No vicarious liability arises for a company where one of its agents perpetrates a fraud in the course of a recognisably independent business. This applies even where, to facilitate the fraud, the agent uses an online portal which he or she only has access to because they are an agent of the company: Frederick & ors v Positive Solutions (Financial Services) Ltd  EWCA Civ 431, 13 March 2018
The appellants had invested in a fraudulent investment scheme perpetrated by a Mr Warren and another individual. In doing so, the appellants had re-mortgaged their property in order to raise money to invest. They lost all their money.
As well as being a fraudster, Mr Warren was an independent financial adviser engaged by the respondent company, Positive Solutions (Financial Services) Ltd (Positive Solutions). By virtue of his position, he had access to an online mortgage portal.
Mr Warren arranged the re-mortgages for the appellants with what was then Abbey National, via this online portal. Abbey National paid a commission to Positive Solutions via an automated system. Unknown to both the appellants and Positive Solutions, Mr Warren had fraudulently misrepresented the appellants’ occupations and salaries on the application. The appellants advanced part of the mortgage monies to Mr Warren. These funds were subsequently misappropriated by Mr Warren and his accomplice.
The appellants obtained summary judgment against Positive Solutions for their loss, on the basis that (1) it was vicariously liable for the loss caused by Mr Warren; and (2) it had assumed responsibility for Mr Warren’s actions, and therefore owed a duty of care to the appellants.
On appeal, the Court of Appeal dismissed the claim to a duty of care on the grounds that there was no proximate relationship between the appellants and Positive Solutions, and maintained summary judgment against the appellants on vicarious liability.
Test for vicarious liability
The Court of Appeal cited the guidance laid down in Various Claimants and Catholic Child Welfare Society & ors  UKSC 56, as interpreted and re-stated by Lord Reed in Cox v Ministry of Justice  UKSC 10. This set out the two factors which establish vicarious liability in the absence of an employment relationship. As Mr Warren was an agent of the company and not an employee, the relevant tests were as follows: (1) where harm is wrongfully done by an individual who carries on activities as an integral part of the business activities carried on by a defendant and for its benefit (rather than his activities being entirely attributable to the conduct of a recognisably independent business of his own or of a third party); and (2) where the commission of the wrongful act is a risk created by the defendant by assigning those activities to the individual in question.
A recognisably independent business – “moonlighting”
The Court of Appeal accepted Positive Solutions’ argument that Mr Warren was engaged in a “recognisably independent business”. Mr Warren’s use of the online portal to make fraudulent applications to Abbey National was only the means by which he was able to obtain funds for the appellants to invest. Interestingly, the Court of Appeal did not disapprove of the terms “moonlighting” and “frolic of one’s own” – these were convenient colloquial shorthand for the “activities being entirely attributable to the conduct of a recognisably independent business”. Neither the fact that Positive Solutions received commission nor that Positive Solutions had the benefit of an indemnity from Mr Warren relating to fraudulent conduct impacted this conclusion.
Not all the acts had occurred within the course of employment
The Court of Appeal also accepted the argument that not all of the necessary acts and omissions for Mr Warren to be held personally liable had occurred within the course of his agency, and thus Positive Solutions could not be held vicariously liable for his conduct. A necessary element of the appellant’s claim was the inducement to invest in the property development scheme, which was committed by Mr Warren’s accomplice. The loss was caused by the appellants advancing the money to Mr Warren; the appellants did not claim that the re-mortgaging itself caused loss. This misappropriation of the monies could not in any sense be described as an integral part of Positive Solutions’ business activities, and therefore did not occur within the court of Mr Warren’s agency.
Mere opportunity insufficient
Further, merely providing the opportunity to commit the fraud was not sufficient without more to give rise to vicarious liability in the absence of Mr Warren holding himself out as having the authority to act for Positive Solutions.
The High Court recently addressed the question of vicarious liability in Various Claimants v Wm Morrisons Supermarket PLC  EWHC 3113 (QB). In that case, Morrisons was held to be vicariously liable for its employee who had intentionally and maliciously posted payroll data to a file sharing website using his own equipment outside of office hours.
It is interesting to contrast the present decision with that in Morrisons. In Morrisons, the employee in question was entrusted with sensitive data as part of his employment so the unlawful actions were closely associated with the tasks he was required to perform. The same is not true of Mr Warren’s engagement in the investment scheme and his access to the portal.