The case of Llyod Pauper v. Grace Smith and Corporation was judged by the House of Lords who shed new light on the matter of vicarious liability in a principle-agent relationship. It deals with the now-established law that the master (principal) is liable for the wrongdoings of the servant (agent) in the course of his employment. The main argument of the case deals with the term, ‘benefit’, whether the principal is liable even when there is no benefit to him by the wrongs of the agent or not. Today, the concept as illustrated in the case is enshrined under Section 238 of the Indian Contract Act, 1872 which states any misrepresentation or fraud made by an agent acting on behalf of a principal in the course of business shall be treated as if such misrepresentation or fraud is done by the principal itself.
Mrs Emily Lloyd, the plaintiff had bought two freehold cottages at Ellesmere Port herself, after her husband’s death. To deal with matters of the property she went to Mr Frederick Smith who by profession is a solicitor and sole member of the firm of Grace, Smith & Co. On 11th January 1910, the plaintiff went to the office as she wanted some advice relating to her property as she was dissatisfied with her return on the property and that was when she met Sandles. He advised her to come the next day and bring the property papers to sell them. Sandles, a clerk in the firm acted as an accredited representative and dealt with the issue of the property. Mrs Lloyd in the course of business, put all the legitimate business in the hands of the Sandles as he was a member of the firm and held the position of the managing clerk in Liverpool.
The very next day, the plaintiff bought the deeds and gave them to Sandles. After receiving the documents, he went outside the office room to collect the paperwork. After twenty minutes with a clerk, he then returned and put forth two documents for Mrs Lloyd to sign. He induced her to sign to sell the property and get her money back. She signed without demur as she thought it was something that ‘had to sign before houses were sold.’ At that time Sandles gave her a receipt in his name. 14th of the same month, she wrote to the firm that she has changed her mind and wished to cancel her instructions, and on the 17th went to the office to ask for the actual receipt of her deeds. Her friend who had seen the receipt thought it was an odd form since it should have been in the name of the firm. Though Sandles who had the two documents as an armoury and the clerk as a witnessing shield stated that the property had been called in the mortgaged to the bank, transferred it and disposed of the proceeds from selling the property in paying off his debts. The documents signed by the plaintiff were documents of transfer of the mortgage to Sandles and expressed consideration of Mrs Llyod.
- Whether the fraud committed for the benefit of the firm or the benefit of Sandles?
- Whether the principal will be liable for the fraud committed by the servant? Was the servant acting in his course of employment while committing the crime?
- Can a mortgage deed be revoked even if the defendant has a witness present?
The learned judges gave the judgment that upon receiving the certificate and instructions to sell the property and recover the mortgage debt, Sandles declared that he will act as a trustee of the documents necessary for the execution of Mrs Llyod on behalf of Grace, Smith & Company. Throughout the whole history of the transaction, Mrs Lloyd was under the pretext that Sandles is dealing as per the course of his employment. The client relied on Sandles as an agent who stated that he is acting on behalf of the company, the document in question is necessary to facilitate this. On selling real estate, the plaintiff has transferred the title signed to Sandles outside the scope of employment though they are unaware of it is a misrepresentation. As she has the right to rely on Sandles as an agent without even trying to read or try to understand the documents provided to her. Therefore, it seems to be an obvious statement of fraud that was committed in the process of Sandles’s employment and was not outside the scope of his agency.
Further, the court had also discussed Barwick v. English Joint Stock Bank (1867) which was the precedent used to dictate that ‘the principal is not liable for the fraud of his agent unless the fraud is committed for the benefit of the principal.’
Lord Macnaghten although did get into the bottom of the pit and gave the opinion that the agent of the bank had committed the fraud, as the principal who thought innocent but having received proceeds from the same, must also be liable for it.
Willes J. contended that in all the cited cases by the defendant, the master had not authorized the acts but he has put the agent in his place to do that classless acts and he must be answerable for how that agent has conducted himself.
He also contended that so far as the question has been whether a principal is legally responsible for his or her agent’s actions in the course of his employer’s business and the benefit of the employer there is a reasonable distinction between fraud and the general rule. Also, the question that whether the master is liable for any wrong done by the servant or agent in the course of service and for the benefit of the master, although it is not possible to prove an explicit or private command of the master. The Honourable Court ultimately decided that it is found that fraud was committed in the course of and within the scope of the duties of Sandles. These said duties were entrusted to him by the defendant as a managing clerk and therefore, the principal should stand answerable for the misconduct of his agent.
Smith had stated that he was a gentleman devoted to ‘Public Work’ which means that his proper business as a solicitor was a matter of secondary consideration for him therefore, maybe he was negligent about the working of the firm. Also, Mr Smith had mentioned that Sandles was practical ‘second-in-command’ and therefore had the authority to represent the firm just as much as if he had been a partner. He even stated that he was to be told about the proceedings of day-to-day activities by Sandles. Since Sandles had the authority as a managing clerk and agent to make deals and he is the one who committed fraud, the firm owner also becomes liable since it is a principle-agent relationship. The fact that Mr Smith had been the recipient of ‘benefit’ of fraud or not should be seen as the only criteria for justifying his actions. Rather, his role as the principal should have been a regulating one which he was unable to fulfil. His employee was the one who committed fraud and his clerk acted as the witness to substantiate the same. In his defence, the defendant held that it was a private dealing between the plaintiff and Sandles, but they both committed the dealings inside the office. Mrs Lloyd was under the pretext that she is dealing with the agent of the firm, therefore, it cannot be considered a private contract since there is no consensus of mind. Therefore, the case is that of vicarious liability where the principal will be held liable for the wrongdoings of the agent and the agent was in this case under the due course of his employment.
VICARIOUS LIABILITY IN INDIA
In India, the relationship between the principal and agent is ruled by section 182 of the Indian Contract Act, 1872 where the principal and agent are defined in terms of work. The agent is the one who works on behalf of the principal and follows his command therefore as per the Latin legal maxim Qui facit per alium facit per se, which means one who does a task through another, does it himself so the principal is deemed as to be doing the task itself. In such a case the liability is that of the principal only and it is known vicarious liability of the principal.
The case of Chairman, Life Insurance v. Rajiv Kumar Bhasker, throws light on the fact that there is a present principal-agent relationship between two parties if they have consented to have agreed to such a relationship in law even if they have not expressly used the terminologies. Similarly, Sandles is acting as an agent even if not expressly stated by either of the parties.
The agent commits the fraud by purporting to act in the course of business, and therefore, his act was ‘benefitting’ the plaintiff itself as stated by the case of Barwick v. English Joint Stock since the agent was a representative. Throughout the history of the transaction, the plaintiff was under the pretext that she was dealing with Mr Smith of Grace Smith & Corporation. Even when Sandles was instructed to sell her property, he took undue advantage of the opportunity because of his job entitlement to realize her property. It was a tortious act committed by the clerk in conducting business that he should have conducted honestly and with due diligence. This case of Vicarious liability with fraud as an element led to a clear understanding that the principal will be held liable for the wrongdoings of the agent during his employment even after they have been terminated from the job when the situation came to light.
Author(s) Name: Charu Kohli (Vivekanand Institute of Professional Studies, Delhi)