Federal Court affirms an employer’s vicarious liability for fraudulent acts of employees

Legal Directions

Introduction

In Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd [2016] FCAFC 78, the Full Court of the Federal Court of Australia has ruled that an employer can be held liable for the fraudulent acts of its employee, even when those acts are prohibited.

Background and Federal Court proceedings

Pioneer Mortgage Services Pty Ltd (‘Pioneer’) is a mortgage originator and manager. Pioneer and Columbus Capital Pty Ltd (‘Capital’) were parties to a series of deeds whereby Pioneer would originate loans and Capital would fund them.

Ms Tupeia Dando was a manager at Pioneer. She was authorised to make customer redraws via Pioneer’s software system. Between 2006 and 2013, Ms Dando made numerous redraws from the accounts of Pioneer customers without their consent. She deposited the money into her husband’s account. The fraudulent redraws were not discovered until 2014 when Ms Dando went on leave and one of the borrowers contacted another employee of Pioneer to challenge the amounts the borrower was said to owe under the loan.

The primary judge held that Pioneer was liable to Capital in three ways:

  1. Breach of the deeds,
  2. On the basis of vicarious liability,
  3. A breach of the relevant Consumer Law provisions.

Full Court of the Federal Court of Australia

Pioneer appealed the Federal Court’s ruling on the basis that the primary judge erred in finding it liable on each cause of action. The Full Federal Court dismissed Pioneer’s appeal on each ground. In its reasoning, the Full Court discussed how vicarious liability arises in Australia and how it applies to the situation where an employee’s unauthorised fraudulent acts have caused a loss.

The Full Federal Court explained that vicarious liability in the course of employment can arise on one of two bases. The first is where the acts of the employee are attributed to the employer; the second is where the liability of the employee is attributed to the employer.

Attribution of Acts

The first and traditional operation of vicarious liability is where an employee’s acts are attributed to his / her employer in the course of employment. This has been the most commonly applied test in Australia.

Here, Ms Dando’s fraudulent acts were not authorised by her employer. The Full Court therefore considered whether Pioneer could be held to be vicariously liable for acts it had not authorised.

The Full Court set out the classic formulation of the test that ‘an employer is liable for authorised acts or for unauthorised acts which involve improper modes of performing authorised acts.’ The Court went on to explain that it is clear that it has never been a bar to the attribution of acts to an employer solely because they were not expressly or impliedly authorised.

Their Honours referred to the classic case of Lloyd v Grace, Smith & Co [1912] AC 716. There, the managing clerk of a firm of solicitors induced a client to give him the deeds to her property and to sign two documents so that he could sell the property and keep the proceeds. The House of Lords in Lloyd relied on principles of agency to find that the firm was held to be vicariously liable. The Lord Chancellor held that the employer will be vicariously liable if the agent commits the fraud purporting to act in the course of business such as he was authorised, or held out as authorised, to transact on account of his principal”.

The Full Court reasoned that:

There can be little doubt that the employer or firm is liable in a case like Lloyd where acts are done under cover of the authority that the servant is held as possessing.

The Full Court said the vicarious liability of Pioneer arose in the same way as it arose in Lloyd. Ms Dando’s acts should be attributed to Pioneer because:

The fraud was committed in the course of doing the very class of acts that Ms Dando had been empowered to do by Pioneer, namely the management of redraw payments to borrowers. And it was performed in the ostensible pursuit of Pioneer’s business and in the apparent execution of the authority that Pioneer held Ms Dando out as having.

Attribution of Liability

The second test is the accepted test in England. Under this test, an employer will be vicariously liable for its employee’s conduct where the employee’s liability is attributed to the employer in the course of employment The attribution of liability is based upon a test of close or sufficient connection between the employment relationship and the tort committed by the employee. The test has been described as one which gives ‘the concept of “ordinary course of employment” an extended scope’. This test has not been adopted by the majority of the High Court of Australia, but it has been adopted and applied by intermediate and appellate courts.

In its reasons, the Full Court referred to the English decision of Mohamud v Wm Morrison Supermarkets plc [2016] UKSC 11. In that case the employer, who ran a petrol station, was held to be liable for its employee who verbally abused a customer from behind the counter of the petrol station, demanded that he leave the petrol station, and then assaulted him outside. Although the employee’s conduct was a gross abuse of his position, his actions were regarded as part of a ‘seamless episode’ from the time he was behind the counter. There was a sufficient connection between the job that the employee was entrusted to do and the assault on the customer.

The Full Court reasoned that Mohamud illustrates that acts can have a close connection with employment even if they are expressly or impliedly forbidden.

The Full Court accepted that the primary judge was correct to conclude Pioneer was also vicariously liable on this basis:

The circumstances of this case illustrate a very close connection between Ms Dando’s acts and her employment. As we have explained, her fraud was only possible because of the authority she had to use [Pioneer’s software] system. She perpetuated the fraud through the additional authority and access that came with her role as manager and her authority to supervise the very acts that constituted her fraud. Ms Dando’s liability should also be attributed to her employer.

The Full Court found that, because Pioneer could be held to be vicariously liable on either basis, it was not necessary for it to determine what the true source of attribution was in Australia.

Comments

This case reaffirms that, even if an employee’s fraudulent acts are prohibited by an employer, that the employer can still be held vicariously liable for those acts. The Full Federal Court has not clarified where the true source of attribution of vicarious liability comes from in Australia. However, this judgment suggests that the broader test, which looks at whether the employee’s liability is sufficiently close to the employment relationship, can be relevant.

Authored by Stephanie Young, Senior Associate, Melbourne


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