High Court considers bank's vicarious liability for fraudulent misrepresentations made by former employee

In a recent High Court decision, the court examined a claim against a bank for fraudulent misrepresentations made by its former corporate banking relationship manager, finding that the bank was vicariously liable on the basis that the employee had apparent authority to make the representations relied upon by the claimant: Vegesentials Ltd & Anor v Shanghai Commercial & Savings Bank Ltd [2024] EWHC 7 (Ch).

The judgment confirms that the correct test for determining vicarious liability for an agent's deceit is Armagas Ltd v Mundogas (The Ocean Frost) [1985] UKHL 11, which states that a principal will be liable where they hold out to the claimant that the agent had authority to do what they did, including acts falling within the usual scope of the agent’s apparent/ostensible authority (and that this holding out is intended to be and is in fact acted upon by the claimant). The decision is a reminder that, if an employee's position and actions give the appearance of authority, a financial institution may be held liable for the employee's fraudulent misrepresentation, even where the employee's actions are outside the scope of their actual authority.

In the present case, the bank's employee provided a proof of funds letter confirming that potential investors had the funds available to make an investment in the claimant. The investors did not have the required funds and this letter was found to contain fraudulent misrepresentations. The court was not satisfied that the employee had the actual authority of the bank to sign and send the letter; and it acknowledged that the letter, terms and circumstances in which it was sent were highly suspicious. However, the court found that there was no reason for the claimant to doubt that the bank's employee had the apparent authority to sign or send the letter, given the presence of factors which suggested otherwise such as the employee's position as an appointed customer relationship manager of the bank, their use of the bank's letterhead and stamp. Having found that the claimant was induced to rely upon the letter as confirmation of the ability of the third-party investors to transfer funds, and that the claimant had a real chance of securing investment from another potential investor, the court held that the misrepresentations were a substantial cause of the loss of that chance.

We consider the decision in further detail below.

Background

In 2017, the claimant company was looking for funding in relation to the development of a health drink. In this context, an employee at the defendant bank (SCSB) emailed the claimant's bankers a proof of funds letter confirming that potential investors had the required funds available (the Letter). The Letter was on SCSB's letterhead, contained an authentic SCSB stamp and was signed by the former employee as a corporate business manager.

It was accepted at trial that the potential investors did not have the funds available and that SCSB's employee made the fraudulent misrepresentations knowing them to be false and intending they should be relied upon by the claimant (his motive for doing so was unclear). The employee was subsequently convicted in Taiwan on fraud charges arising out of the Letter.

The sale did not proceed; the claimant attempted to find alternative funding, but was unsuccessful and the business collapsed. The claimant subsequently commenced proceedings against SCSB seeking damages for the fraudulent misrepresentations in the Letter. SCSB conceded that the misrepresentations were fraudulent but disputed liability on the grounds of applicable law, reliance, vicarious liability, causation, and quantum.

Decision

The High Court found that the claimant succeeded in its claim for damages. The key areas of the judgment which will be of interest to financial institutions are examined below.

Having found that the law of England and Wales applied to the claim and noting SCSB's acceptance that fraudulent misrepresentations were in fact made by the bank's employee, the court considered whether SCSB was vicariously liable for those representations. This depended on whether the employee had actual authority to sign and send the Letter, or whether SCSB allowed it to appear so, in other words that the employee had ostensible authority (as per Armagas).

On the basis of the evidence submitted by SCSB, the court was not satisfied that the employee had the actual authority of SCSB to sign the Letter.

However, the court said that the employee's position, their use of SCSB's letterhead and stamp were sufficient to give them apparent authority. The court noted that, as per Armagas, in order to establish ostensible authority the claimant needed to show a holding out or representation by SCSB to the claimant, intended to be and in fact acted upon by the claimant, that the employee had authority to do what they did, including acts falling within the usual scope of their ostensible authority. Although the Letter, terms and circumstances in which it was sent were highly suspicious, the employee was an appointed customer relations manager of SCSB and could use its letterhead and its stamp. There was no reason for the claimant to think it was apparent that the employee did not have the authority to sign or email the Letter.

In light of this finding, the court concluded that SCSB was vicariously liable for the fraudulent misrepresentations.

The court went on to find that on the balance of probabilities, the claimant was induced to rely upon the Letter and that it was satisfied that the Letter was the substantial cause of any claimed loss. The court concluded that the claimant had a real chance, as opposed to a speculative one, of securing investment from another potential investor, and that the misrepresentations were a substantial cause of the loss of that chance.

Accordingly, the court found in favour of the claimant in its claim against SCSB.