Contract – indemnity – employee – legality
The local authority undertook to indemnify its employees for claims arising against them for defaults they committed ‘in or about the pursuit of their duties on behalf of the council while acting within the scope of their authority’. This indemnity was included in the assistant chief executive’s contract. Using its powers to provide recreational facilities pursuant to s19 Local Government (Miscellaneous Provisions) Act 1976, the council formed a company to establish a public water park, with the assistant chief executive acting as a director. The creation of the company was subsequently agreed, following a number of judicial cases, to be ultra vires and void. The company being in liquidation, the liquidators sought to recover money from the assistant chief executive by means of a wrongful trading action under s214 Insolvency Act 1986. The assistant chief executive denied liability and sought to rely on the indemnity. The district auditor argued that the indemnity did not cover the claims against the assistant chief executive, and the council was not prepared to indemnify him on this basis. The assistant chief executive issued a summons was issued against the council and the district auditor.
The Court held that the contractual indemnity could not be relied upon by the assistant chief executive in relation to the insolvency proceedings. In working as a company director it could not be said that he was pursuing his duties on behalf of the council of acting within the scope of his authority when the council had no power to appoint him as director or to confer authority upon him. On its proper construction the indemnity did not cover the defaults of employees for acts authorised by the council where that authorisation was ultra vires.