Liability for the fraud of an agent revisited
The liability of a financial institution (FI) for a fraud conducted by a third party, but in which an employee or agent acting on behalf of the FI have become embroiled in some way, is, in practice, an important question.
There needs to be kept firmly in mind that vicarious liability may arise where the agent or employee has an alleged primary liability in tort, and a secondary liability.
Liability outside the scope of agency?
In Frederick v Positive Solutions (Financial Services) Limited  EWCA Civ 431, 18 March 2018, the individual in question was not held out by the FI in any way to the claimants, although he was in fact an agent for limited purposes. The claimants had been talked into applying for remortgages by a third party, who introduced the claimants to the FI’s agent. The agent used an online portal, to which the FI gave him access, to arrange mortgages for the claimants, but the FI was not involved in the application, and did not hold out the agent as acting for the FI in arranging the remortgage. The remortgages were made for more than the claimants requested, and the balances misappropriated. It was not contended that the agent’s conduct was within the scope of his express or apparent agency.
The prime ground on which the claim was rejected was that the activity of the agent was in no sense “integral” to the business of the FI; the agent had been “moonlighting”; and his activities “were entirely attributable to the conduct of a recognisably different business of his own or a third party”. The following facts did not prevent that conclusion:
a. the agent used the online portal provided by the FI to obtain the remortgage offers
b. commission was automatically paid by the mortgagee to the FI and held in a suspense account
c. the agent had agreed to indemnify the FI for any wrongdoing
d. the remortgage offers stated that the FI “recommended that you take out this mortgage”
e. one of the claimants had found and drawn comfort from the agent’s entry in the FSA online register which stated that he was a “client facing adviser”.
The Court of Appeal referred to a fundamental dispute as to whether, in the case of agents, there could be liability based on the principle stated by the Supreme Court in Cox v Ministry of Justice  UKSC 10, . That principle was that there are 2 elements to vicarious liability cases:
a. was the harm done by an individual who carried on activities as an integral part of the business activities of the defendant and for its benefit, and
b.whether the commission of the wrongful act was a risk created by the defendant by assigning those activities to the individual.
The rival contention was that the Cox principle did not apply to financial loss arising from commercial relationships, but only to “cases of sex abuse or physical or psychological injury, where the abuser or wrongdoer could not afford to pay”.
Without deciding that issue, the Court held that even if the Cox principle were potentially applicable in this context, it did not in fact apply on the primary ground above.
It is important to appreciate that in Frederick, the agent dealt directly with the claimants, and there was no problem with making a primary claim in fraud against the agent personally. The problem for the claimants was how to make a claim based on vicarious liability for the primary claim against the agent.
However, in some cases, especially in the context of banking, the claimants may never meet, or deal with, or even know of, the bank employee or agent involved, until after the fraud. A bank employee may for example be suborned by a third party fraudster to open an account to receive funds, or provide inside information to a fraudster who talks the claimant into sending funds.
Before there can be any vicarious liability of the FI, there must be a liability to the claimant, in tort, of the employee or agent. What might that be?
In such cases, it is possible that the employee or agent was jointly liable with a third party fraudster, and the FI was vicariously liable for the joint liability.
For instance, if the third party inveigled the claimants to act through deceit, the employee or agent may become jointly liable for deceit if he combines with others in a common design to commit the tort, or if he authorises or procures it. Often, the essential question is whether or not the employee or agent knew enough about the fraud for what he did in, for example, opening accounts, to render him jointly liable for deceit, and whether or not he caused the loss: Fish & Fish Ltd v Sea Shepherd UK  UKSC 10 at . The person who is jointly liable is frequently called the “secondary tortfeasor”; and the claim is a claim of secondary liability.
The courts have shied away from defining what amounts to a “common design” with any real precision (Fish & Fish, at ). The general approach appears from Unilever plc v Gillette (UK) Ltd (Joinder)  RPC 583, per Mustill J at page 608.
“I use the words ‘common design’ because they are readily to hand, but there are other expressions in the cases, such as ‘concerted action’ or ‘agreed on common action’ which will serve just as well. The words are not to be construed as if they formed part of a statute. They all convey the same idea. This idea does not, as it seems to me, call for any finding that the secondary party has explicitly mapped out a plan with the primary offender. Their tacit agreement will be sufficient. Nor, as it seems to me, is there any need for a common design to infringe. It is enough if the parties combine to secure the doing of acts which in the event prove to be infringements.”
Another way of expressing this is that the secondary tortfeasor must make the tort his own: see Sabaf SpA v MFI Furniture Centres Ltd  RPC 254.
“The underlying concept for joint tortfeasance must be that the joint tortfeasor has been so involved in the commission of the tort as to make himself liable for the tort. Unless he has made the infringing act his own, he has not himself committed the tort. That notion seems to us what underlies all the decisions to which we were referred. If there is a common design or concerted action or otherwise a combination to secure the doing of the infringing acts, then each of the combiners has made the act his own and will be liable.”
The common design can be inferred, and tacit. Generally, the secondary tortfeasor must know of the type of act which is to be committed which is the tort though he need not know details of the precise act which is to be committed. In practice, the fundamental question is often whether or not it can be inferred that the employee or agent knew of the type of act, eg deceit which was to be committed.
Vicarious liability in secondary liability cases
If there was a joint liability, the next question is was the bank vicariously liable? In principle, an employer or principal is liable for deceit by an employee or agent committed with the actual or ostensible authority of the employer or principal. For example, in order to have actual or ostensible authority to make the representation the employer must have held the employee out as being authorised to make the representation either by an express representation to the third party or by placing the employer in a position where the usual authority of someone in the relevant employee’s position would include making representations of the relevant type of kind.
Where the employee is jointly liable for deceit, the representation may have been made by a third party. However, the relevant question for vicarious liability is whether the fraudulent representations were within the actual or ostensible authority of the employee or agent (even though in fact made by the third party):
“If the tort is committed jointly, then it is conduct which is within the course of the employment sufficient to constitute the tort, irrespective of which tortfeasor performed the acts, which is necessary. As both tortfeasors are responsible for the tortious conduct as a whole in the case of joint torts it is not necessary to distinguish between the actions of the different tortfeasors. For vicarious liability what is critical, as long as one of the joint tortfeasors is an employee, is that the combined conduct of both tortfeasors is sufficient to constitute a tort in the course of the employee’s employment”
Credit Lyonnais v ECGD  1 AC 486 at p495.
The author warmly acknowledges the assistance of Liisa Lahti of Quadrant Chambers in some of the analysis in this note. All errors and omissions are the author’s alone.
See Raymond’s recent Banking and Finance work.