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Reining in Vicarious Liability

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Paper presented at the 22 nd Insurance Market Conference Robinson College, Cambridge 8 th September 2015 Reining in Vicarious Liability Dr Claire McIvor Introduction The doctrine of
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Paper presented at the 22 nd Insurance Market Conference Robinson College, Cambridge 8 th September 2015 Reining in Vicarious Liability Dr Claire McIvor Introduction The doctrine of vicarious liability occupies a highly exceptional and anomalous position within tort law. The UK system of tort law is predominantly fault based and it is premised on the basic principle that people should only be held responsible for their own wrongdoings. Vicarious liability contradicts both of these principles as it imposes no-fault liability on a defendant who has not been shown to have engaged in any kind of tortious wrongdoing. The remit of the doctrine of vicarious liability has expanded dramatically over the last 20 years. The main expansions have been effected with the laudable aim of providing compensation to victims of institutional child abuse, but unfortunately not limited to this context. It is argued that the law has gone too far and, for the sake of the integrity of both the doctrine and the tort system as a whole, the remit of vicarious liability should be drastically curtailed. As will be demonstrated, the current law on vicarious liability is inconsistent, replete with internal contradictions and generally incoherent. This paper will look first at the nature of vicarious liability and possible theoretical justifications for its existence before moving on to discuss and critique the various ways in which the doctrine has been expanded in recent years. This will include discussion of the doctrine of non-delegable duty liability which has become, in effect, a tool for imposing vicarious liability for independent contractors. The Nature of Vicarious Liability Vicarious liability is a form of secondary liability. This means that the defendant s liability is triggered by the primary liability of another party. Primary liability, by contrast, refers to personal liability for wrongdoing. The vicarious liability doctrine most commonly applies to employers and it is almost wholly a common law creation. 1 While this paper is mostly concerned with the position of the 1 There have been two statutory developments in its history: (i) s.88 of the Police Act 1996 which makes Chief Constables or Police Authorities vicariously liable for tort committed by their police officers and (ii) s. 10 of the Partnership Acts 1890 which similarly extends the doctrine to business partners. For convenience purposes, this paper will adopt the terminology of employer and employee when discussing the application of vicarious liability. 1 vicariously liable defendant, it is worth noting briefly the position of the actual tortfeasor, the employee. Vicarious liability does not extinguish the liability of the primary tortfeasor. The vicariously liable employer and the tortfeasor employee are held jointly and severally liable. Claimants therefore have a choice of who to sue, 2 and could in theory sue the employee. They almost always opt to go through the vicarious liability route as it usually guarantees a solvent defendant employers often have public liability insurance. Of more relevance for present purposes, where the insurance company pays out in relation to a vicariously defendant, it takes on a right of subrogation against the tortfeasor employee. A gentleman s agreement not to enforce such rights of subrogation has been in force in the insurance industry for some decades, but it only covers claims where the wrong committed by the employee was unintentional. Most of the expansions of the doctrine of vicarious liability relate to intentional torts, usually trespass torts covering acts of sexual abuse. To my knowledge, nothing has been written about the impact of such developments on the gentleman s agreement. If it is abandoned, the use of subrogation rights risks completely undercutting the main point of vicarious liability the provision compensation through an economically efficient route. In the past, this would have been a moot issue, as most individual tortfeasors would lack assets and would not be worth suing. Now of course it is common for individuals to have public liability insurance as part of their house insurance. The importance of the fact that vicarious liability is a form of no-fault secondary liability is that, in assessing whether liability arises, the court should not inquire at all into the defendant employer s conduct. Liability arises from the existence of an employment-related relationship between our defendant and the tortfeasor and the fact that there is said to be an adequate connection between that relationship and the commission of the tort. In practice, there is evidence in some cases of the courts justifying the imposition of vicarious liability by reference to the conduct of the defendant. This blurs the boundaries between primary and secondary liability. Examples of this will be presented in the next part of this paper. The distinction is further blurred by the Supreme Court s resurrection of non-delegable duty liability, a form of primary liability, to extend the range of circumstances in which employers can be held liable on a no-fault basis for independent contractors. This too will be explored later in the paper. As regards the legal elements of the doctrine, traditionally it was described as being composed of 3 requirements: (i) the existence of a contract of employment; (ii) the commission of a tort by the employee and (iii) proof that the tort in question was committed with the course of employment. Following the decision of the Court of Appeal in JGE [2012] EWCA Civ 938 in July 2012 and the UK Supreme Court in Various Claimants v Catholic Child Welfare Society [2012] UKSC 56 in November 2012, the test has been reformulated and is now said to consist of a two-stage approach: (i) is there a relationship between the defendant and the tortfeasor that is capable of giving rise of giving rise of vicarious liability (the relationship requirement) and (ii) evidence of a close connection between that 2 Recovering in full from that party and leaving that defendant with a contribution right to pursue against the other liable party. 2 relationship and the act or omission of the tortfeasor (the close connection requirement). The recent legal developments in vicarious liability will be discussed under the headings of the relationship requirement and the close connection requirement. The latter will be addressed first in order to reflect the chronology of the relevant case law. Firstly, however, it is necessary to look briefly at the theoretical basis for the existence of the doctrine. Theoretical Justifications for Vicarious Liability This paper adopts the position that we can only properly critique the composition and application of the doctrine if we have a clear idea of what it is for. Although the doctrine has been around for hundreds of years, and is routinely used in practice, it is perhaps surprising that no one has yet come up with a convincing set of theoretical justifications for its very existence within our fault based tort system, let alone its now controversial manner of operation. Much ink has been spent on this exercise and with little success. Baty (writing in 1916) 3 and Atiyah (writing in 1967) 4 concluded that the doctrine could perhaps be justified by reference to the following non-exhaustive list of justifications: (i) the employer gets the benefit of the employee s labour so should take on any associated burdens (ii) the employer has contributed to risk of harm to public by choosing to operate the relevant enterprise and by choosing to have employed the harm-causing employee (iii) the employer has deep pockets (meaning he or she can afford to cover the loss)and (iv) the employer can engage in widespread loss distribution that is, pass on the cost of the damages award to consumers through small increase in price of product being produced. This reflects the idea that a loss of 1000 is much less of a loss if spread amongst 1000 people than if it is imposed on just one person. Lastly, there is also the consideration that it is cheaper and more administratively efficient for employer to secure insurance to cover activities of enterprise, than for individual workers to take out their own policies to cover themselves against potential liabilities. Of all the reasons cited, the loss distribution one has probably always been regarded as carrying the most weight. None of these justifications were said to be convincing on their own, but instead to have cumulative effect in terms of justifying vicarious liability. Since doctrine operated fairly narrowly within the field of commercial enterprise (and only applied to unintentional torts committed by employees) until the late 1990s, it was not that controversial and therefore it was tolerated without too much scrutiny or criticism. However the new expanded version of the doctrine is one that routinely applies to not-for-profit organisations and makes them liable for harms that have been intentionally inflicted by one of their workers. This makes it very difficult to justify on loss distribution grounds. Nonetheless, the loss 3 T Baty, Vicarious Liability (London, 1916) 4 P S Atiyah, Vicarious Liability in the Law of Torts (Butterworths: London, 1967) 3 distribution justification is still routinely cited by the courts as a justification for the new expanded version of vicarious liability. This demonstrates the lack of judicial engagement with crucial question of the doctrine s continued legitimacy. The key cases effecting this expansion contain vague and contradictory attempts at justifying it. Initial attempts at justification focussed on vague policy-based justice and fairness reasoning. While it might seem fair to compensate the victim, it is certainly not fair to saddle a defendant with no fault liability in circumstances where he or she is unable to distribute the loss. Moreover, why are the victims of torts committed by employees more deserving of an easy route to guaranteed compensation that anyone else? A highly emphasised recurring message is that vicarious liability also achieves deterrence. This is just wrong. Fault based liability achieves deterrence. No fault liability is more likely to encourage a devil may care attitude. Plus, in the context of child abuse cases, given that the threat of criminal prosecution has not deterred the tortfeasor, it is hard to see how an employer can realistically make changes within institution to guard against such harm. Note that in the seminal child abuse vicarious liability cases, the claims were only brought via the vicarious liability route as no fault could be found on the part of the employer as regards vetting procedures and employee supervision. The enterprise risk justification (which refers to the idea that the defendant s enterprise has created the particular risk of the harm caused by the tort and that as a quid pro quo it should therefore assume the burden of paying for that harm) is another current judicial favourite. The problem with this argument is that it only works in cases where liability is limited to risks that are both linked to a special feature of the enterprise and as well as to a tangible benefit received by the employer defendant. When the courts try to use this argument to justify the imposition of no fault liability on not-for-profit run childrens homes and care homes for the elderly, it rings completely hollow. Contrary to the suggestion of a senior judge, 5 the setting up of an institution to care for the vulnerable does not create a new risk of abuse. Such predators sadly already exist. Moreover, the application of vicarious liability to such enterprises effectively punishes those carrying out valuable social activities. A point that has not received nearly enough attention is that the imposition of no-fault liability in these contexts will inevitably discourage private not-for-profit enterprises from continuing to operate. The insurance premiums will often prove prohibitive. So for the sake of compensating the few, the many will lose out. Where the service is provided by a public authority, the damages award will come out of its (limited) budget. This means less money available to discharge its public duties. On a more analytical note, the other big problem with the use of the enterprise risk argument is that it is applied too loosely. As will be seen from the discussion of the case law in the next sections, almost any activity can be described as linked to a risk created by the enterprise. The use of risk rationales to impose no fault liability is always going to be a, for want of a better word, risky strategy. As everyone knows, risks are ubiquitous. So why single out employer enterprises as sole targets of no-fault liability? If we apply risk reasoning consistently, all risky 5 Lister v Hesley Hall [2001] UKHL 22 per Lord Millett at paragraph 83. 4 activities should attract no fault liability. Having children is a good example so it should follow that parent should be liable on a no fault basis for all harms caused by their children. Another obvious example is driving accidents. Is that where we want to end up? Within American tort scholarship, reams and reams have been written on economic efficiency theories of vicarious liability. (There is a very active law and economics movement in the US but, fortunately, it has never really caught on in the UK). Economic efficiency in this context is based on idea that only optimally efficient enterprises should operate within the market and that this can only be achieved by imposing no-fault liability for harms associated with the enterprise. This is because optimally efficient enterprises are said to be those that can cover both their internal and external costs (including, harm to others through the fact of operating) and still make a profit. The costs of harms to others are thus treated as a form of transaction that must be attributed to the enterprise so that an accurate picture of its true costs is obtained. If the enterprise can absorb such costs and still survive in the market, then that supposedly means that people must really want/need its products or services. The theory runs that it is a valuable enterprise that is worth keeping within the market. 6 This is a very simplified explanation of economic efficiency theory and its application to vicarious liability. Further elaboration is not however necessary as it is does not provide a credible explanation of the operation of the doctrine of vicarious liability in law. In so far as it makes wealth maximisation a core goal, it is also an unattractive theory and it is based on certain tenuous assumptions, such as the idea that people as consumers always act rationally. More importantly, economic efficiency theory of vicarious liability does not withstand sustain detailed scrutiny. It fails to explain numerous legal cases of vicarious liability, and more significantly, if fails to explain why the doctrine of vicarious liability is limited to torts of employees for economic efficiency theory covers all harms caused by the enterprise. Moreover, it is only remotely persuasive if it limits vicarious liability to for-profit enterprises, since not-forprofits cannot engage in the kind of loss distribution needed to achieve optimal efficiency. In my opinion, American scholar George Fletcher offers the most convincing explanation of why we have vicarious liability and why we only apply it to employers. 7 This theory may be described as a fairness conception of enterprise liability. Briefly stated, the defendant employer should be liable because he/she acquires some kind of benefit from having another person (the tortfeasor) act to pursue his/her particular aims and so it is only morally fair that he/she should take on burden of harms caused by that employee in the course of pursuing the aims of the enterprise. It is important to note that that the burden and the benefit must be proportionate. Predictably, however, this theory of vicarious liability is again only really convincing if limited to commercial enterprises. This is due to the 6 See, for example, G Calabresi Some Thoughts on Risk Distribution and the Law of Torts (1961) 70 Yale Law Journal G C Keating, The Idea of Fairness in the Law Enterprise Liability (1997) 95 Michigan Law Review fact that efficient loss distribution will generally always be central to the proportionality assessment. In summary, vicarious liability can only really be justified in relation to for-profit enterprises where a proportionate benefit/burden can be established, and it can also be shown that the defendant can efficiently distribute the cost of paying the compensation. One way of reining in vicarious liability is therefore to limit its application to forprofit enterprises. At its core, vicarious liability is tolerated as an exceptional doctrine within fault-based tort regimes because the burden of liability it imposes is easily spread. Realistically however, the courts are highly unlikely to accept the argument that not-for-profit enterprises should be exempted. Alternatively, liability should only extend to torts that are committed while the employee is pursuing the aims of the enterprise. In addition to excluding intentional torts, this would means a strict interpretation of the old course of employment requirement, now the close connection assessment. It is to this requirement that we now turn. The Development of the Close Connection Test It is important to situate the developments in vicarious liability within their social and political context. As mentioned in the Introduction, the main changes in the doctrine of vicarious liability have been directed at dealing with the social problem of institutional child abuse that emerged as a huge public scandal across the Commonwealth in the late 1990s and early 2000s. These scandals concerned abuse that had taken place in the 40s, 50s, 60, 70s and 80s. The countries most affected were the UK, Ireland, the US, Canada, Australia and New Zealand. The scandal was particularly serious in Canada where there was direct state involvement in taking indigenous children from family homes and putting them into children s homes where they were mistreated. Such actions were designed to break up indigenous communities and based on an overt policy of cultural assimilation which was pursed by the federal government for several decades. This arguably explains why Canada took the lead in changing the law of vicarious liability to provide compensation to child abuse victims. In Canada s defence, it is currently way ahead of other countries in terms of making amends for its mistakes. It has set up truth commissions and state funded compensation schemes. In Australia, a similar pattern of state behaviour ( Stolen Generations ) was evident from late the 1800s right up until the 1970s. The term the Stolen Generations has been adopted to refer to those Aboriginal children who were forcibly removed from their family homes by the State and placed into residential facilities. Some children were also adopted by non-aboriginal families. For those sent to residential facilities, physical sexual and psychological abuse was rife. Quite astonishingly, these forcible removals were legal under specially created Acts of Parliament. The rational for removal was that such children would be disadvantaged if left in their own communities and that they would receive a better education and general upbringing if remove. Like Canada, Australia is now 6 doing what it can to atone for this and notably it has set up a Royal Commission set up to investigate. It is against this backdrop that we need to read the game-changing cases in the expansion of vicarious liability, namely the Canadian Supreme Court decision in Bazley v Curry (1999) 2 SCR 534 and the UK House of Lords decision in Lister v Hesley Hall [2001] UKHL 22. The prime objective in these cases was to provide
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