Can an employer in a contract with a third-party business exclude or limit liability for an employee’s dishonesty, fraud, and/or gross carelessness?
The Answer
The High Court decision in the case of Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35, suggests that a general exclusion provision could be enforceable if worded correctly as, in this case, an exclusion clause was held to be effective where it excluded an employer's liability for an employee’s dishonesty in the employee’s performance of the contract with the employer’s business customer. The High Court appeared to suggest that it may be possible, in principle, to exclude dishonesty by the party itself.
The above decision is in line with another previous case of Photo Production v Securicor 1980, where an employee working for a security firm deliberately set fire to a factory that the employer was required to provide security services and the employer relied on an exclusion clause in the contract to avoid liability for their employee’s malicious and deliberate behaviour that stated, “under no circumstances shall [the firm] be responsible for any injurious act or default by any employee of the [firm] unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of the [firm].”
The Risk/Threat
The judgment in the case of Frans Maas [2004] EWHC 1502 emphasised that "Parties do not contemplate fraud in the making of a contract… But it is another thing altogether to say that parties do not contemplate the risk of deliberate wrongdoing at some point in the performance of a valid contract", thus without an exclusion clause in place, the employer can be at risk of a personal action by the other party to the contract where the employer’s employee commits an act of dishonesty or fraud or gross negligence and thus be subject to substantial damages claims.
What You Need To Do
It is unlikely that an employer’s own fraud or dishonesty to induce the other party to enter into a contract would exclude the employer’s own liability but other than that, in a business to business contract, the parties are able to freely limit liability for breach of any obligations under the contract as long as such clauses, if disputed by the other party ,satisfy the test of “reasonableness” under the Unfair Contract Terms Act 1977 (“UCTA”). Thus, when employers are looking to supply services of their employees to a business customer that they consider contract terms that limit or exclude their liability for their employees’ misconduct, fraud or dishonesty in the performance their obligations within the contract. Such clauses should be legally drafted to ensure that the wording of the clauses can be relied upon in any court action.
If you require any further assistance, please do not hesitate to contact our HR/Legal advice line team at 01455 852 028.
