One of the first basic legal concepts you learn as a budding law student is the doctrine of vicarious liability. Put simply it means that employers are legally responsible for the wrongful actions of their employees carried out during the course of their employment. Put even more simply, the buck stops with the company so that if an employee makes a mistake, it is the employer who is held accountable and must make good any damage done.
Based on this doctrine, employees have not needed to fear being personally sued for their actions while working. They may fear losing their job if they make a mistake, but that is another matter. In light of the fundamental nature of this doctrine and its far-reaching effect on how we regulate our commercio-legal system, it is surprising there has not been more comment on a recent High Court decision that has challenged this protection for employees. A company was sued for misleading and deceptive conduct under Victorian fair trading and federal trade practices law and an employee was found personally responsible along with his employer for giving bad and misleading advice that led to a substantial loss for the client.
Houghton v Arms was decided in December last year by a five-member High Court. It held that, in addition to the defendant company, an employee of that company was also liable, personally, for misleading advice he had given the plaintiff/client, despite being employed at the time. Let's start with a brief summary of the facts of this case. . A client of a website company was in the business of providing marketing services for small to medium independent wineries that marketed directly to consumers. The client's profitability depended on paying a low rate of sales tax applied because of the way he sold through the website. . The website company (the employer) was engaged to provide advice on the appropriate website design, construction and administration. . Two employees of the website company provided incorrect advice to the client that affected sales tax calculations and resulted in the client losing a substantial amount of money until the problem was corrected. . The client won his claim against the website company but by then the company was in liquidation. . Being unable to recover the loss against the liquidated company, the client asked the court to make the employees personally responsible for their actions during the course of their employment, and therefore liable for the client's loss. . After several lower courts heard the case, it went on appeal to the High Court, which ruled the employees were personally liable.
The decision was based on the wording of section 52 of the Federal Trade Practices Act and the similar wording of section 9 of the Victorian Fair Trading Act (FTA). It was also based on section 159(1) of the FTA, which allows a person who suffers loss as the result of the contravention of the FTA the right to recover that loss from "any person involved in the contravention". The High Court seemed to leave a back door open to avoid liability through the use of the argument of 'embodiment'. This argument is based on English case law (Tesco Supermarkets v Nattrass) where it was held that if the employees were senior management or directors exerting a high level of control over the company, those actions are the embodiment of actions of the company itself. Let's face it, a company is not a person and so everything it does it has to do through the people involved in it.
In other words, the actions of those senior management are not personal actions but simply the actions of the company as such. Those actions may therefore be excluded from liability. The actions of these high-level staff are inextricably the actions of the company itself and there is therefore no separate liability of such a senior employee. This is a very fine distinction indeed and one that will certainly see further comment by judges. Anyway, until we hear further from the courts or the legislature, the decision in Houghton v Arms has important implications for employers and employees. Whether the decision will extend to the financial services sector remains to be seen. Financial services are regulated by the Corporations Act and the ASIC Act and are specifically excluded from coverage under the Trade Practices Act. But the provisions of section 12GF of the ASIC Act are virtually identical to section 159(1) of the FTA, so there is every reason to think the same reasoning would apply.
Several consequences of this 'separate liability of employees' seem to flow from this decision. Firstly, we all know unhappy clients claim firstly against the Australian financial services (AFS) licensee, but also include the authorised representative, just in case the AFS licensee is not able to meet the claim. Now plaintiff clients may also personally be suing the employees of the licensee and the employees of the authorised representative who gave the advice. The Westpoint class actions may be the first to take this line in the financial services sector.
Secondly, given we are in such a low unemployment era, where good financial planners are hard to come by, licensees and authorised representatives may need to focus on ensuring that correct indemnity insurance is in place for their valuable staff and that those insurance contracts are reviewed to ensure they contain appropriate indemnity clauses to protect not only the business but also the staff personally. This would of course extend to the directors of the company itself who may personally be the shareholders of the company and have set themselves up in a corporate structure with the very aim of avoiding such personal liability.
Thirdly, employed planners may need to check whether they are covered personally by their employer's insurance and, if not, whether they need their own insurance, whether they need to restructure their personal assets in case they are sued personally, or whether they need to change employers. This may also be an area where the FPA can support employed planners by lobbying for governments at federal and state level to change the law through legislation and return us to the long-held and traditional status of vicarious liability.
