McGrath v Fairfield Municipal Council

The appellant was employed by the respondent Council as a grader driver. The appellant's negligence in controlling the grader caused damage to a plaintiff who obtained a judgment awarding damages against the appellant and the Council. The Council was held vicariously liable for the appellant's negligence. The Council sought an order against the appellant for contribution under s. 5(1)(c) of the Law Reform (Miscellaneous Provisions) Act 1946 N.S.W. ("the N.S.W. Law Reform Act"). The learned trial judge refused to make the order but his decision was reversed by a majority decision of the Court of Appeal of the Supreme Court of New South Wales (Hutley A.P. and Glass J.A., Mahoney J.A. dissenting). Section 5(1)(c) of the N.S.W. Law Reform Act provides:

Where damage is suffered by any person as a result of a tort (whether a crime or not) -

(c) any tort-feasor liable in respect of that damage may recover contribution from any other tort-feasor who is, or would if sued have been, liable in respect of the same damage, whether as a joint tort-feasor or otherwise, so, however, that no person shall be entitled to recover contribution under this section from any person entitled to be indemnified by him in respect of the liability in respect of which the contribution is sought.

In Lister v. Romford Ice & Cold Storage Co. Ltd. [1] , an employer obtained indemnity from an employee in similar circumstances. In that case the employer put its case on three bases: breach of contract, contribution under s. 6(1)(c) of the Law Reform (Married Women and Tortfeasors) Act 1935 U.K. ("the U.K. Law Reform Act"), the provision from which s. 5(1)(c) of the N.S.W. Law Reform Act was taken, and a tortious breach of a duty of care owed to the employer. The third basis was not pursued in the present case and it can be passed over. The other two bases must be considered.

Each of their Lordships held that the employer was entitled, prima facie, to claim in contract. In their Lordships' opinion, the employee driver of the motor vehicle was under a contractual duty to his employer to exercise reasonable skill and care in driving the vehicle and, prima facie, he was liable to his employers in damages for breach of contract if he should fail to exercise that skill and care and if, as a result of his failure, the employer were held liable in damages to a plaintiff. Lord Morton of Henryton also held, in agreement with the trial judge, that the employer was entitled, as a concurrent tortfeasor, to recover full contribution from the negligent employee under the U.K. Law Reform Act while Viscount Simonds stated that he saw no reason to doubt that that was so. Their Lordships were divided in opinion as to whether the employee's contract of employment contained an implied term that the employer would ensure that the driver was protected by insurance against any third party liability arising from his driving, a majority of their Lordships (Viscount Simonds, Lord Morton of Henryton and Lord Tucker) denying the existence of such an implied term, Lord Radcliffe and Lord Somervell of Harrow holding the opposing view. That point, which was the central matter in controversy, is not in issue here since the case has been conducted and disposed of in the courts below on the basis that the decision in Lister v. Romford Ice, which has never been the subject of critical examination in this Court, should be accepted in this country as precluding the implication of any such term.

The Employees' Liability (Indemnification of Employer) Act 1982 N.S.W. ("the Act") was enacted by the Parliament of New South Wales to overcome what were seen as undesirable consequences of the decision of the House of Lords in Lister v. Romford Ice. Section 2(3) of the Act provides as follows:

(a) a person suffers damage as a result of the fault of an employee; and

(b) but for this Act, the employee would be liable to indemnify the employer against whom proceedings for damages may be taken as a result of the fault against any liability of the employer arising out of those proceedings,

the employee is not so liable, whether the cause of action against the employer arose before, or arises after, the commencement of this Act.

It is common ground that the Act excludes an employer's claim against an employee for whose negligence the employer is vicariously liable when the employer seeks an indemnity on the basis of a breach of a contractual duty of care owed by the employee to the employer - the basis which found favour with all of their Lordships in Lister v. Romford Ice. The question which the present appeal raises is whether the Act is also effective to exclude an employer's claim for contribution against an employee for whose negligence the employer is vicariously liable when the employer's claim is based on s. 5(1)(c) of the N.S.W. Law Reform Act.

It would be curious if the Act were effective to exclude an indemnity only upon the contractual basis on which the employer finally succeeded in Lister v. Romford Ice in the House of Lords leaving unaffected the contribution basis (s. 6(1)(c) of the U.K. Law Reform Act) upon which the employer had succeeded both at first instance and (in its second action) in the Court of Appeal and which had been upheld expressly by one of their Lordships, not doubted by another and not denied by others. It is scarcely to be supposed that the legislature intended to exclude the employer's right to recover in contract but to leave on foot his right to recover contribution from his employee as a concurrent tortfeasor. Indeed, it would seem improbable that the legislature even concerned itself with the nice distinction between recovery in contract and recovery between concurrent tortfeasors, more especially when we recall that in Lister v. Romford Ice it was an implied term of the contract of employment - a term arising out of the nature of the employment relationship - that grounded the employer's right to indemnity by his employee recognized by the House of Lords. The 1982 amendment sprang from a deeply rooted and general concern with the substance of the problem as it was thought to exist under the law as expounded in Lister v. Romford Ice, namely, the perceived injustice in the employer's entitlement to recoupment whether under s. 5(1)(c) or under the contract from an employee whose fault resulted in the employer becoming liable to a plaintiff. That perceived injustice arose from the conviction that the employer should shoulder the responsibility for damages for which he becomes liable in consequence of the "fault" of his employee occurring as an incident of the latter's employment when in most instances the employer insures himself against that liability. Plainly enough this was the mischief which the Act sought to remedy, a mischief of which lawyers at least were made aware by commentaries on, and reviews of, the decision of both the Court of Appeal and the House of Lords: see, e.g., Glanville Williams, Vicarious Liability and the Master's Indemnity, Modern Law Review, vol. 20 (1957), pp. 221, 437, esp. at p. 446 and Parsons, Individual Responsibility Versus Enterprise Liability, Australian Law Journal, vol. 29 (1956), p. 714. The criticism from the point of view of policy of the decision in Lister v. Romford Ice was equally applicable regardless of whether the decision was based on an employer's entitlement to contribution from his employee as a concurrent tortfeasor or on an employer's entitlement to indemnity under a contractual term. Indeed, it was identified by Denning L.J. in Romford Ice v. Lister in the Court of Appeal [2] , in a comment which was made with reference to both contribution and contractual indemnity:

The risk should be borne by the undertaking as a whole rather than by the servant who happens to make a mistake, especially when he is working his master's machine. The master takes the profits from using the machine and should bear the responsibility for the damage it does, even though the damage would not happen without some human error. 1. [1956] 2 Q.B. 180, at p. 186.

The Council's argument that s. 2(3) of the Act precludes recovery only on the contractual basis depends on the use of the word "indemnity", a term which is said to be appropriate only to a claim in contract, not to a claim for contribution between tortfeasors. That argument succeeded in the Court of Appeal. Glass J.A. stated a further reason for limiting the operation of the Act. He observed that s. 5(1)(c) of the N.S.W. Law Reform Act applies when the employer's liability to a plaintiff might be "vicarious, personal or both" whereas the Act applies only where the employer's liability is vicarious. His Honour thought that the Act could not apply to a case where the employer bore some personal responsibility for the damage and would be entitled under s. 5(1)(c) to obtain from the employee only a contribution falling short of complete indemnity. He said [3] :

the hypothesis that the 1982 Act applied by implication to s. 5 contributions between tortfeasors amounting to a complete indemnity although it expressly cannot apply to contributions falling short of an indemnity is untenable. It imputes to the legislature an intention - in my opinion manifestly absurd - that employees should be exempt from any contribution when they are wholly to blame for the plaintiff's injuries but not when they are partly to blame. There is no doubt that the Act applies to an employee's liability "to indemnify" his employer, and only to an indemnity in respect of the employer's vicarious liability for the results of the employee's fault. But, for reasons presently to be mentioned, the Act is applicable in a case where the employer could be made to bear some personal responsibility for the damage suffered by a plaintiff. 1. [1984] 2 N.S.W.L.R. 247, at p. 250.

Section 2(3) of the Act relates to an employee's liability to indemnify the employer against whom proceedings for damages may be taken as a result of the employee's "fault". "Fault" is defined by s. 2(1) of the Act to mean -

negligence, or other act or omission, of the employee (not being negligence, or other act or omission, that is serious and wilful misconduct) as a result of which his employer is, as employer and not otherwise, liable in damages in tort. The employer's liability to which s. 2(3) of the Act refers is thus a liability incurred as employer and not otherwise - that is, vicariously. If the rule in Merryweather v. Nixan [4] prevents an employer who is vicariously liable for the negligence of his employee from recovering contribution (The Koursk [5] , but see Lister v. Romford Ice [6] ), that rule was displaced by s. 5(1)(c) of the N.S.W. Law Reform Act. Section 5(1)(c) confers a right to "contribution" to be assessed, having regard to the respective responsibility of the concurrent tortfeasors for the damage (s. 5(2)), but does s. 5(1)(c) entitle an employer who is guilty of no personal responsibility to an indemnity? 1. (1799) 8 Term Rep. 186 [101 E.R. 1337]. 2. [1924] P. 140, at p. 155. 3. [1957] A.C., at pp. 579, 585.

In Ryan v. Fildes [7] , Tucker J. (as he then was), speaking of the U.K. equivalent of s. 5(2) of the N.S.W. Law Reform Act said:

That sub-section makes it clear that, although the section is dealing with contribution, and the word "contribution" finally indicates the payment of some smaller sum towards a larger sum, payable by some other person, none the less the section contemplates cases in which either or both of two defendants have been found liable to pay damages in law, and none the less one of them may be exempted by the order of the court from making any contribution whatever. That is to say, two persons having been found legally liable to pay, prima facie, the whole of the damage, one of them, for reasons which may appear sufficient to the court, may be exempted altogether from his liability. On the other hand, although the section is dealing with contribution, it is said in terms that the court may direct that a contribution to be recovered from any person shall amount to a complete indemnity. It is clearly contemplated in that case that a contribution may amount to 100 per cent contribution, and may become in effect an indemnity. Whether or not that is precisely the correct way to describe a contribution is immaterial, because the meaning is clear. 1. [1938] 3 All E.R. 517, at pp. 524-525.

On the facts of that case, his Lordship saw no reason "for making any order other than what would, prima facie, appear to be the proper order - namely, that the person actually responsible for the commission of the tort should contribute the full amount of the damages recovered against the master" [8] . In Lister v. Romford Ice [9] , Viscount Simonds expressed the same opinion: " I see no reason to doubt that under the Act the respondents would be entitled to recover contribution from the appellant to the extent of 100 per cent. Ryan v. Fildes was, I think, rightly decided." That was the view of Finnemore J. in Semtex Ltd. v. Gladstone [10] and of McNair J. in Harvey v. R. G. O'Dell Ltd. [11] . The English view was followed in New South Wales by Hope J. in Northern Assurance Co. Ltd. v. Coal Mines Insurance Pty. Ltd. [12] , despite some doubts which he entertained. This Court has not settled that question: cf. Commercial and General Insurance Co. Ltd. v. Government Insurance Office (N.S.W.) [13] . In New Zealand, Henry J., following the English view, held in Richardson v. O'Neill [14] , that a defendant for whose negligence another party was vicariously liable should "completely indemnify" that party.

1. [1938] 3 All E.R., at p. 525. 2. [1957] A.C., at pp. 579-580. 3. [1954] 1 W.L.R. 945, at p. 949. 4. [1958] 2 Q.B. 78, at p. 107. 5. (1970) 91 W.N. (N.S.W.) 293, at p. 301. 6. (1973) 129 C.L.R. 374, at pp. 380-381. 7. [1959] N.Z.L.R. 540, at p. 544.

Thus it appears that, when the Act was introduced in 1982, the weight of authority in New South Wales supported the view that the liability of an employee under s. 5(1)(c) of the N.S.W. Law Reform Act was to contribute the whole of the damages for which his employer was vicariously liable. It further appears that the term "indemnity" had been used to describe the employee's liability to contribute the whole of the damages for which the employer is vicariously liable. Although the term "indemnity" has been used in some contexts to mean only a contractual liability (see, e.g., Speller v. Bristol Steam Navigation Co. [15] ), its use was not so restricted in the context of an employee's liability to his employer in respect of the employer's vicarious liability for the employee's negligence.

Unless that interpretation of "indemnity" would give the Act an operation that Parliament could not have intended, we would construe s. 2(3) of the Act as applying to an employee's liability under s. 5(1)(c) to contribute the whole of the damages for which his employer is vicariously liable. However, Glass J.A. is surely right in saying that the Act would have an absurd operation if personal negligence on the part of the employer, which would limit an employer's rights under s. 5(1)(c) to a contribution of something less than the whole of the damages, were to make the Act inapplicable. If that were the Act's operation the employer, on proof of his own negligence, would acquire a right to recover contribution from an employee although he could not claim an indemnity. In our opinion, that is not the operation to be attributed to the Act.

The Act refers to an employee's liability to indemnify his employer against the employer's liability arising out of proceedings that "may be taken" as a result of the employee's fault. It is not directed to the order that should be made when an action is actually brought against an employer and an employee and the plaintiff recovers a judgment against the employer on the ground of the employer's personal negligence as well as his vicarious liability for the employee's negligence. Section 2(3) excludes the liability of an employee to indemnify his employer against a liability which is defined by reference to an hypothetical action brought against the employer - an action to sheet home only the employer's vicarious liability ("as a result of the fault"), i.e., a liability incurred independently of the employer's personal responsibility for the damage ("as employer and not otherwise"). The Act operates to exclude the particular liability that would be imposed on an employee to indemnify the employer if such an hypothetical action were brought against the employer. The employer's personal responsibility for the damage is immaterial, for the hypothetical action sheets home only that liability which attaches to the employer in his character as employer, irrespective of his conduct or the "actual circumstances of the employment" (the factor mentioned in Commercial and General Insurance [16] ). The Act relates to an indemnity in respect of that head or element of an employer's liability to a plaintiff which arises simply by reason of the relationship of employer and employee when the employee's acts or omissions have been a tortious cause of the plaintiff's damage.

In practice, of course, the effect of the Act is to transfer the whole of the ultimate burden of a judgment to the employer: he was never entitled to claim any contribution from his employee under s. 5(1)(c) of the N.S.W. Law Reform Act in respect of his (the employer's) personal responsibility for the damage and now, by force of the Act, he can claim nothing in respect of the employee's negligence for which he, the employer, is vicariously liable. To the extent to which the Act deprives the employer of a right to indemnity or contribution from the employee, it operates as a partial repeal of s. 5(1)(c) of the N.S.W. Law Reform Act. It should be added that the Act leaves intact an employee's claim for contribution against an employer in respect of the employer's tortious responsibility for the damage, but it does not create in the employee a right to be indemnified by his employer against his own liability for negligence over and above any right to such indemnity which an employee may have by reason of an express or implied term of his particular contract of employment. If we have correctly identified the mischief at which the Act was aimed, it is natural that it should have this effect.

It follows that the appeal should be allowed, the judgment of the Court of Appeal set aside and in lieu thereof the appeal to that Court should be dismissed.