Court of Appeal considers fraud vicarious liability test

Out-Law News | 19 Nov 2018 | 3:06 pm | 4 min. read

The Court of Appeal has overturned a finding of the High Court of fraudulent misrepresentation against a postal equipment supplier, on the grounds that it was not 'vicariously liable' for the dishonesty of its agent.

The issue of vicarious liability of the principal on the grounds of ostensible authority for the agent has been referred back to the High Court.

In a unanimous judgment, the Court of Appeal said that the High Court judge in the case had applied the wrong legal test when he found James Winter liable for the conduct of his agent, Brian Ramsden. Vicarious liability would only have been appropriate if Ramsden's deceitful conduct had been "within the scope of his actual or apparent authority" from Winter.

Commercial litigation expert Michael Fenn of Pinsent Masons, the firm behind Out-Law, said that this "offers some protection to principals who, through no fault of their own, are subsequently implicated in a fraud or deceit executed by their agent."

"However, a principal cannot simply close their eyes to the obvious," he said. "Any protection will not allow a principal to escape liability in circumstances where they have directly or indirectly sanctioned fraudulent behaviour. In those circumstances such behaviour could still result in the principal being liable on the basis that the agent acted within their actual or apparent authority."

Ramsden had arranged for Hockley Mint, a jewellery supplier, to lease postal and office equipment from Winter, promising the company that it would substantially reduce its postage costs. He claimed that, when Hockley Mint leased the equipment, it would receive 'postage credits' from Royal Mail that would exceed the cost of leasing the equipment, and that would be paid during the entire period of the lease.

In fact, no such credits existed. Hockley Mint instead received rebates which were paid by Winter, but were only guaranteed for one year. The company was then obliged to continue to make payments under the lease for a further 27 months.

Hockley Mint brought a claim against Winter on the grounds that he was vicariously liable for the actions of Ramsden as his agent, as well as directly in deceit and for unlawful means conspiracy.

The High Court judge found "ample evidence" on which to conclude that Ramsden had committed fraud, and that Hockley Mint entered into the leases in reliance on Ramsden's fraudulent misrepresentation. While Winter himself was "merely an innocent supplier" and not a party to Ramsden's fraud, so Winter was not directly liable, the High Court judge concluded that Winter was nevertheless vicariously liable for Ramsden's actions.

However, the Court of Appeal found that the High Court judge had applied the wrong legal test for vicarious liability in cases of deceit.

"The analysis of the [High Court] judge did not identify or address the essential ingredients of vicarious liability of a principal for the deceit of his agent…: a holding out or representation by the principal to the claimant, intended to be and in fact acted upon by the claimant, that the agent had authority to do what he or she did, including acts falling within the usual scope of the agent's ostensible authority," the Court of Appeal said in its judgment.

The test that the High Court judge had applied was instead one of "a broad principle of fairness and a test of 'sufficiently close connection'". The judge had derived that test from cases in which the actions of an agent or employee were taken in the ordinary course of a firm's business or in the ordinary course of employment. They did not involve fraudulent misrepresentation by an agent or employee said to have apparent authority on behalf of their principal as a result of a holding out by that principal, the Court of Appeal said.

The Court of Appeal also rejected an argument that previous case law was "laying down a definitive statement of law that a principal will always be vicariously liable for the wrongdoing of his or her agent where the wrongdoing was committed for the benefit of the principal, regardless of the circumstances and even in cases of deceit".

Fenn said that "the distinction highlighted by the Court of Appeal in respect of fraudulent actions is an important one. There has been some suggestion that the law on vicarious liability was moving towards a single 'close connection' test. However, it is right that the extent of any liability of a principal for an agent's actions should differ if the agent goes beyond the scope of their authority and acts fraudulently."

The Court of Appeal went on to consider some of the evidence itself and found that there was "material which arguably is capable of supporting a case of vicarious liability on the basis of Ramsden's ostensible authority". However, as the High Court judge did not apply the correct test, it ruled that the issue had to go back to the High Court for further consideration.

"We take the view that the judge intended to address, and did address, vicarious liability, otherwise than on the ground of actual authority, and we are... proposing that the issue should be determined in accordance with the correct test rather than the one that he applied," it said.

Fenn said: "The re-determination of this issue by the High Court will involve further time and cost, and will inevitably be fact-specific. This highlights the importance, for a business dealing with another business via an agent, of taking steps to obtain confirmation from the apparent principal that the agent has their authority and what the scope of that authority is."

The Court of Appeal dismissed Hockley Mint's appeal on direct liability, ruling that there was "no basis" on which it could "interfere with the judge's finding of fact that Winter was not a dishonest participant in a fraud on Hockley Mint".