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Court of Appeal provides guidance on the liability of a principal for dishonest acts by its agent

10 February 2011

In Paul Quinn v CC Automotive Group Ltd t/a Carcraft [2010] EWCA Civ 1412, the Court of Appeal considered the test for apparent authority and the circumstances in which a principal will be held vicariously liable for the dishonest acts of its agent.

This case concerned an agent who caused loss to an innocent third party while acting outside the scope of his actual authority. It made clear that where a representation of authority to perform those acts has been honestly relied upon by the innocent third party, it is not necessary to consider whether that reliance was reasonable or whether the third party should have been “put on enquiry” by suspicious circumstances.

Facts

The appellant in this case, Mr Quinn (Q), wished to purchase a new Jaguar, preferably red, for his daughter’s wedding day. At the respondent’s (Carcraft) showroom he agreed with Carcraft’s employee, Mr Khan (K), to trade in his silver Jaguar in part exchange for a blue Jaguar. As part of the deal, Carcraft would pay off the existing financing on the silver Jaguar, and arrange financing for the new car, both with Black Horse Ltd (Black Horse). In the event Q was persuaded by K to purchase on the same terms a red Jaguar, purportedly owned by Carcraft, but in fact of unknown origin. As the red Jaguar was not located at the showroom, the purchase was concluded at a motorway service station, although Q and his wife had no suspicions about K, who seemed “thoroughly charming” and helpful.

Assuming (wrongly) that the financing on the silver Jaguar had been paid off, Q cancelled his standing order to Black Horse, only for Black Horse to bring successful proceedings against Q for unpaid amounts. Having won an essentially worthless judgment against K, Q claimed that Carcraft was vicariously liable for K’s actions. Since the red Jaguar was not in fact owned by Carcraft, K did not have actual authority from his employer to sell it, so this dispute concerned K’s apparent authority.

Having considered what a third-party such as Q would properly consider K could do in the ordinary course of business, the court at first instance held that K did have apparent authority to conclude the transaction on Carcraft’s behalf. Expressed in terms of vicarious liability, there was a “sufficiently close connection” between K’s deceit and his employment. Nevertheless, and despite the fact that the judge had an impression of Q and his wife as “entirely honest witnesses”, Q’s claim was unsuccessful on the basis that he should have been put on inquiry by certain unusual circumstances. On appeal it was argued on behalf of Q that the judge had erred in importing such an “inquiry” test.

Decision

Setting out the legal framework in some detail, Gross LJ’s judgment provides a useful guide to the law on an employer’s liability for the dishonest conduct of its employee/agent. Dishonest conduct is to be distinguished from “blundering attempts to promote the employer’s business interest” and is governed by its own set of authorities. These authorities are numerous but can be distilled into a number of key principles:

  • An employer will not be liable for all the deceits or frauds of its employees, but only those which fall within the employee’s actual or apparent authority. It is not enough that the latter’s employment has given him the opportunity to commit the fraud.
  • Crucial to establishing apparent authority is a representation by the employer, by words or conduct, that the employee had the authority to perform the “class of acts” of which the dishonest conduct formed part. Apparent authority will not arise where the representation is by the employee himself.
  • Another way of considering the same question, based on the principles of vicarious liability, is to examine the closeness of the connection between the work the employee had been engaged to do and the torts (or frauds) committed. If the connection is sufficient, then the torts (or frauds) will be within the scope of the employee’s employment, for which the employer is vicariously liable.
  • In considering the “class of acts” or “scope of employment” above, a broad approach should be adopted. It is inappropriate to concentrate too closely on the particular act complained of, which must be seen in the context in which it occurred. Tricks may be so cunningly contrived so as to seem to the victim a mere matter of course. Hindsight is to be avoided.
  • The third party must rely on the employer’s representation as to the employee’s authority in respect of the transaction in question. It follows that the third party must have an honest belief in the employee’s authority and must not turn a blind eye to suspicions as to that authority.
  • The question of the reasonableness of the third party’s belief is “neither here nor there”. It is no defence to argue that the third party “should not have believed the lie that he was told for the purpose of inspiring that belief, or plead that if the representee had not been such a fool, no harm would have been done.”

Based on the above principles, the Court of Appeal found little room for any consideration of whether Q was “put on inquiry”. Such a consideration might arise where the employee was acting outside the usual authority of a person in that position or in the context of whether a third party turned a blind eye to his suspicions, but the threshold for “blind eye” ignorance is high (see discussion below), and neither of these circumstances existed in this case. The appeal was therefore allowed.

Comment: This judgment illustrates the interesting interplay in cases of this kind between general principles relating to the actual or apparent authority of agents and the law on vicarious liability. The latter, described by Lord Millett in Lister and Hesley Hall as “a species of strict liability … best understood as a loss distribution device”, has always been underpinned by public policy considerations – an employer who enjoys the benefits of his employees’ good work is in the best position to bear the losses arising from their bad work.
 
This case makes clear that where “apparent authority” or a “sufficiently close connection” between the dishonest conduct and the employee’s work have been established, a court will not examine the extent to which a victim should or should not have been taken in by the misconduct. A fraud is, after all, designed to deceive and it would be unjust if an honest victim of the deception were penalised, while the person who held the fraudster out in a position of trust and confidence (ie the employer) bore no responsibility at all.

As the trial judge had not questioned the honesty of Q and his wife, the Court of Appeal did not have cause to consider what constitutes “turning a blind eye”. It did, however, refer to the 2009 case of Thanakharn v Akai Holdings Ltd from the Court of Final Appeal of Hong Kong, in which this question was considered in detail.
 
“Blind-eye ignorance” requires more than a failure to ask questions. Rather it involves a conscious decision by the third party, whose suspicions have been aroused, to avoid asking questions lest his suspicion should become knowledge. Such behaviour would in itself be dishonest, thereby undermining the third party’s honest reliance on the employer’s representation of authority.

Further Information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 (0)20 3088 3710.