Vicarious Liability Essay: Employer Preventive Measures.

1. Identifies the salient case law or statutory law.

2. Identifies most relevant case law or statutory law.

Doctrine of Vicarious Liability and Respondeat Superior

To ascertain whether Jack would be liable to pay the price of the gold leaf sheets purchased by his employee Michelle without authorization, in his absence, which turned out to be profitable for the organization.

Liability arises when a person authorizes another person to do a work on his behalf, and when the person who has been so authorized does the act wrong or omits to do the act, the person who employs the other to do it, would be held liable for such wrongful act or omission. This is the doctrine of Vicarious Liability, which is based on the rule of ‘Respondeat Superior’. The negligence or the negligent misrepresentation of an employee attracts liability for the employer, provided that such wrongful act has been carried out in the course of the employee’s employment tenure. The employer would be held liable under the principles of vicarious liability for the tort committed by his employee, as they share a relationship of mutual trust where the superior would be responsible for the person working under him. The relationship between the employer and the employee holds the employer liable to cover the losses for the negligence of the employee as the employer has a liability to provide a standard of care to the third party. Thus there is a responsibility on the employer to mend the injury of the customers or supplier, which has occurred due to a wrongful or unauthorized act committed by an employee in the course of employment. The court decides whether the employee would be held liable for the tortious act, whether authorized or not, of the employee, which would give rise to a cause of action. In the case of Prince Alfred College Incorporated v ADC, the court brought out a different perspective by interpreting the principle of vicarious liability in Australia. Previously, there were ambiguity pertaining to the liability of the employer. The court, in this case, explained and extended the scope to hold an employer liable for the tortious act of his employee, done in the course of employment. While, it is the duty of the employee to have a thorough knowledge of his work as an employee of the particular organization and therefore should take necessary steps to refrain from committing negligence or negligent misrepresentation. There are significant tests to determine whether an employer would be held responsible for an authorized act done by the employee, in the course of business. To know the presence of vicariously liability, it is important to ascertain that: a) whether the employer himself asked the employee to do the act, and b) whether the employee carried out the unauthorized act on the direction of the employer, in the course of employment. The answer to such questions would decide as to the responsibility of the employer towards the recovery of the loss or expenditure sustained by the customer or supplier. The employer cannot escape his liability even if the employee has acted outside the ambit of his job role or without the authorization of the employer, if such act id arising out of the employment and the wrongful act could be avoided while acting as per his normal course. In addition, the employer cannot deny his liability to the loss of the third party even when the tortious act of the employee has criminal charges attached to it. Thus, the third party and his claims are protected by law even if the wrongful act of the employee has criminal charges and if the employer tries to escape his liability.

Liability of Employer for Employee's Wrongful Acts

Additionally, the employer would bear liability upon the matter even if the employee has left or has been fired from the organization. This policy does not let the employer deny his duty towards the aggrieved party at loss affected by his own employee. The employer would be liable to pay the necessary amount due to the third party however the employer would have the right to reimburse the amount, wholly or partly, from the employee under the Employee’s Liability Act 1991. The employer should prove that the employee has committed the wrong outside his capacity or did not act in the course of employment.

Jack would be liable to pay $5000 to Glitzy Touch for the unauthorized purchase made by Michelle, the chef manager whose responsibility is the check on the kitchen supplies. Michelle purchased the gold leaf sheets in order to give a touch of art to the chocolates and cakes in the bakery which was a success, even though without the permission of her employer, Jack. The bona fide intention of Michelle for the welfare of the business is clear and evident. It can also be justified on the ground that the act was so much related with the regular course of her work that it could not be demarcated as an unauthorized act by Michelle and she acted in good faith. Therefore it could be claimed that Jack would be responsible of the act of Michelle even if it was not permitted by him, but it was conducted in the course of usual business. Moreover, the unauthorized act turned out to be a profitable deal and made a great impact on the customers as they were impressed with the golden touch to the baked goodies. This boosted the sale of the bakery and improved its financial status. Jack has no ground to deny making the payment of Glitzy Touch, while he has the scope to ask Michelle to reimburse the money for her negligent misrepresentation.

Conclusion

Therefore, Jack would be liable to pay the amount due with Glitzy Touch, the supplier of the gold leaf sheets.

To provide advice and recommendation to Jack that would help him to avoid vicarious liability arising out of tortious act of employees.

The employer and the employee share such a relationship that the superior (master or employer) would always be held liable for the inferior (servant or employee) based on the principle of Respondeat Superior which says ‘let the superior respond’. Thus any civil or criminal activity committed by an employee against a party related to the business would make the employee vicariously liable to pay damages to such aggrieved party. However, the employer could adopt a few preventive measures to escape from being held liable for a wrongful act committed by an employee in the course of employment.

Scope of Liability for Unauthorized Acts

The employer should stop his employees from making an unauthorized purchase in his absence. The employees should be made aware of the policies of the organization and that such unauthorized purchase would fetch them heavy penalty. The employer must incorporate such stringent clauses in the employment contract and must discuss this in person with the employees. The Employee’s Liability Act 1991 holds an employee responsible for any tortious or criminal activity performed in the course of business. The employees needs to be educated on these matters so there is an apprehension in their mind to deviate from their regular course of business.

The employer should keep a close eye on his employees and recognize any possible risk that may arise from the misconducts or wrongful actions of the employees and take necessary steps accordingly. By adopting such monitoring skill, the organization would be saved from unnecessary legal and financial hassle.

Additionally, the employer must make appropriate agreement with the suppliers or any other transacting party regarding the authorized purchase procedure. The suppliers must be put under contract not to sell products to anyone other than the authorized person to make the purchase. Violation of such clause would attract penalty or rescission of the contract.

Lastly, the employer should always make himself available for constant consultation, which may be required for certain critical transactions. The employees should not feel left or abandoned so that they start to act in a dysfunctional way, which may not be the usual course of employment. 

In this case, Jack must train his employees not to act otherwise than the usual course of business and not to make any purchase without his permission; no matter how much lucrative such offer looks. The employees should be bound by a strict employment contract which would penalize them if they act outside their capacity. Glitzy Touch, the supplier should be brought under contract asking not to pursue employees for purchasing products in absence of the person authorized the make such purchases. In addition to, Jack needs to share his contact details when he is away from the bakery-café, so that the employees could ask for his authorization, if required.

Conclusion

The adoption of the necessary steps discussed under Rule and Application would help Jack escape the clutch of vicarious liability.

The primary issue involved in this case is whether Michelle have breached any statutory duties as the director of ‘Le Petit Plat’. The secondary issue in this case is to determine whether she would be personally liable for the debt of the company.

Preventive Measures to Avoid Vicarious Liability

The Corporations Act 2001 has provided under Section 180 that director of a corporation have certain duties towards the company. Subsection 180(1) of this Act has stated that the directors should maintain a minimum standard of care and diligence while exercising their powers and discharging the duties imposed upon them. Directors are given with the power to make decisions on behalf of the company, and so are required to prove that their decisions are based on proper reason and made with exercising proper care. It is the duty of the director to maintain his position that he possesses the required skills to monitor a company. To make a decision on behalf of the company, he is required to attend the board meetings of the company to obtain the proper information about the ongoing functions and status of the company. A director failing to do so, shall be said to have committed a breach of his duties.

In the landmark case of Australian Securities and Investment Commission (ASIC) v Cassimatis (No 8) [2016] FCA 1023, it was found by the Federal Court of Australia that the directors are required to exercise due care and diligence while exercising their powers, by virtue of their position. This duty is imposed on them under the provision of Section 180(1) of the Corporations Act 2001. The Court also established that the director involved in this case has failed to exercise the responsibilities of a reasonable director in his position, causing a breach of his duties under the Corporations Act 2001.

Further it should be stated that, the responsibilities of the directors are not only limited decision making. His responsibilities shall be extended to carefully checking the financial statements of the company. The reports should be analysed by the directors as a part of their duty. The process of financial reporting should be examined and overseen by the directors. They are liable on the behalf of company to be aware of the debts it has incurred and the other difficulties regarding their financial situation. Director should obtain adequate amount of knowledge about the financial obligations of the company and they should direct the company regarding the matter.

In the case of Australian Securities and Investments Commissions v Rich (2009) 75 ACSR 1; 236 FLR 1, the director was alleged to have contravened Section 180(1) of the Corporations Act for not performing his duties regarding the financial obligation of the company. The Court while deciding the matter reiterated that directors have a duty to scrutinize the financial reports of the company. For this purpose, directors must be fully aware of facts of the financial circumstances of the company.

Recommendations for Jack

The decision of Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 should also be mentioned in this context, where the Court recognised the duty of a director and stated that they should maintain their knowledge about the financial circumstances of the company. It is their duty to report and scrutinize the monetary condition of the company. Director may acquire personal liability for a breach of his duty to act for the proper purpose, which has resulted in a loss to the company.

The rule of personal liability was also recognised in the Bell Group Limited (In Liq) v Westpac Banking Corporations (No 9) [2008] WASC 239. The Court restated the rules of the Corporations Act 2001 which requires the director to comply with the best interest of the company while taking a decision on behalf of it. If a director fails to comply with this responsibility, he shall be liable personally for the debts of the company resulting from his act.

Michelle had breached her duties as the director of ‘Le Petit Plat Pty Ltd’. She was obligated to attend the board meetings of the company to have the required information about the operation of the business. It was her duty to notify other member before taking a decision of borrowing $600,000 amount of money from the Best Bank Limited on behalf of ‘Le Petit Plat Pty Ltd’. As she was not aware of the debts and financial obligations of the company, she should have reported the confusion to the other members. It is breach of her duty to act in a good faith and proper purpose for the company. She had failed to discharge her obligations for the best interest of ‘La Petit Plat Pty Ltd’. She had also failed to exercise due care while acting as a director by not becoming a part of overseeing the management of the business. She did not inspect the financial report of ‘La Petit’, which led her to make a decision which was inappropriate for the company. If she had read the financial report, she would have considered the debts of the company while making decision of borrowing money. As she failed to exercise reasonable care while performing her duties, it can be said that a breach of duty was committed by Michelle.

In addition to this, Michelle may be personally liable for any debts acquired by ‘Le Petit Plat Pty Ltd’ for her breach of duties. As per the Corporations Act 2001, she shall be liable for not being able to discharge her duties for the best interest of ‘Le Petit Plat Pty Ltd’.

Conclusion

Michelle had breached her duties as the director of ‘Le Petit Plat’ and she may be held personally liable for any debts incurred by the company that has been resulted from the breach of duty.

Whether any changes could be made in the operation of the business of ‘Le Petit Plat’to manage the personal risks of the director.

It is the duty of the director to make decision in the best interests of the company. The liability they have is to monitor and oversee the management of the company. The responsibility to act for proper purpose and best interest of the company is imposed on them. A director shall be said to have committed a breach if he has failed or refused to perform his or her obligations towards the company. The director of a company must have to bear the responsibilities of the debt arising from his or her breach of duties to the company. The liabilities of the director of debt of the company for their breach of duties may be extended to their personal liability. Hence, it is required that a director making a decision for the company should be aware of all the obligation of the corporation. A company can bring certain changes in their operations to manage the personal risks of a director, such as: providing a clear insight about the duties and responsibilities to the director, mandating the presence of the directors in the board meetings, obligating the directors to comply with the duties that has been given to them by virtue of the Corporations Act 2001, and timely improving the skills of the directors.

“Le Petit Plat Pty Ltd” should make a change in their business operation and they should inspect and improve the needed skills from the directors periodically. ‘Le Petit Plat Pty Ltd’ show make sure that the directors are aware of the chances of consequences the directors have to face if they breach their duties. In order to make proper decision they should make a policy mandating the directors to attend the meetings and keep acquaintance of the financial status of the company. An essential example to refer in this circumstances is the case of Australian Securities and Investments Commission v Hellicar&Ors [2012] HCA17, where the Court highlighted the on the importance of skills of the director to perform their obligations. They should be also concerned about the liabilities that they may acquire. In the presence of a strong governance policy, regulating the conduct of the directors, ‘Le Petit Plat Pty Ltd’ would be able to manage the personal risks of the directors.

Conclusion

Therefore, it would be suggested that Le Petit Plat Pty Ltd could make the abovementioned changes in the business operation to eradicate the personal risks of the directors.

References:

Australian Securities and Investment Commission (ASIC) v Cassimatis (No 8) [2016] FCA 1023

Australian Securities and Investments Commission v Healey (2011) 196 FCR 291

Australian Securities and Investments Commission v Hellicar&Ors [2012] HCA17

Australian Securities and Investments Commissions v Rich (2009) 75 ACSR 1; 236 FLR 1

Bell Group Limited (In Liq) v Westpac Banking Corporations (No 9) [2008] WASC 239

Employee’s Liability Act 1991

Prince Alfred College Incorporated v. ADC [2016] HCA 37

The Corporations Act 2001