Credit Lyonnais Nederland N.V. (now known as Generale Bank Nederland N.V.) v. Export Credits Guarantee Department

The House of Lords dismissed the bank's appeal and held that an employer is not vicariously liable for a wrong of which an employee is a party unless the acts constituting the employee's liability occurred in the course of his employment. The court rejected the submission that an employee's acts of assistance which, when combined with the acts of a third party, produce a deceit should be treated as a standalone tortious wrong (or be "rationalised" as a duty not to assist) capable of attracting vicarious liability, and declined to create a new primary tort of knowingly assisting another's wrong. The court also noted that, in any event, issues of causation had not to be decided if vicarious liability did not arise.

Material subsidiary findings: the underwriter (Mr. Pillai) was held by the Court of Appeal to have been party to a common design with the fraudster in relation to specific bankers' guarantees (S.B.G.s) and was personally liable as a joint tortfeasor; the Export Credits Guarantee Department accepted that finding but contended it was not vicariously liable because the essential elements of the deceit did not occur in the course of employment. The bank's contractual claim failed because the bank had not taken required precautions and its own recklessness broke the guarantee obligations.

This appeal arose from a large-scale commercial fraud practised by a rogue, Mr. Chong, who obtained money from the appellant bank by presenting forged bills of exchange purporting to arise from export contracts. A senior underwriter of the respondent Department, Mr. Pillai, was bribed and participated in facilitating guarantees (notably four Specific Bankers Guarantees) which were an essential part of the fraudulent scheme. The bank sued the Department in contract and in tort seeking damages for the loss sustained.

The case reached the House of Lords after trial before Longmore J. and an appeal to the Court of Appeal. Longmore J. found extensive fraud by Chong and corruption of the underwriter; the Court of Appeal held that, for the later S.B.G. transactions, Mr. Pillai was party to a common design with Chong and was personally liable as a joint tortfeasor. The Department accepted that finding. The bank pursued two tort-based arguments before the House of Lords: (i) that where an employee assists in the violation of another's rights pursuant to a common design, the assistance, if performed in the course of employment, makes the employer vicariously liable (the "joint vicarious liability" argument); and (ii) that the employee's acts of assistance, carried out with the intention of bringing about the violation of the bank's rights, were themselves primary torts (the "primary liability" argument), such that the employer would be vicariously liable.

The House of Lords considered governing principles on vicarious liability (including Lloyd v. Grace, Smith & Co.) and authorities on secondary liability and procurement (including Lumley v. Gye and the Amstrad decisions). The court held that vicarious liability requires that those features of the wrong which make the employee liable must have occurred in the course of employment; one cannot combine acts done in the course of employment with others done outside it to create vicarious liability. The court rejected the creation of a new standalone tort of assistance or procurement in the circumstances and held that existing doctrines of joint liability and secondary liability adequately deal with such conduct. The House of Lords therefore dismissed the appeal and did not reach the detailed causation issues argued below.

Relief sought: damages for deceit (tort) and contractual recovery; issues framed: (i) whether the employer could be vicariously liable where the employee's assistance in a common design was performed in the course of employment; (ii) whether the employee's assistance could constitute a primary tort; (iii) causation of the bank's loss. Reasoning: vicarious liability is confined by the requirement that the employee's tortious acts occur in the course of employment; there is insufficient authority and policy justification to recognise a new tort of knowingly assisting another's wrong to extend vicarious liability.

Appeal dismissed. The House of Lords held that an employer is not vicariously liable for a deceit committed by a combination of acts only partly carried out in the course of an employee's employment; all elements necessary to make the employee liable must have occurred in the course of employment. The court also refused to recognise a new primary tort of knowingly assisting another's wrong for the purpose of expanding employer liability and therefore dismissed the bank's claim against the Department; the court did not decide causation as liability was negatived on these grounds.

Trial before Longmore J. [1996] 1 Lloyd's Rep. 200; appeal to the Court of Appeal (Stuart-Smith, Hobhouse and Thorpe L.JJ.) [1998] 1 Lloyd's Rep. 19 (which dismissed the bank's appeal and held the underwriter was party to a common design in respect of the S.B.G.s); final appeal to the House of Lords [1999] UKHL 9; [2000] 1 AC 486, appeal dismissed.