Court of Appeal confirms correct legal test for determining a principal's liability for its agent's fraudulent misrepresentation

The Court of Appeal has confirmed that, where a claimant has suffered loss in reliance on an agent's fraud, the principal will be vicariously liable only if the fraudulent conduct was within the agent's actual or ostensible authority: Winter v Hockley Mint Limited [2018] EWCA Civ 2480.

The court rejected the test applied by the High Court, which was whether it was just and fair for the principal to bear the loss and whether there was a sufficiently close connection between the agent's wrongdoing and the class of acts he was employed to perform. The correct test is the objective one established by the House of Lords in Armagas Ltd v Mundogas SA [1986] AC 717, which requires a holding out or representation by the principal to the claimant that the agent had the necessary authority, including ostensible authority. This is likely to provide greater certainty as to when a principal will be liable for its agent's fraud.

However, whilst the Court of Appeal's decision states that there must be a holding out or representation by the principal, and not merely the agent, the facts which the court thought would (arguably) support a finding of ostensible authority in this case did not involve any direct statement from the principal to the claimant. Instead, they comprised acts such as the provision of an email address and notepaper which might lead the claimant to believe the agent had authority.

Although the Court of Appeal's comments on the factual matters were obiter (as the case is to be remitted to the High Court for trial), they suggest principals or employers may have ostensible authority, and therefore vicarious liability for an agent's fraud, even if they do not have direct contact with a potential claimant. To help reduce the risk of liability for a "rogue" agent's fraudulent conduct, principals and employers should consider carefully what internal procedures may be required to ensure there is sufficient oversight or monitoring of communications or activities carried out by agents.

Jade Hu, an associate in our Dispute Resolution Division, considers the decision further below.

Background

The case concerned three tripartite agreements for the lease of postal equipment entered into between Hockley Mint Limited ("Hockley Mint"), Mr Winter trading as Erskine Hathaway, and BNP Paribas. The equipment was sold by Erskine Hathaway to BNP Paribas, which then leased it to Hockley Mint. Erskine Hathaway paid rebates to Hockley Mint out of the profit from the sale of the equipment to BNP Paribas.

The lease agreements were negotiated by Mr Ramsden on behalf of Erskine Hathaway. Mr Ramsden dishonestly represented to Hockley Mint that the rebates were postage credits ultimately paid by Royal Mail and would be paid during the entire period of the lease agreements (such that the equipment effectively came at no net cost to Hockley Mint). In fact, no such postage credits existed and Hockley Mint was only guaranteed rebates for a brief period at the start of the lease agreement, but its obligation to make payments would continue for the remainder of the lease agreements.

In 2017, Hockley Mint commenced proceedings against several defendants, including Mr Ramsden and Mr Winter, for damages for deceit and conspiracy to injure by unlawful means. Hockley Mint alleged that Mr Winter was liable as Mr Ramsden's principal, as the relevant representations of Mr Ramsden were within the scope of his authority.

At trial, the High Court found Mr Ramsden guilty of fraudulent misrepresentation. As for Mr Winter, the High Court found that he was not party to Mr Ramsden's fraud. However, he was vicariously liable for Mr Ramsden's deceit on the basis that:

1. it was just and fair for liability to be imposed on Mr Winter as principal for the wrongdoing of his agent (applying Lister v Hesley Hall [2001] UKHL 22) since Mr Winter had put Mr Ramsden in a position where he could commit the wrong; and
2. there was a sufficiently close connection between Mr Ramsden's wrongdoing and the class of acts which he was employed to perform (applying Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48).

Decision

On appeal, the Court of Appeal (the Master of the Rolls and Flaux and Carr LJJ) held that the High Court had applied the wrong legal test for determining Mr Winter's vicarious liability for Mr Ramsden's fraud.

The test was not "a broad principle of fairness" and a test of "sufficiently close connection" derived from Lister and Dubai Aluminium. Neither of these cases concerned a reliance based tort or an agent or employee's ostensible authority as a result of a holding out by the principal or employer.

Rather, the correct test was that laid down by the House of Lords in Armagas Ltd v Mundogas SA [1986] AC 717. This asked whether there was 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 the authority to do what he/she did, including acts falling within the usual scope of the agent's ostensible authority.

Accordingly, the case was remitted to the High Court to consider whether Mr Winter was vicariously liable on the basis of Mr Ramsden's ostensible authority.

Although the Court of Appeal did not need to decide the question, it noted there was material "which is arguably capable of supporting a case of vicarious liability on the basis of Mr Ramsden's ostensible authority". This included the following facts:

• Mr Winter gave Mr Ramsden the "contractual documentation" which was used by Mr Ramsden in his negotiations with Hockley Mint to procure the relevant transaction. Mr Winter also gave Mr Ramsden the right to use "Erskine Hathaway notepaper";
• Mr Winter insisted upon Mr Ramsden assuming the fictitious persona of a Karl Hansen for the purpose of communications with Hockley Mint on behalf of Erskine Hathaway because of the belief that Mr Ramsden had "something of an unsavoury reputation";
• Mr Winter authorised the fictitious Karl Hansen having an Erskine Hathaway email address and monitored the same;
• Mr Ramsden used Erskine Hathaway's notepaper logo on emails from the fictitious Karl Hansen to Hockley Mint; and
• Mr Winter authorised the payment of rebates to Hockley Mint pursuant to invoices from Hockley Mint which referred to "postage for the quarter" and "savings on postal agreement".

The Court of Appeal said this was not a case in which the claimant relied solely on the representations of the agent as to his or her authority without any representation or holding out by the principal. The matters above "emanated from or with the authority of Mr Winter and were intended to lead Hockley Mint to believe, or at any event were objectively capable of leading Hockley Mint to believe, that Mr Ramsden had authority to commit Erskine Hathaway, whoever or whatever that trading entity might be".

The question of whether vicarious liability in fact arose on the basis of ostensible authority was, however, a matter for the High Court.