 2006/7 the bank conducted an internal investigation and concluded that his conduct was in line with customary business practice and he was not guilty of wrongdoing. The bank spent considerable sums on representation and advice to assist him in criminal defence costs, including an ongoing appeal to the European Court of Human Rights.

Initial attempt to strike out claim failed

Credit Suisse initially tried to get the claims struck out (here), but the High Court ruled that Mr Benyatov’s claims based on (i) an implied indemnity to cover his loss of earnings due to his inability to work following his conviction, and (ii) a duty of care to assess the risks flowing from his work in Romania, should be allowed to proceed to be determined on the facts.

The High court dismissed Mr Benyatov’s claims in contract and tort: decision and reasoning

1. No duty of care in tort

As mentioned above, Mr Benyatov did not assert that the bank owed him a general duty of care to protect him from future economic loss. He framed his claim in specific terms as a duty of care in tort to protect him from criminal conviction in the performance of his duties, and subsequent losses arising from the bank’s failure to assess the risks which led to his conviction. He referred to risks arising as a result of him being a Russian speaker operating in Romania at a time of privatisation, the specific nature of the work that he did and the foreseeability of harm that could befall him, including the amber and red flags and the gravity of the consequences if the risks materialised.

The bank’s view was that such a duty could expose it and similar institutions to “huge, indeterminate liabilities for loss of earnings to many employees stretching many years into the future”.

The court considered arguments on whether such a duty of care existed, taking into account the three-stage analysis in Caparo v Dickman on duty of care:

• foreseeability of damage;
• proximity; and
• whether the situation is such that it is fair, just and reasonable that the court should impose such a duty.

The courts are generally reluctant to expand the number of situations where one party has a duty in tort to prevent a party from suffering from pure economic loss. Further, employers do not have a general duty to protect employees’ financial interests; indeed, the court noted the considerable difficulty in seeing what the content of a general duty to take reasonable care for the economic well-being of an employee would be. However, the court analysed relevant case law and found that whilst the existing cases rejected a general and sweeping duty on employers to compensate employees for financial loss, they recognised that there were circumstances where a more focused and specific duty to take reasonable care to protect employees from certain economic losses could arise.

The court cited cases such as Scally v Southern Health and Social Services Board and Spring v Guardian Assurance as examples of where such circumstances had existed.

• Scally involved a claim by employees for damages in respect of the failure by their employer to inform them of the right to buy added pension years; the House of Lords held that there was an implied duty on the employer to take reasonable steps to bring this contingent right to an employee’s attention.
• Spring concerned liability in the financial industry for a reference to a former employee; the House of Lords held that an employer could be subject to a duty of care to protect an employee’s economic interests by taking reasonable care to produce an accurate and properly researched reference.

The court considered Rihan v Ernst & Young (Global) Ltd [2020] EWHC 901 (QB) in some detail, in which the law was developed incrementally:

• to find a novel duty of care to take reasonable steps to prevent an individual from suffering financial loss, ie loss of earnings, by reason of the defendants’ failure to conduct an audit in an ethical and professional manner (the audit duty) – this was justified on the basis that the judge saw no reason why, in certain circumstances, the moral and professional integrity of the employee should not be protected by a duty to take reasonable steps to provide an ethically acceptable work environment;
• but to dismiss a separate safety duty, described as a duty of care to protect the individual from loss of earnings arising from his reasonably apprehended concerns regarding safety of his work environment overseas, which led him to resign. Employers are not under a duty to safeguard employees against pure economic loss incurred as a result of an employee’s need to cease working to avoid a threat to their physical safety. It was held to be “far-fetched” to suggest that the remedy of the employee who is sent to work in a physically unsafe work environment can claim by way of damages in tort the entire cost of a lost career if he or she decides to disobey the instruction and part company with the employer.

The judge drew a distinction between the audit duty in Rihan, where the claimant was tainted as a result of the lack of integrity of the employer, and this case, where Mr Benyatov was tainted due to the actions of a third party, the Romanian prosecution and courts. In Benyatov, there is no challenge about the integrity of the business of the bank or its practices: the allegations are about negligent systems and omissions. There was, therefore, no analogy between the audit duty in Rihan and the facts of the Benyatov case.

The safety duty, which failed in Rihan, is closer to Mr Benyatov’s circumstances. Whether there would be a duty of care depends on the reasonable foreseeability of the events which then occurred; the judge held that if it was reasonably foreseeable that Mr Benyatov would go to the country, be falsely convicted and become unable to continue his career then there may be duty of care. In each case it will depend on a consideration of the facts and whether it is fair, just and reasonable to impose a duty.

The Court considered evidence in relation to the duty of care asserted by Benyatov, and made findings of fact, including that:

• Romania was not considered a high-risk country during the relevant period,
• the particular transaction was not considered a high-risk transaction,
• none of the alleged amber or red flags were established to put the bank on notice of some special need for vigilance in the instant case,
• There was no standard in commissioning a political or other detailed risk assessment,
• The were no circumstances applying specifically to Mr Benyatov which made it inappropriate for him to be appointed on the transaction.

In essence, the court concluded that Benyatov had failed to prove that, in the circumstances of this case, it was reasonably foreseeable that he would be exposed to a conviction and subsequent losses in the performance of his duties for the bank. Further, it was not fair, just and reasonable to create the alleged or a related duty of care in the circumstances of this case.

However, the fact that an employer could be held liable for breach of a tortious duty to protect an employee from economic loss in the conduct of his duties raises the question whether such liability would be insured. Employment Practice Liability policies may well refer to a range of employment law or contractual breaches but not to breach of such a duty of care: employers would do well to make sure their policies are extended to cover breaches of tortious duty.

2. No implied contractual indemnity

It was common ground between the parties that there was a right to an indemnity implied into the contract. In contention was the extent of such an indemnity.

The bank accepted that it owed an implied duty to indemnify the Claimant in respect of expenses and liabilities reasonably incurred by him in carrying out his duties as the bank's employee and in the scope of his authority. In other words, it sought to limit the scope of the indemnity to sums "paid or payable to third parties".

However, Mr Benyatov's case was that the duty applies not only to expenses and liabilities incurred but also to losses suffered.

The bank argued that what Mr Benyatov sought would represent a very significant extension of the law.

For a term to be implied in law it must be demonstrated that it is “a necessary incident of a definable category of contractual relationship”. For it to be implied in fact it must be necessary to give business efficacy to the contract or so obvious that it goes without saying.

The judge concluded by reference to existing case law that the scope of the implied indemnity was limited to payments or liabilities ie payments made and payments to be made in discharge of liabilities incurred in the course of or in consequence of the employment or agency relationship.

The court considered whether to extend such an implied indemnity to cover consequential losses, such as future loss of earnings. The judge noted that based on the extension of the prima facie duty of care in tort an incremental approach is preferred when developing the law. If the indemnity was extended it would sidestep this incremental approach and provide remedies for loss of earnings where none had existed. The caution set out in the Johnson v Unisys resonated here and the judge highlights that it is not for the Court to circumvent the statutory framework. The judge concluded that an indemnity for loss of earnings has no precedent.

Therefore, the court concluded that consequential losses (such as loss of earnings) are not recoverable as a matter of law in implied indemnity whether in an employment or agency relationship. The scope of the implied indemnity is limited to payments or liabilities, that is payments made and payments to be made in discharge of liabilities incurred in the course of or in consequence of the employment or agency.

The High Court judge says there is “a real problem as to the interrelation of the right to indemnity as formulated in the cases and in the textbooks with the law of tort as to circumstances in which an employee can recover damages against an employer.”

But, importantly, the judge did leave open the possibility of incremental development for another case. The judge said it was not necessary to consider whether the scope of an implied indemnity of fact could extend to loss of earnings in an appropriate case. “It suffices to find, as the Court does, that the basis sought for such a finding is not made out on the facts of this case” (para 369)

3. Implied indemnity in agency relationships

The position is the same in relation both an employment and agency relationship: consequential losses (such as loss of earnings) are not recoverable as a matter of law in implied indemnity whether in an employment or agency relationship. The scope of the implied indemnity is limited to payments or liabilities, that is payments made and payments to be made in discharge of liabilities incurred in the course of or in consequence of the employment or agency.

There seems to be some earlier case law suggesting that losses could be recovered in the context of an agency relationship: the earlier Court of Appeal judgment in Famatina set out the underlying principle that there is "well settled rule that an agent had a right against his principal, founded upon an implied contract, to be indemnified against all losses and liabilities, and to be reimbursed all expenses incurred by him in the execution of his authority." (para 327, citing para 145).

But the scope of this is disputed, as the High Court judge in Benyatov decided that it seems that the recovery of “losses” were in fact costs incurred by the claimant – ie costs paid or liability incurred to a third party, rather than genuinely future losses (in Famatina); and it was not obvious how the court in Whitlam (Court of Appeal decision of New South Wales) reached a difference decision.

Finally, while the case decided that the implied indemnity arising from the employment or agency relationship does not extend to the loss of future earnings suffered by an employee in carrying out his/her duties, it affirmed the view that liabilities – including defence costs incurred by the employee in defending criminal prosecutions – are within the scope of the implied indemnity (as long as the employee was acting in good faith). In those circumstances, employers are not entitled to refuse to fund employees’ defence costs in respect of a criminal prosecution. Should employers refuse to do so – perhaps relying on the obligation of the employer’s D&O insurers to indemnify the employee for defence costs under “Side A” – they may find that those insurers will, having paid out to the employee, seek to the recoup such payments from the employer up to the policy retention amount.

Conclusion

The decision will be a relief for many employers.

Imposing an implied term that the employer would indemnify employees for future economic loss as a result of harm experienced while carrying out their duties, would have had potentially far-reaching consequences, particularly for global institutions sending employees overseas.

Practical tips

1. Expressly state in employment contract that there is no contractual indemnity

2. Regularly update and revise risk assessment processes for high risk jurisdictions and/or high risk transactions to reflect political, humanitarian, social and economic developments

3. Consider discrimination risks where advising an employee not to travel for reasons associated with their protected characteristics

4. Focus risk policies on risks to the individual employees, as well as risks to the organisation and the organisation’s interests.

5. Ensure an organisational overview of risk: in this case risks had been assessed within separate business divisions (fixed income, investment banking, equities) but a more centralised approach was required

6. Consider what enhanced security options are available where sending staff to high-risk jurisdictions including using specialist agencies, relevant local embassies, other consultants to provide specific intelligence on risks associated with particular locations, nationalities or activities.

7. Keep track of red flag issues raised by employees based in high risk jurisdictions

8. Review and assess appropriateness of D&O cover