REUTERS | Michaela Rehle

Costs indemnity clauses: an unenforceable deterrent?

Recent reports suggest that Deliveroo requires its couriers to warrant that they will not bring an employment-related claim, and to indemnify the company if they do. It is clear that the warranty would be unenforceable, but are Deliveroo onto something with the indemnity?

According to the reports the courier agreement provides:

“You further warrant that neither you nor anyone acting on your behalf will present any claim in the employment tribunal or any civil court in which it is contended that you are either an employee or a worker.”

So far, so unenforceable. Deliveroo appears to engage the couriers on the basis that they are self-employed but that does not, of course, preclude an argument that they are in fact workers or even employees. The employment tribunal has recently heard such an argument from a number of Uber drivers, who claim that they are entitled to holiday and sick pay. It is likely that there will be intense interest in the outcome from those working in similar roles who claim that they are deprived of employment rights under the banner of self-employment.

If there were a successful challenge to employment status, then it is very unlikely that a warranty of the sort reportedly contained in the Deliveroo contracts would prevent the worker from pursuing an employment-related claim. Most employment legislation contains a provision which renders such a waiver of rights void, unless it is contained in a settlement agreement or COT3 (see, for example, section 203 of the Employment Rights Act 1996).

The question of the enforceability of a costs indemnity requires closer consideration. The Deliveroo clause reportedly states that if the couriers do bring legal action then they must:

“indemnify and keep indemnified Deliveroo against costs (including legal costs) and expenses that it incurs”.

There must be a good argument that a full indemnity, which is applicable whether or not the worker is successful with their claim, would be void on public policy grounds. This is hinted at in Church Commissioners v Ibrahim [1997] 1 EGLR 13, which is referred to in Chaplair Ltd v Kumari [2015] CP Rep 46, at paragraph 34. The differing bargaining positions in an employment relationship would make this even more likely to be the case.

But would the position be different if the indemnity was limited to the reasonable legal costs incurred by the employer if the claim were unsuccessful? The answer may depend upon where the claim is brought and how the issue of costs is determined.

In the civil courts, it is clear that the payment of a successful party’s costs can be determined by contract. If there is a contractual obligation to pay costs, then, unless there is a good reason to do otherwise (such as public policy grounds), the court ought to exercise its discretion to reflect those contractual rights. However, this does not necessarily reflect the position in the employment tribunal, where the Civil Procedure Rules do not apply and costs do not “follow the event” as they do in the civil courts.

In my view an employment tribunal is unlikely to consider itself bound to award costs in line with a contractual provision. Unlike the CPR, there is no provision in the Employment Tribunal Rules of Procedure for the parties to contract for payment of costs, and rule 76 provides that costs may only be awarded in specific circumstances. The tribunal may only award costs where a party has acted vexatiously, abusively, disruptively or otherwise unreasonably in the bringing or conduct of the proceedings (or where the claim had no reasonable prospect of success). The employment tribunal would not have the power to award costs unless it determined that, in the circumstances, the claimant had acted in such a way and the existence of a costs indemnity would not alter this.

If the employment tribunal declined to award costs, could the employer then enforce the indemnity in the civil courts? The court in those circumstances would be mindful of the principle of res judicata. Consideration would need to be given to whether the matter of costs had already been determined by the tribunal and whether it would be an abuse of process to raise the issue in fresh proceedings. Where the employer refrains from applying for costs in the employment tribunal and expressly reserves their right to pursue costs under the indemnity clause in the civil courts, then they may be in a stronger position in that regard.

However even if the court agreed to consider enforcing the indemnity, it may conclude that any such a provision is void on public policy grounds and may also take into account the differing bargaining positions between employer and employee, the costs regime in the tribunal, the contractual matrix and the statutory restrictions on waiving employment rights.  On the other hand, the courts may consider that it is a step too far to introduce such a limit on contractual freedom in the absence of any legislative basis for doing so.

There may also be an argument that such an indemnity is a penalty clause and is unenforceable on that basis.  However, where the indemnity is limited to reasonable legal expenses incurred, there might be an argument that it is in proportion to the interests of the employer and not extravagant or unconscionable. Also, if the indemnity is not triggered upon breach of contract, it may not be regarded as a penalty clause at all.  This will be a matter of construction of the clauses and their interaction.  Even if the indemnity is not a penalty, it does not preclude the argument mentioned above that it may be unenforceable on other public policy grounds.

The lack of litigation on this point could be due to a general perception that such a clause would be unenforceable, or concern that the inclusion of such a clause may not present the employer in a particularly favourable light before the tribunal. However, the publicity that the Deliveroo indemnity has received may cause some employers to take another look at the inclusion of such a provision, as a deterrent if nothing else.

Costs were awarded in only 870 out of 61,306 claims brought in the employment tribunal in 2014/15, so most claimants pursue their claim relatively safe in the knowledge that a costs award is unlikely. If a costs indemnity were enforceable in an employment claim context then it is likely that it would become common practice to include such a provision in employment contracts. This would circumvent the high hurdle for an award of costs, which has traditionally existed to avoid the threat of costs acting as a barrier to the enforcement of employment rights.

When combined with the requirement to pay employment tribunal fees, it is easy to see why this could strike a further blow to access to the employment tribunal system. From an employer’s perspective, it is equally easy to see why (PR and employee relations issues aside) such a clause would be attractive in minimising claims, even if its enforceability remains questionable.


Practical Law Employment Jillian Paton

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