top of page

Employment Contracts on Damage to Property

The author is Chytanya S Agarwal, second year student at National Law School of India University, Bangalore.


In the past, labour considered a chattel owned by the master who had complete authority to “hire-and-fire” the worker for no fault on his part. Today, the nature of employment contracts and the prerogatives of employers have transformed considerably from the common law position of “hire-and-fire,” with greater safeguards being given to the employee while balancing them with the business interests of the employer. Using a labour law perspective, this article argues that an employee is not liable for damage to the employer’s property if such damage cannot be attributable to the employee’s wrongful act or negligence. It concludes that if an employment contract provides for no-fault liability in cases where the employee did not act maliciously or negligently, such contract would be void under Section 23 of the Indian Contract Act. Thus, contracts that impose such no-fault liability on employees are void.

2. The Scope of The Employer’s Right To Damages Under The Law

Per Selwyn (p.279), under employment contracts, it is an implied term that the employee will perform his duties faithfully and exercise due care. A breach of this term entitles the employer to claim damages. According to Singhania (p.70), this means that an employee undertakes to take adequate care of the employer’s property and safeguard the company property in his/her possession, failing which, he/she is liable to compensate the employer for any loss.

2.1. When The Damage is Caused Intentionally

As per HL Kumar (¶6.4.42), deliberately inflicting harm or damage to the property of the employer’s firm with the intent to cause loss to the employer is called ‘sabotage’. In cases of sabotage, the consequences for the employee are three-fold.

Firstly, sabotage is a ground for dismissal of the employee and considered an act of ‘misconduct’ under employment contracts and standing orders of most industrial organizations (See para 14(3)(c) of 1st Schedule of the Industrial Employment (Standing Orders) Central Rules 1946). In Municipal Corporation of Greater Bombay v. B.E.S.T. Workers Union, the employee, a bus driver, was held guilty of sabotage by the Bombay High Court which opined that wilfully rendering inoperable a bus that was otherwise in running condition amounted to gross misconduct, justifying his dismissal.

Secondly, an employer can claim damages under Section 73 of the Indian Contract Act. As mentioned earlier, the employee is bound by an implied contractual term to exercise due care and safeguard the employer’s property. If the employee causes wilful damage to or loss of the employer’s property, then the employer is entitled to claim damages for such contractual breach. Apart from claiming damages under employment contracts, Section 4(6)(a) of the Payment of Gratuity Act also provides for forfeiture of gratuity by the employer in case of wilful property damage (Also see Union Bank of India v. C. G. Ajay Babu).

Lastly, an act of sabotage is also a criminal offence. It is covered by the offence of ‘mischief’ and ‘criminal breach of trust’. It also is an unfair labour practice punishable with a fine and imprisonment under Section 84 read with para II(7) of 2nd Schedule of the Industrial Relations Code.

2.2. When damage is caused by negligence

When damage is a consequence of the employee’s negligence the implied term mandating the employee to practice due care is breached. However, due to the lack of malicious intent, the gravity of the employee’s actions is lower when compared to wilful damage. There are two recourses available to the employer in this case.

Firstly, as mentioned earlier, the employer can claim damages from the employee under Section 73 of the Contract Act for not following due care. Moreover, it is statutorily recognised in the Code on Wages that the employer can make deductions from the salary of the employee for damage to property entrusted to the latter, where such damage is caused by the employee’s default or negligence. However, such deduction shall not exceed the amount of damage or loss caused to the employer. Moreover, adequate show cause opportunity must be provided to the employee otherwise such deduction would be invalid.

Secondly, as per Selwyn, the employee’s negligence may lead to his dismissal if damage resulted from gross negligence (Comerford v. Swel Foods Ltd.) on part of the employee or if the employee has done a series of minor acts of negligence (Lowndes v. Specialist Heavy Engineering Ltd.). In short, a single act of minor negligence, that does not lead to substantial loss to the employer, is not sufficient to warrant an employee’s dismissal. The determination of the threshold when negligence becomes ‘major’, depends upon the specific circumstances and the magnitude of loss caused – a question beyond this article’s scope. Thus, the dismissal of the employee must be proportionate to the harm incurred by the employer.

2.3. When The Damage Cannot Be Attributed to The Employee’s Default or Neglect

The law is prima facie silent on the employee’s liability when there is damage to property entrusted to the employee, and when such damage did not arise from any deliberate act or omission, default or neglect on part of the employee. Such damage instead occurs due to an unforeseeable event over which the employee had no control, despite exercising due care. In such a situation, there exists no causal connection between the employee’s acts and the damage caused. Consequently, the employer has no claim to damages against the innocent employee. Rather, it is for the employer to bear the loss caused to him by the external event. There are two reasons for justifying this proposition.

Firstly, according to the Code on Wages, an employer can lawfully make deductions from the wages of the worker only for the purpose of reimbursing such damage caused by the employee’s default or negligence. Through a textual reading of this Code, it can be inferred that by confining deductions to cases of default and negligence, the law has deliberately not held the employees responsible for no-fault damage caused despite due care, and this can be indicative of the legislative intent which could be to hold the employee liable only to the extent to which he/she is blameworthy. Moreover, in cases involving the dismissal of employees, courts invalidated the dismissal in case neglect or default of the worker is not proved. For instance, in Motiur Rahman v. Presiding Officer, Labour Court, it was held by the Patna High Court that a mere breakdown in machinery does not prove sabotage and the employee thereby was not liable to give damages as he exercised due care. In conclusion, it is submitted that an employee cannot be held liable for damage to property entrusted to him/her when proven sabotage or negligence is absent, even if an employment contract provides for such liability.

Secondly, under the Industrial Relations Code, an employer is prohibited from dismissing any employee in bad faith or in the colourable exercise of power. In Rajneesh Khajuria v. M/s Wockhardt Ltd (para 14), the Supreme Court ruled that mala fide (or ‘bad faith’) could be inferred from the intentional doing of a wrongful act without there being a reasonable relation to the purpose of the exercise of the power. In other words, actions of the employer, that dismiss a prudent employee acting in good faith for property damage can be said to be devoid of any rational nexus to the dismissal’s object, which is to penalise/deter a malicious or negligent employee, and thereby could be deemed mala fide and in the colourable exercise of powers.

3. Voidability of Contracts providing No-Fault Liability

Thus, certain laws ensure that the employer’s right to dismiss the worker is not absolute. Under the para I(5) of 2nd Schedule of the Industrial Relations Code, the employer’s common law right to dismiss the employee at his discretion is circumscribed by the rules of natural justice and must not be a colourable exercise of power or in bad faith otherwise, the employer becomes guilty of ‘unfair labour practice’ which is a punishable offence under Section 84 of the Code. Moreover, as per Section 90(1)(b) of the Code, the employer cannot dismiss the employee during the pendency of such proceedings.

In Gujarat Steel Tubes Ltd. v. Gujarat Steel Tubes Mazdoor Sabha, Krishna Iyer J. of the Supreme Court observed, “If the basis or foundation for the order of termination is clearly not turpitudinous or stigmatic or rooted in misconduct or visited with evil pecuniary effects, then the inference of dismissal stands negated.” In Management Of Murugan Mills Ltd. v. Industrial Tribunal Madras, the Supreme Court observed that “The right of the employer to terminate the services of his workman under a standing order… which accounts to a claim to “hire and fire” an employee as the employer pleases completely negatives security of service which has been secured to industrial employees through industrial adjudication.” In short, these judgements lead to two conclusions – that the employer’s right to penalise an employee is not absolute and that the same is subject to due process under the law and the rules of natural justice and fairness. Thus, an employee has the right not to be penalised when there is no fault on his part.

Given these legal safeguards, this article submits that employment contracts cannot be in their contravention. In Delhi Transport Corporation. v. D.T.C. Mazdoor Congress, the Supreme Court held that arbitrary termination of an employee’s services in disregard of the rules of natural justice was opposed to public policy. In Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly where the Supreme Court held that unconscionable, unfair, and unreasonable terms in employment contracts are against public policy and, thus, void under Section 23 of the Contract Act. Moreover, the Section invalidates contracts that would defeat the purpose of any statute, such as the labour laws in the current instance that seek to grant security of employment by limiting the power of the employers to dismiss the employees. Such contractual terms cannot be enforced notwithstanding their clear acceptance by the employees. Therefore, if an employment contract imposes an unfair and no-fault burden on the employees, it shall thereby be deemed void.


In D.T.C. Mazdoor Congress, Sawant J. observed that the right to livelihood is integral to the right to life under Article 21 and, therefore, “cannot hang on to the fancies of individuals in authority.” This dictum is highly pertinent in the context of employment contracts that no longer endow sweeping and arbitrary powers on the employer. As this article highlights, such powers are circumscribed by statutory limitations, judicial precedents, and the rules of natural justice. Thus, the law, in its current form, implicitly protects employees exercising due care and any contract in its contravention shall be void.

858 views0 comments


bottom of page