Lord Steyn said,
14. Vicarious liability is legal responsibility imposed on an employer, although he is himself free from blame, for a tort committed by his employee in the course of his employment. Fleming observed that this formula represented “a compromise between two conflicting policies: on the one end, the social interest in furnishing an innocent tort victim with recourse against a financially responsible defendant; on the other, a hesitation to foist any undue burden on business enterprise”: The Law of Torts, 9th ed (1998), pp 409-410.
15. For nearly a century English judges have adopted Salmond’s statement of the applicable test as correct. Salmond said that a wrongful act is deemed to be done by a “servant” in the course of his employment if “it is either (a) a wrongful act authorised by the master, or (b) a wrongful and unauthorised mode of doing some act authorised by the master”…
Situation (a) causes no problems. The difficulty arises in respect of cases under (b). Salmond did, however, offer an explanation which has sometimes been overlooked. He said…that “a master … is liable even for acts which he has not authorised, provided they are so connected with acts which he has authorised, that they may rightly be regarded as modes—although improper modes—of doing them” (my emphasis)… Salmond’s explanation is the germ of the close connection test adumbrated by the Canadian Supreme Court in Bazley v Curry 174 DLR (4th) 45 and Jacobi v Griffiths 174 DLR (4th) 71 .
16. It is not necessary to embark on a detailed examination of the development of the modern principle of vicarious liability. But it is necessary to face up to the way in which the law of vicarious liability sometimes may embrace intentional wrongdoing by an employee. If one mechanically applies Salmond’s test, the result might at first glance be thought to be that a bank is not liable to a customer where a bank employee defrauds a customer by giving him only half the foreign exchange which he paid for, the employee pocketing the difference. A preoccupation with conceptualistic reasoning may lead to the absurd conclusion that there can only be vicarious liability if the bank carries on business in defrauding its customers. Ideas divorced from reality have never held much attraction for judges steeped in the tradition that their task is to deliver principled but practical justice…
27. My Lords, I have been greatly assisted by the luminous and illuminating judgments of the Canadian Supreme Court in Bazley v Curr 174 DLR (4th) 45 and Jacobi v Griffiths 174 DLR (4th) 71 . Wherever such problems are considered in future in the common law world these judgments will be the starting point. On the other hand, it is unnecessary to express views on the full range of policy considerations examined in those decisions.
28. Employing the traditional methodology of English law, I am satisfied that in the case of the appeals under consideration the evidence showed that the employers entrusted the care of the children in Axeholme House to the warden.
The question is whether the warden’s torts were so closely connected with his employment that it would be fair and just to hold the employers vicariously liable. On the facts of the case the answer is yes. After all, the sexual abuse was inextricably interwoven with the carrying out by the warden of his duties in Axeholme House. Matters of degree arise. But the present cases clearly fall on the side of vicarious liability.
Edited for ease of reading.