Vicarious Liability and Employer Liability
Vicarious liability is the liability, which holds a man of position responsible for an act or an omission of such act committed by another person. Under Common Law, employers has the liability for the tortious act of his employee, committed in the course of employment. An employer could be held liable for the injury or expenditure that his employee has effected on a third party while acting in the course of employment. The theory of vicarious liability is based on the doctrine of ‘respondeat superior’, which holds the superior (employer) in position liable for the tortious act of the inferior (employee). It speaks of the relationship between the employer and employee in the course of employment. This relationship holds the employer responsible for the lack of care, expenditure or loss that a third party has contracted to which the employer owes a duty to mend or cover. The doctrine of respondeat superior is applied to cases where the employee has committed the tort in the scope of the employment. However, it is important to decide whether the employer has a liability towards the aggrieved party or the party injured, whether the act of the employee has injured the plaintiff and has given rise to a statutory action.
In Australia, the legal extent of an employee’s tortious act that makes the employer vicariously liable has been unclear. The landmark judgment delivered in Prince Alfred College Incorporated v ADC [2016] HCA 37 makes things a little clear. This case guides with the appropriate approach that is to be adopted to question the employer pertaining to the extent of his vicarious liability due to a wrongful act or misconduct committed by an employee, arising in of the course of employment. It is important for an employee to understand his own responsibility in the employment and must execute accordingly, like the ambit of his responsibility, contracts that he can sign, decisions he can make pertaining to the business, etcetera. The employee must know his rights as well as his duties so that he may plead innocence as needed. However, it is an important aspect to consider the liability of the employer to ascertain as to if the employee committed the tort in personal capacity or in the course of employment. The conventional test to ascertain whether the employee has committed the tort in the course of employment has two aspects:
- Whether the employee was authorized to do the tortious act by the employer; or
- Whether it is an unauthorized act committed in the course of an authorized act given by the owner or employer.
The test states that an owner or employer would be liable even for the unauthorized act of the employee, provided that such act without authorization is so connected with the authorized act that it is perceived as a mode of conducting the authorized act. The courts are of the opinion that even if such act has a criminal nature, it would still hold the employer to be liable to compensate the aggrieved party. It therefore does not enable an employer to escape his vicarious liability taking the criminal nature of the wrongful act as a defense. However, it is difficult to ascertain the liability of the employer as it involves various intricate details. The liability of the employer does not extinguishes even after the employee has resigned or has been sacked from the organization as the law still holds the employer responsible for the loss sustained by the third party and actions can still be constituted against the employer irrespective of the tortfeasor is no longer associated with the occupation. The owner or employer would still have the liability to pay monetary compensation to the third party who has suffered the loss due to the tortious action of the employee of the concerned organization. Nonetheless, the employer would always have the grounds to hold the tortfeasor guilty under the Employee’s Liability Act 1991. The employer, however, need to prove that the employee did not act in the course of the business or did something that did not arise out of the employment.
Case Law on Vicarious Liability in Australia
Therefore, Jack would be held liable to pay the price of the gold leaf sheets purchased by Michelle even when it was an unauthorized purchase made by her. Michelle bought the gold leaf sheets in good faith and with the intention to uplift the condition of the bakery-café and consumer satisfaction. Although it was not a part of her job responsibility, yet the act is so proximately connected with her responsibility as a ‘chef manager’ to keep a check of the kitchen supplies. Therefore, it can be said that Michelle purchased the gold leaf sheets in the course of her employment, even though Jack, the sole owner of the bakery-café, had no idea about such purchase. Moreover, the unauthorized purchase made by Michelle in the course of her employment did no harm or injury, neither to the supplier, ‘Glitzy Touch’ nor her own employer. It instead, turned out as ad profitable venture, which he customers welcomed whole-heartedly. It boosted the financial condition of the business and made a pleasant impact on its consumer base. Therefore, there seems to be no injury or damage that Michelle has caused, apart from acting out of her capacity as a chef manager and making an unauthorized purchase, which was meant to be controlled by the owner. This makes Jack liable to make payment of the sheets that has been used in making the cakes and chocolates that enhanced the business instead. In McDonald v State of South Australia [2008] SASC 134, the Supreme Court of South Australia held by reviewing the Common law and the Australian law that a mutual trust and confidence is the most significant essence in an employment contract between an employer and employee and should be considered while dealing with cases in this matter. It was observed that the trust and confidence aspect works equally for both the employer and the employee, and the employee would not be held guilty of acting out of capacity if such act proves to be beneficial for the organization.
Recommendations to avoid similar problem in future
The first and the foremost step that Jack should adopt to avoid vicarious liability of the employees is to ensure that he has taken all necessary precautions to prevent the commission of unauthorized purchases. The contract of employment must include such terms that prohibit employees from making purchases that might affect the business. The owner needs to hold his position strong and take stringent action against employees acting out of capacity, irrespective of their intentions. It is important for an employer to recognize a probable unlawful action of an employee and take preventive steps. This would help to reduce the chance of the employer being held responsible for the wrongful act committed by the employee in the course of employment. Proper recruitment, training and regular monitoring the employees would ensure the employer is free from any liability arising out of any tort caused by his employees.
Ascertaining the Liability of the Employer
Additionally, Jack should make sure with the supplier that they do not offer the employees any special discount and push them to purchase, no matter how much discounted the offers are. As the owner of the restaurant, Jack must guard such unauthorized purchase by way of strict agreements and contracts, written or oral, with the supplier, infringement of which would make the violator liable to penalty and compensation. Lastly, Jack must have provided the details of his stay in Montreal, which would have let Michelle, intimated Jack about the lucrative offer made by the supplier and could have taken Jack’s authorization before placing the order for the gold leaf sheets worth $5000.
Subsection 180(1) of the Corporations Act 2001 provides a standard for the performance of the duties of directors that a director of a corporation should exercise their powers and duties maintaining the degree of diligence and care that one reasonable person in their position would have exercised. Directors are needed to be present at the board meetings to hold proper knowledge of financial and other conditions of the corporation. They should establish that the decisions they are taking are made with due diligence and care. It is essential that a record is kept for the process of decision making by the directors on behalf of the corporation. Additionally, as per Section 180 of this Act a director should make a decision on behalf of the company, if it is in the best interest of the corporation.
In the case of Australian Securities and Investment Commission v Adler, NSW Supreme Court stated that directors have a duty to exercise skill and care. It further elaborated that, a person implies, by becoming a director that possess the skill that is expected from a reasonable competent person within his scope of appointment. He should take proper actions to place himself in a position to monitor and regulate the company. This means that, directors are necessitated to be present the board meeting of the company without any proper reason. If a director does not attend the board meeting to properly carry out his functions, he shall be deemed to have committed a breach of the duty as provided under Section 180(2) of the Corporations Act 2001.
Duties of the director to be aware of financial obligation that the company has
In light of this fact, the responsibilities of the directors in relation to the financial reports of the company should also be analyzed. Directors are responsible for overseeing the process of financial reporting. An organisation, not being a natural person, is not capable of fulfilling its obligations by itself. Therefore, the directors are responsible on behalf of the company, regarding its debts and financial difficulties. Directors are expected to have sufficient knowledge of the financial conditions of the company and direct the company regarding their financial obligations.
Director’s Duties and Personal Liability
In Australian Securities Investigation Commission v Healy, the Court decide that every directors are expected to be an interested in that information which are accessible for him and required to understand that information. They need to apply their enquiring mind in the responsibilities given to them.
In the landmark case of AWA Appeal the Court while determining the director’s duties, reiterated that a director should maintain awareness about the financial conditions of the corporation and must possess the understanding about financial statement of the company.
In Centro decision, it was established by the court that the duty of director to have reasonable knowledge of the financial obligation of the corporation falls under his duty to act for proper purpose. A director may incur personal liability if his or her breach of duty has resulted into a loss for the company. This law was applied in the case of Teck Corporation Ltd v Millar (1972) 33 DLR (3d) 288. The court decided following the rules of Corporations Act that directors are obliged to act in the best interest for the company. A breach of this duty shall make the director personally responsible for the debt incurred by the company for his act.
This is to be understood from the relevant rules that Michelle has breached her statutory duties as the director. As director, it was her duty to be present at the board meeting of the company in respect to keep herself acquainted with operation of the business. She was obliged to take the approval of the other members before borrowing $600,000 money on behalf of the company from the Best Bank Limited. Michelle must have reported to the other member of that company, as she was not aware of the financial obligations of the company. She had breached her duties under Section 180 of the Corporations Act 2001, to act for good faith and in the best interests of the company. It is to be noted that she had breached her duties by not enlightening the other members about his business judgment that she made. In addition, she had failed to exercise her obligation to exercise proper care by not being active part of monitoring the business of ‘Le Petit Plat Pty Limited’. In addition to it, as an executive director of Le Petit Plat Pty Ltd, Michelle was obliged go through the financial report of the company in order to make herself aware of the financial difficulties of the company. Before taking a decision on behalf of the company, she should have gone through the financial reports and gathered a knowledge of the financial issues of the company. As the executive director, Michelle was expected to learn that “Le Petit Plat Pty Ltd” had already outstanding debts to pay. In this context, borrowing $600,000 money from Best Bank limited was a decision, which could not be considered to be for the best interest of the company. She has breached her duty in this respect also. There was to reasonable excuse for taking such unreasonable decision by Michelle. A reasonable person in her category of appointment would have executed more care before borrowing such a huge amount and consulted with the other member. As per the legal obligation of an executive director as stated in the Corporations Act 2001, Michelle failed to meet her duties as director. Therefore, Michelle can be held personally responsible if the company suffers any loss in relation to the decision taken by her.
Recommendations for Mitigating Personal Risk as a Director
Further advice for “Le Petit Plat”
Directors are liable for making decision on behalf of the company. They are directly liable for monitoring the business of the company. They should be responsible for promoting success for the company, and are given with the responsibilities to act for the good faith and best interest of the corporation. However, there may be certain situation where the director fails to or refuses to perform the duties. In this case, he shall commit a breach of his duty. The director may be personally responsible if that breach of his duty has a long-term consequence on the company. The director may be subjected to disqualification from his position, incur criminal or civil liability or be personally liable for the debt incurred by the company for the breach of his duty. To avoid any kind of personal risks, directors are required to understand their duties and maintain compliance with such duty. They should be aware of the insider information of the company before making any decision on behalf of it. In order to avoid such personal risks of a director, ‘La Petit Plat’ should make the following changes in the operation of their business:
- Making a clear policy as to the duty of the director.
- Requiring the directors to be present in the board meeting of the company.
- Maximising the protection for the directors that can be afforded to them.
- Mandating compliance with the duties conferred upon them by the Corporations Act 2001.
- Affirmation of the decision of the directors on behalf of the corporation by the other members of the entity, ensuring that the decision is for the best interest of the company.
- Focusing on the requisite skill of the director and improving it timely.
The James Hardie case is a significant example in this aspect as it highlighted on the requisite skill and care of the director while discharging their duties. They should be properly aware of the matter on which they are making the decision. Directors should be aware of the potential liability they may incur while acting in their scope. They should also be aware of the consequences if they breach their duties. “La Petit Plat” should ensure that the directors are concerned about the financial status of the company before borrowing money as the company is already in a debt. ‘La Petit Plat’ should create a rigid provisions requiring compliance of the directors with the duties set out in Corporations Act 2011. They should know that their decision-making would significantly affect the company and for this reason, they should exercise diligence. Therefore, it would be suggested that “La Petit Plat Pty Ltd” should change the governance of their company and make the provisions regulating the conduct of the director a little strict, so that they can ensure the compliance from the director. These changes can help in mitigating the personal risk of the director.
Reference
Australian Securities and Investments Commission v Adler and 4 Ors [2002] NSWSC 171 (14 March 2002)
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 (‘Centro’)
Australian Securities and Investments Commission v Healy [2011] FCS 717
AWA Appeal (1995) 37 NSWLR 438, 504
Employee’s Liability Act 1991
Mcdonald v. State Of South Australia [2008] SASC 134
Prince Alfred College Incorporated v. ADC [2016] HCA 37
Teck Corporation Ltd. v. Millar (1972) 33 DLR (3d) 288
The Corporations Act 2011
The James Hardie Decisions: ASIC v Hellicar & Ors [2012] HCA17
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
