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.

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...

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