Frederick & Others v Positive Solutions Limited – a win for principals on vicarious liability

The Court of Appeal has reinforced the idea that liability will only attach to a principal in cases where a tort committed by an agent can be shown to have been completed as an integral part of the business activities of the principal. Furthermore, all elements composing the tort must take place within the course of the agency.

The case thickens the lines defining what conduct of an agent could lead to recovery from the principal.

This week, the Court of Appeal has handed down judgment in a case that has relevance to the developing area of the law of vicarious liability. In summary, the Court of Appeal has reinforced the idea that liability will only attach to a principal in cases where a tort committed by an agent can demonstrably be shown to have been completed as an integral part of the business activities of the principal. Furthermore, all of the necessary elements composing the tort must take place within the course of the agency.

This is likely to be of particular interest to any business utilising agency relationships. The case thickens the lines defining what conduct on the part of an agent could lead to recovery from the principal; in brief, vicarious liability will not attach if an agent is completing work outside of the course of the principal's business  (essentially, if the agent is on a frolic of his own).             

RPC recently acted for Positive Solutions in the Court of Appeal. We had originally been successful in striking out a claim (made on behalf of several claimants) at the High Court and the Claimants were appealing against this decision.  You can read the decision here.

The claim itself can be summarised as follows: the Claimants were approached by a man called Qureshi and induced to invest in a property development being carried out with his business partner, Mr Warren. Mr Qureshi explained that the monies could be raised via re-mortgages obtained through Mr Warren, an 'independent financial advisor'. Mr Warren was an agent of Positive Solutions, however, the Claimants did not meet him nor did they have any direct contact with him or Positive Solutions. Remortgages were obtained by Mr Warren via Positive Solutions' online portal, however, on the assumed facts for the purposes of the strike out hearing it was accepted that the mortgages were obtained using false information dishonestly put forward by Mr Warren. Some of the monies were used to pay off existing mortgages and the balance misappropriated and lost in the property investment scheme.

In the first instance, it was held that there was no sustainable claim arising out of any alleged direct duty on the part of Positive Solutions and the Court therefore ordered that the Claimants should amend their pleadings so that the claim proceeded based on vicarious liability alone. Both sides appealed to the High Court, which noted that (in the case of Cox v Ministry of Justice [2016] UKSC 10) a relationship other than that of employment was capable of giving rise to vicarious liability. However, the High Court found that the Claimants in this case failed the two stage test in Cox in that the tortfeasor (in this case Mr Warren) was not acting in the course of an integral part of the business activities of the defendant (in essence, he was on a frolic of his own).

The Claimants appealed this decision and the question for the Court of Appeal was therefore to what extent could Positive Solutions be vicariously liable to the Claimants for the actions of Mr Warren?

The Court of Appeal rejected the appeal, finding that the Claimants in this case could not satisfy the two stage test in Cox, which can be summarised as follows:

1.      was the harm wrongfully done by an individual who carried on activities as an integral part of the business activities of the defendant and for the defendant’s benefit, rather than his activities being entirely attributable to the conduct of a recognisably independent business of his own or that of a third party; and

2.      was the commission of the wrongful act a risk created by the defendant by assigning those activities to the individual in question, in which case liability will be imposed.

Here, the Court determined that the activities of Mr Warren (in making the mortgage applications) was part of a recognisable independent business of his own, being the property investment scheme. The use of the online portal to obtain mortgage monies was simply the means by which he obtained the funds to invest in the scheme. The Court held that, to call this an integral part of Positive Solutions' business was "a complete distortion of the true position on the facts." It was held to be immaterial that Positive Solutions received commission for these transactions (with the judge noting that these payments were generated automatically and held within a suspense account, because the transaction did not appear on Positive Solutions' books). The Court held that, in allowing the use of their online portal, Positive Solutions was merely presenting the opportunity for fraud to be committed and that this was not enough to hold them liable under the second limb of the test in Cox.

The Court also held that this was a case where not all the acts and omissions which would be necessary to make Warren personally liable in tort took place within the course of his employment or agency, from which it followed that Positive Solutions (as principal) could not be vicariously liable for his wrongdoing. In brief, the Claimants did not suffer loss when the mortgage monies were obtained and it was not until these were spirited away via the property scheme, which fell outside of Mr Warren's agency, that loss was suffered.

Given the above, the Court did not look at whether or not it was correct that reliance based torts such as deceit or misrepresentation committed by an agent are in a distinct category from cases such as Cox, so that the principal cannot be vicariously liable unless the agent had actual or ostensible authority to do the acts forming the basis of the claim. However, the Court did helpfully note that the position of agency was not being considered in Cox, which does at least offer some assistance on how that case should be interpreted and applied. 

In general terms, this decision should offer some comfort to professional businesses, which utilise agency or employment relationships; this case demonstrates that (in the absence of authority) liability will only attach to an employer or principal if the employee or agent is acting demonstrably within the confines of the employer/principal's business and for its benefit. An employer and/or principal still needs to take care when representing to clients or third parties its employee/agent has authority at act on its behalf. However, in cases where an employee or agent makes sales or completes transactions outside of the scope of their authority it will be difficult for liability to attach to the employer or principal in the absence of such representations.