The Law of Agency and the Vicarious Liability Clause - Case Study Example

Introduction and facts of the case: The relationship between an employee and the employer often plays the part of a relationship between an agent andthe principal. The employee who acts on behalf of the employer can be considered to be the agent and the employer for whom such an act is undertaken can be considered to be the principal. The background of the case discussed here has this concept of principal agent relationship with regard to the acts of an employee and the subsequent issues that have occurred because of the acts. Canine Creations is a small business unit engaged in the business of pet grooming. The joint owners, Alfie and Casey have started a mobile dog grooming unit as a part of expansion and diversification of their business. This had resulted in both of them ‘being on the road’ for most part of the day. This had resulted in the shop employing a girl called Shelley to manage the shop while the owners were tending to their mobile unit. The unit was a regular customer of a dog shampoo supplied by a company called Papa Dog for the past two years. Of late customer complaints about the shampoo causing skin allergies to dogs after a visit to the shop had been received. Acting upon the compliant the owners instructed Shelley to stop ordering the shampoo from Papa Dog. As instructed the employee promptly informs Josh, the sales representative of Papa Dog that the shop will discontinue the use the particular shampoo. Josh tells Shelley that the problem had been solved and an improved shampoo had been introduced which will not cause the aforementioned allergy. The sales representative offers a commission of 25% for the product and Shelley, presumably on this basis orders a batch of the ‘improved shampoo’ worth six hundred pounds. It should be noted that this act was done without clarification and approval of her employers. The events that followed further compound the issue here. Josh calls Shelley for a date and tells her he would be happy to offer a ten percent commission that was actually entitled to him. Shelley accepts the offer and continues to buy products from Papa Dog. The orders are priced normally, but the ten percent commission was paid to Shelley personally without the knowledge of her employees. It was only when Alfie and Casey received their quarterly account from Papa Dog that they come to know that Shelley had been disobeying their orders and had continued to order products from the company. They confront their employee with this problem which results in her resignation. Shelley creates more problems for her employers when she books two return tickets to New York crediting the amount to Canine Creations. The tickets were for her and Josh. Issues in the case: There are several relevant issues to be discussed here. The first one is that as an employee, Shelley is acting on the instructions of her bosses and hence is their agent. According to the In the Corruption Bill, “The structure of the legislation revolves around the concept of agency but it extends to both the public sector (where a public official is regarded as an agent of the public) and to the private sector (where, for example, an employee is an agent of his employing company).” (Smith 2003, p. 2). In normal course, the action of Shelley would be binding on the company and hence the bill for the dog shampoo would have been payable. But in this instance, Shelley had acted outside her authority, because she had been clearly told not to order any more products from the company. The order did not pertain to the price of the product, but the quality and hence she had no authority to buy products because a huge discount of 25% was offered to the company. It amounts to be seen whether the employee’s actions would be binding on the employer, namely Canine Creations. A related issue in this instance is that Shelley did not intimate the matter of reordering the product from Papa Dog. Another issue is the angle of corruption that has risen in this case. Shelley had made secret profits from the purchase and the matter was not intimated to her employees. The fourth issue is that Shelley had booked personal tickets for her and Josh and credited the amount to her former employer’s account. All these issues will be discussed with relevant legal laws and statutes in the coming sections. The Law of Agency and the vicarious liability clause: The relationship between a principal and agent is quite a sacred one and requires mutual trust and respect among the two parties. An agency is “the fiduciary relationship which exists between two persons, one of whom expressly or impliedly manifestly assents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifestly assents so to act or so acts.” (Vollans). With regard to this definition, there exists a fiduciary relationship between Shelley and her employers. The authority given to Shelley when she was employed in the firm also confirms the fact that her employers had expected her to act on their behalf and that Shelley by accepting the position had shown her assent to do so. The fact that the employers had acknowledged her actions (by paying the bills for products ordered by her), the final part of the definition also holds well here. Hence it can be established without doubt that Shelley is an agent of her employees. Hence, it has to be seen whether Canine Creations will be liable to pay the bill for products ordered by Shelley outside her authority. Another statute that can be used to hold Canine Creations is the Vicarious Liability Clause. “Vicarious liability is where an employer is held to be liable for the acts or omissions of an employee, even when the employee is hired from a different employer.” (Vicarious Liability: Luminar Leisure. 2007). In normal course of employment, Canine Creations can be held accountable for the actions of Shelley. Duties of an agent: Since the issue of agency has come up in this case, it is prudent to examine the primary duties and responsibilities of an agent towards his job and his principals. The prominent among them include obedience to lawful instruction, practicing care and skill on the job, personal performance and showing good faith towards the principals. (A Summary of Directors Duties of Care and Skill: Duties as agent. 2008). a. Obedience to lawful instructions: An agent is required to act only according the express or implied instructions from his or her employers. A deviation can only be done on the issuance of fresh instructions and authority. In case the instruction is not clearly spelt out the adherence to instructions will be judged on the basis of reasonableness and if the act was done in accordance to the best interest towards the employer (principal). In this instance, Shelley had clearly acted not in accordance to the specific instructions provided by Alfie and Casey. b. Exercising care and skill: An agent should exercise proper care and skill in doing the duties assigned to him or her. This is quite ambiguous and judging the care and skill can only be done with reference to what a reasonable person with the current skills and knowledge will act in a particular circumstance. An error of judgment, if proved, cannot be held against an agent. Shelley can be accused of not exercising proper care since the earlier shampoo was causing problems for the dogs and she did not care to check whether the improved shampoo was indeed free from the defect. There is no evidence of her not showing any lack of skill expected of her. c. Personal performance: An agent should personally do the job assigned to him and does not have the authority to delegate it to another person without the consent of the principal. “The general rule is ‘delegatus non potest delegare’ an agent cannot delegate.” (The Law of International Trade and Carriage of Goods. 2004). Shelley cannot be accused of this clause since there was no delegation of work done by her. d. Acting in good faith: This implies that the agent should not act in a way that will cheat or harm the principal in any way. Good faith can be defined as “An act performed on the basis of trust and with no intent to misrepresent or defraud.” (Your Online Legal Resources Centre for Property Management). Shelley has certainly not acted in good faith here. She had not acted in good faith on a number of counts. One is that she disobeyed the orders or her employers and purchased the problem causing shampoo. The second is that she had given orders for a shampoo that has previously caused problems and also without testing whether the new improved version was free of defect. Apart from causing skin problems for the dogs, it will harm the goodwill of Canine Creations. There exists more viewpoints of the duties of agents and they are discussed in here. Any repetition of what has already been said above will only be provided with a casual mention. The article that appeared in the April 2006 issue of the Letting Update Journal is discussed here. According to the article, the duties can be divided into fiduciary, contractual and statutory duties. “In common law, fiduciary is a legal term used to describe a relationship between a person who occupies a particular position of trust, power or responsibility with respect to the rights, property or interests of another.” (A Journal for Property Letting Professionals: Fiducial Duties. 2006, P. 15). The secret commission accepted by Shelley is an example of the breach of fiduciary duty. Even if Papa Dog had informed that a commission had been paid to the concerned employee, it would still amount to breach of fiduciary duty. This has been corroborated in the case of Wilson and Anor v Hurstanger Ltd where information that the agent had received additional commission (over and above what was agreed) had been intimated to the principal. “In Wilson and Anor v Hurstanger Ltd, the Court of Appeal has decided that, when a third party makes a payment to an agent, there may be circumstances in which disclosure of the payment to the agents principal has been sufficient to negate secrecy and so to preclude the payment from being a bribe, but not sufficient to amount to an obtaining of the principals informed consent so as to avoid a breach of the agents fiduciary duty.” (Agency Secret Commissions and Breach of Fiduciary Duty. 2007). In this case it was Papa Dog that informed Canine Creations of the bribe (10% discout). If the fact had been intimated to them by Papa Dog or any of its employees, Shelley may be acquitted of accepting a bribe. But it is seen from the case that Canine Creations only came to know about the fact when they received their quarterly bill and subsequently contact Papa Dog to enquire about the same. So the fact that a commission had been paid had not been intimated to Shelly’s employers effectively showing that a bribe was involved. In any case, she had erred in the performance of her fiduciary duties. In the Tesco vs. Pook case, the latter who was an employee of Tesco was found guilty of embezzlement of company funds. He misused his relatively senior position as grocery development manager who had the authority to authorized payments to the company’s suppliers. He fraudulently made invoices and took nearly half a million pounds be deceiving Tesco into believing them as authentic. “Mr Pook was suspended once these invoices had been discovered and was subsequently dismissed. Mr Pook was convicted of theft and sentenced to a term of imprisonment.” (Employees’ Duty is to Disclose their Own Wrongdoing). Tesco also filed a suit against the employee to recover the amount embezzled from the company. Npower, one of Britain’s largest suppliers of energy sued a sales agent called First Contact for offering bribes to one of their senior executives. First Contact had allegedly paid 12,000 pounds to this executive on condition that the existing contact the company had with Npower would be terminated. This abrupt termination would enable First Contact to obtain a large compensation which is possible in such instances. “Disciplinary proceedings were subsequently brought against the npower executive who was allegedly bribed, but the executive resigned from the company before they were complete.” (Harrison 2005). The article further states other duties which include duty of care, duty of loyalty, and duty not to delegate. Contractual duty simply denotes to the contractual agreement between the principal and agent. Canine Creations being a small concern may not have provided with a contract and a job description. But it can be assumed that her rights and duties have been intimated to Shelley orally. Doing acts that exceed the authority given to an employee or performing illegal acts all come within the ambit of breaking the contractual duty. In such a case she had broken the contractual duty by ignoring the orders not to buy from Papa Dog. She can also be at fault for accepting a bribe if the matter had not been intimated to Canine Creations by someone other than Shelley herself. In other words, if the fact was known from Shelly’s own confession at the time of resignation, she can be accused of taking a bribe also. Statutory duties that are implied on a person be the existence of statues and laws in a particular country, regions state and local authorities. In such a case many other statutes other than the law of agency might be relevant in this case. For example, Shelley can be dismissed from her job under the UK Employment Laws. Dismissal is considered fair under the following conditions also if the employer follows the statutory procedures. It can be done on the basis of conduct of the employee, if the employee has crossed the specified retirement age, if he or she is incapable of doing the tasks and duties for which employment was provided, redundancy, statutory or legal reasons. The law also provides an additional clause which will cover any other valid reasons under the title ‘any other substantial reasons’. (Dismissal – Fair and Unfair: A Guide for Employers: What may be a Valid Reason for Dismissal? 2009). Shelley’s conduct can be a reason for a fair dismissal. But in this case this is not needed since she has already resigned from her job. Legal position of Canine Creations: The issue to be cleared is whether Canine Creations have a liability to pay Papa Dog for the amount owed and also whether they have any liability against Feltford Travels for the ticket booked by Shelley to travel to New York and back. In the case of Feltford Travels, it is assumed that the company was aware of Shelley’s employment with Canine Creations. It could also be assumed that Shelley had previously (under authorization from her employees) booked tickets on behalf of the company. Under such circumstances, the travel agency would have acted in good faith and let Shelley book the ticket. It was not theirs to question as to why the name of Josh was included as a traveller. In the law of agency, the agent is considered to be acting under authority if the principal does nothing to indicate that the person is no longer an agent or that he or she did not possess the authority to act in a particular way. The case of Lass Salt Garvin v Pomeroy [2003] EWHC 1007 is an instance of an agent acting without authority, but also where the principal had failed to indicate or rectify the fact that the act was unauthorized. The former were a firm of solicitors who sued to recover a share transfer fee of 100,000 pounds from the latter. Pomeroy refused to pay saying that the agent who concluded the deal was not authorized to fix the fee mentioned above. The fact was that the agent did act in an unauthorized manner and the fact was known to Pomeroy. But they did nothing to correct the situation even after receiving invoices from the solicitor firm. “The claim by the solicitor firm was that even if T did not have authority to agree the fees, P’s subsequent silence and failure to challenge LSG’s invoices amounted to a ratification of the agreement.” (Law of Agency – Notes of Cases. 2007). Here P is Pomeroy and T the agent in question. It was held that the company had not corrected the issue with the solicitor firm and hence their silence amounted to ratifying the agent’s unauthorized decision. Position with regard to Feltford Travels: Here also the travel agency would not have been aware of the resignation of Shelley which had effectively ended the agent principal relation between her and Canine Creations. Since this factor was not intimated to the travel agency, they should be compensated by the pet firm and subsequently recover the amount from Shelley through a court of law or compromise. The company could argue that they did not have sufficient time for intimation as the act of booking was done immediately after Shelly’s resignation. The courts may take a lenient view on the matter, but in all possibility, Canine Creations will have to pay Feltford Travels the amount due on the tickets and resort to recovering the amount from Shelley instead. The precedence in this instance is the Lass Salt Garvin v Pomeroy case. Position with regard to Papa Dog: The issue with Papa Dog is more complicated than the above instance. It should be noted that even though Alfie and Casey were not involved in the day to day operations of the shop and left it to Shelley, they were very much involved in their mobile dog grooming unit. Papa Dog can claim that they had continued to use their dog shampoo during the mobile grooming unit visits to their clients since further orders were placed by Shelley (even after her employers telling her to stop further purchases). In effect, Papa Dog can claim that the owners had used the improved shampoo since they had already dispatched the order. This is because the first unauthorized order was done on 26th of January and a full four months had passed when their quarterly accounts were sent to Canine Creations. Papa Dog can claim that this period was quite sufficient for the Alfie and Casey to detect the unauthorized purchase and their silence on the matter is in effect an approval of Shelley’s acts. Moreover, dog shampoo will take up shelf space and the packages should have been noticed by the owners when they occasionally visited the store. Alfie and Casey will have to prove that they were unaware of the actions of their employee. It would have to be proved that Shelley had hidden the packages to avoid detection. Here also the precedence is the Lass Salt Garvin v Pomeroy case which can be used by Papa Dog. But, taking into consideration the facts of the Npower case, Canine Creations can charge Papa Dog with intention and attempt at bribery to one of their employees. This can be proved by the fact that it was the company that informed Canine Creations of the payment. But they will have to pay the amount due on the shampoo packages (the unauthorized purchased by Shelley). They can subsequently try and recover the amount from Shelley. Position against Josh: It was Josh who initiated the first unauthorized purchase and the 10% commission paid to Shelley. The precedence of the Npower case can be used here also and legal action for intention to bribe be taken against Josh. But he can only be a party since he has intimated the matter to his employees (Papa Dog). Moreover, the amount was rightfully due to him as sales commission and what he did was pass it on to Shelley. Position against Shelley: Canine Creations can have the option to recover all the loss created by Shelley by taking legal action against her. The company can take civil and criminal actions against her, the first for illegally accepting the bribe and the second for unauthorized purchase and booking of the ticket. It is not known whether she has the personal capacity to pay for the same and may resort to a bankruptcy claim in order to escape liability. Anyway legal proceedings may be inevitable and Canine Creations should waste no time in initiating them against Shelley. Conclusion: Canine Creations can take legal action against both Papa Dog and their employee Josh for attempt at bribery against one of their employees. They will most probably have to pay the amount due to Papa Dog and it would be better to go in for a compromise settlement rather than a suit. The bribery issue may also make Papa Dog more receptive towards a favourable compromise. With regard to Feltford Travels, it is felt that there is no option but pay. It would be better to do so instead of going in for an expensive and time consuming litigation. Actions to recover all expenses and losses can be taken against Shelley for all her acts and Canine Creation should take the step to do so immediately. Bibliography A Journal for Property Letting Professionals: Fiducial Duties. (2006). [online]. Letting Update. Vol. 14(1), P. 15. 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