England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
HHJ Belcher
7HD01993

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/12/2010

Lord Justice Gross:

INTRODUCTION

1. The issue on this appeal is which of two innocent parties should bear the loss caused by a rogue.
2. For reasons to which I shall come, in a careful judgment, HHJ Belcher held that the loss fell on Mr. Quinn, the Defendant/Part 20 Claimant and dismissed his claim against CC Automotive Group Limited t/a Carcraft, the 1^st Part 20 Defendant.
3. From that judgment ("the judgment"), Mr. Quinn ("A") appeals. Carcraft ("R") seeks to uphold the judgment and, by a Respondent's Notice, contends additionally that the claim was rightly dismissed for a number of reasons rejected by the Judge.
4. The rogue, a Mr. Abeed Khan ("K") is the 2^nd Part 20 Defendant. At the time in question, K was employed by R as a car salesman.

THE FACTS

5. The facts, taken essentially from the judgment, can be shortly summarised.

i) As of July, 2005, A was in possession of a Silver Jaguar ("the Silver Jaguar"), the subject of a hire purchase agreement arranged through the Claimant in the original proceedings, Black Horse Limited ("Black Horse").

ii) The wedding of the A's daughter was due to take place (and, happily, so far as we are aware, did take place) on the 22^nd July. A wished to purchase a new Jaguar, preferably red, for the occasion. With that in mind, A went to R's showroom in Leeds on the 4^th July.

iii) At the showroom, A met K and discussed the purchase of a Blue Jaguar ("the Blue Jaguar"). In the event, A agreed to purchase the Blue Jaguar; he paid, then and there, a reservation fee of £100 in cash (and, subsequently, on the 8^th July, an additional £400 by credit card) – so a total deposit of £500. It may be noted that the Blue Jaguar was not present in the showroom at the time. The transaction was handled on R's behalf by K. It was agreed that A would pay £7,500 for the Blue Jaguar, together with the Silver Jag in part exchange. As part of the deal, R would be responsible for paying and clearing the outstanding finance with Black Horse on the Silver Jaguar, together with arranging (hire purchase) financing for the Blue Jaguar. The Judge observed, rightly, that this was not an unusual transaction.

iv) As the Judge held and was not in dispute before this Court, later on the 4^th July, K telephoned A's wife ("Mrs Quinn") to say that he had located a Red Jaguar and invited A and Mrs Quinn to return to the showroom on the 5^th July, with a view to buying the Red Jaguar instead of the Blue Jaguar. Accordingly, on the 5^th July, A and Mrs Quinn again went to R's premises, where K showed them a Red Jaguar on a computer screen; they were told that the car was physically in Bury, hence they were shown the picture/s on the screen.

v) In the event, A decided to purchase the Red Jaguar ("the Red Jaguar") instead of the Blue Jaguar and, thereafter, K arranged for the return of the deposit paid on the Blue Jaguar.

vi) On the 14^th July, A and Mrs Quinn met K at a motorway service station on the M62. The meeting was brief but included the cancellation of the agreement for the Blue Jaguar and signing the finance agreement for the Red Jaguar. The terms of the purchase of the Red Jaguar, apparently finalised at this meeting, were the same as those for the Blue Jaguar; a part exchange price of £7,500, with finance to be arranged by R, who would pay and clear the outstanding finance on the Silver Jaguar. In fact, it would appear that no deposit was ever paid on the Red Jaguar. As recorded by the Judge, neither A nor Mrs Quinn thought it odd to meet K at the service station; Mrs Quinn said that they thought K was "thoroughly charming" and doing everything he could to ensure that they had the Red Jaguar in time for the 22^nd July wedding.

vii) On the 20^th July, Mrs Quinn received a telephone call from K; he was going to collect the Red Jaguar that day and they arranged to meet at the same service station – it was more convenient than travelling to Leeds. K also said that an additional £700.00 was required, as the Judge noted, "as Black Horse had not allowed enough finance". Mrs Quinn said they could only afford £400. K said that was in order and that the balance (£300) could be paid later.

viii) A, Mrs Quinn and K duly met at the service station at about 20.00 on the 20^th July. A looked over the car and was very happy with it. K gave A the keys for the Red Jaguar; A gave K the keys for the Silver Jaguar, together with £400 in cash and various documents relating to the vehicle.

ix) In these circumstances, A cancelled the standing order for the finance payments in respect of the Silver Jaguar. However, in August 2005, A received a no doubt unwelcome letter from Black Horse advising him that the money owing on the Silver Jaguar had not been settled. Subsequent investigations revealed that K had not cleared the finance on the Silver Jaguar; instead K had sold the Silver Jaguar to a bona fide purchaser for value without notice of the fraud.

x) Inevitably, Black Horse brought proceedings against A for the outstanding balance on the original finance agreement in respect of the Silver Jaguar and, on the 19^th February, 2008, obtained judgment against him in the amount of £11,134.65, plus costs amounting to £3,372.50. A has since obtained a judgment against K but, in practical terms, that judgment must be assumed to be worthless.

xi) As it transpired, the Red Jaguar had never belonged to R or formed part of its stock. Despite extensive inquiries, it has never been established exactly where the vehicle came from. To that, I add, that its subsequent fate too is uncertain – counsel could not tell us (though it matters not to the decision in this case) whether A still has it. But it necessarily follows from this history that K had no actual authority from R to sell the Red Jaguar. Accordingly, the dispute has been concerned with K's apparent authority.

6. It is against this background that A has pursued R in these (third party) proceedings, essentially on the basis that R is vicariously liable for K's deceit.

THE JUDGMENT

7. As to matters of fact and as already underlined, the Judge found that the A and Mrs Quinn had been shown the Red Jaguar on a desktop computer at R's premises; moreover, A had there (i.e., at R's premises) and then confirmed that he wished to purchase the Red Jaguar. Having heard the evidence of A and Mrs Quinn, the Judge further held that they both impressed her as "entirely honest witnesses". Later in her judgment, the Judge said this:

" ...at no point did either of them consider that Mr Khan was, or might be, acting outside the scope of his employment/authority. "

8. Against this background, I turn to the core reasoning in the judgment. The Judge concluded that K had apparent authority to sell the Red Jaguar to A, to deal with part exchange of the Silver Jaguar and to assist in the arrangement of finance on behalf of Carcraft. The Judge said this:

" 41. In my judgment, whilst Mr. Khan had actual authority only to sell vehicles belonging to Carcraft, in assessing his apparent authority I have to consider what a third-party, a customer such as Mr. Quinn would properly consider Mr. Khan could do in the ordinary course of business. Plainly Mr. Khan was employed as a car salesman to sell cars. It would have been unusual, and no doubt, considered very odd if Mr. Quinn had asked Mr. Khan for proof of his authority. Had he done so, he would have received proof that Mr. Khan was authorised by Carcraft to sell cars on their behalf. From Mr. Quinn's point of view that is exactly what Mr Khan went on to do. In my judgment, there is nothing which occurred at Carcraft's premises which would or should have led Mr. Quinn to consider that Mr. Khan was doing anything other than what he was authorised to do, namely selling a vehicle belonging to Carcraft. In the circumstances…Mr. Quinn was….entitled to assume that the red Jaguar he was shown on a desktop computer at Carcraft's premises was a vehicle owned by Carcraft and, therefore, a vehicle Mr. Khan was entitled to sell, and had apparent authority to sell on behalf of Carcraft…."

If it was necessary to express the matter in terms of vicarious liability, the Judge accepted (at [43]) that the deceit practised by K on A "was closely connected with Mr Khan's employment". K was employed as a salesman to sell R's cars; the "wrong alleged" was "deceit in selling a car which he led Mr. Quinn to believe was a car belonging to Carcraft". That wrong had a "sufficiently close connection" with K's employment.

9. Having reached this conclusion and notwithstanding the fact findings she had already made as to A's and Mrs Quinn's state of mind, the Judge said that the issue she had to decide was:

" 44. …..whether a reasonable person in Mr. Quinn's position would have been put on enquiry that Mr. Khan was acting outside his employment and therefore lacked authority to bind Carcraft."

10. The Judge dismissed a variety of factors relied on by R as putting A on inquiry. These included the deposit on the Blue Jaguar being repaid by R; A not being asked for and not paying a deposit for the Red Jaguar; differences in the paperwork between this transaction and A's previous dealings with R; a number of K's unfulfilled promises; the location of two meetings at a motorway service station.
11. However, the Judge went on to conclude, adversely to A:

" 50. ….the demand for the £700 in cash and Mr. Khan's willingness to accept £400 with the balance to follow later, was sufficiently unusual that Mr. Quinn ought to have been put on enquiry at that time. I am satisfied that those aspects of this matter which ought to have put Mr Quinn on enquiry were matters which he overlooked in his desire to have the red Jaguar ….and to have it in time for his daughter's wedding. I do not criticise him for that and I was impressed by this family's desire to make their daughter's wedding as perfect as possible. However the issue I have to decide is whether Mr Quinn should have been on enquiry such that he cannot rely upon Mr. Khan's apparent authority in connection with the transaction. I have enormous sympathy for the position that Mr. Quinn now finds himself in. However, I find that he should have been on enquiry and that in those circumtances he cannot succeed in his claim against Carcraft. These matters would also sever the chain of causation in relation to the vicarious liability for any deceit. "

12. As to whether A was put on enquiry, even if the test was subjective, it nevertheless incorporated "an element of objectivity"; namely, whether A "was or should have been on enquiry"; a claimant could not "simply ignore the facts or bury his head in the sand". On the findings made by the Judge and in his desire to have the Red Jaguar in time for the wedding, A had overlooked matters which ought to have put him on enquiry. This was so, even if the test was subjective.

"54. …..To put this another way, based on the findings of fact I have made, whether applying the objective test as to whether a reasonable person would have been put on enquiry, or the subjective test as to whether Mr. Quinn was or ought to have been put on enquiry, I reach the same conclusion. "

13. In a nutshell, therefore, although K had apparent authority to act on behalf of R in connection with the transaction involving the Red Jaguar, A was or ought to have been put on enquiry – because of K's demand for the extra £700 and his willingness to accept £400, with the balance to follow later. The upshot is that the Judge dismissed A's Part 20 Claim against R.

THE RIVAL CASES

14. For A, Mr. Lakin underlined the facts as found by the Judge – in particular, that K had apparent authority to sell the Red Jaguar to A, that the deceit practised by K on A was closely connected with K's employment and that neither A nor Mrs Quinn at any point considered that K was, or might be, acting outside the scope of his employment or authority. On those fact findings, the Judge ought to have decided the Part 20 Claim in A's favour. The Judge erred in importing an "inquiry" test, alternatively in applying an objective rather than a subjective test to any such "inquiry". On the facts (again as found by the Judge), A must have relied upon K. As a matter of policy, as between A and R, it was just that R should bear the loss occasioned by K, whom R had put in a position that allowed him to commit the fraud – the more especially given R's own evidence that K had previously been employed by R in Rochdale and that, once inquiries were made, R's employees in Rochdale readily spoke of K's involvement in criminal matters and of his being known to the police.
15. For R, Mr. Harper submitted that the Judge had been correct to dismiss the Part 20 Claim, both for the reason (as to the £700) she gave and for the additional reasons contained in the Respondent's Notice. The Judge had been wrong to hold that K had apparent authority to conclude the contract relied upon by A; the only representation made by R was that K had authority to sell and deal with R's cars on behalf of R – but the Red Jaguar had never been a car owned by R. Further, the Judge had been wrong to conclude that K's deceit of A was committed in the course of his employment and/or was closely connected to it. Additionally, the Judge had been wrong to reject the further factors (already mentioned) which R submitted should have put A on inquiry. The demand for the extra £700 had been the straw which broke the camel's back. Any apparent authority enjoyed by K did not extend to this transaction as it developed; even if it did, it was irrational for A to rely upon it. The transaction had crossed the line as soon as it proceeded outside the showroom; there were simply too many unusual factors and too many differences between this transaction and A's previous dealings with R.
16. I gratefully acknowledge the assistance furnished in this appeal by both counsel and their helpfully succinct submissions.

THE LEGAL FRAMEWORK

17. In the course of their submissions, counsel drew the Court's attention to a number of authorities, including such seminal decisions as Lloyd v Grace Smith & Co. [1912] AC 716; Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd. [1964] 2 QB 480; Morris v CW Martin & Sons Ltd [1966] 1 QB 716; Armagas Ltd. v Mundogas SA [1986] AC 717; Lister v Hesley Hall Ltd [2001] UKHL 22; [2002] 1 AC 215. Furthermore, counsel advanced submissions on the recent decision in the Court of Final Appeal of the Hong Kong Special Administrative Region Thanakharn v Akai Holdings Limited, Final Appeal No. 16 of 2009 (Civil) and Final Appeal No. 9 of 2010 (Civil), after the Court alerted them to this authority, in which the substantive judgment was given by Lord Neuberger of Abbotsbury NPJ. For present purposes, the relevant principles, derived from these authorities, can be relatively shortly summarised. (As to terminology, in undertaking that summary, "employer/employee" and "principal/agent" will be used interchangeably and the "representee" will be referred to as "the third party".)
18. First, dishonest conduct of an employee perpetrated with no intention of benefiting the employer "is of a different character from blundering attempts to promote the employer's business interests" and is governed, in the field of vicarious liability, "by a set of principles and a line of authority of peculiar application": Lord Keith of Kinkel, in Armagas v Mundogas, at p.780. The "genesis of these principles" as Lord Keith put it (ibid), can be traced back to the statement of Holt CJ in Hern v Nichols (1700) 1 Salk. 289:

" Seeing somebody must be a loser, by this deceit, it is more reason that he that employs and puts a trust and confidence in the deceiver should be a loser, than a stranger."

That passage was described, with approval, by Diplock LJ (as he then was), in Morris v Martin (at p.733), as expressing an "old, robust and moral principle". More recently, Lord Millett has spoken of vicarious liability "…as a species of strict liability….best understood as a loss-distribution device….": Lister v Hesley Hall, at [65].

19. Secondly, however, these principles are to be confined within the limits that justice requires. So, plainly, an employer will not be liable for all the deceits or frauds of his employees; without more, an employer will not be liable unless the fraud itself falls within the actual or apparent authority of the employee. Moreover, it is settled law that an employer is not liable for the dishonest tort of his employee merely because the latter's employment has given him the opportunity to commit it: Lord Keith, in Armagas v Mundogas (ibid).
20. Thirdly, an employer will or will likely be liable to an innocent party for the loss occasioned by the fraudulent misrepresentation of his employee acting within the scope of his apparent authority; statements of the highest authority address this question:

i) The principal may be liable for the fraud of his agent committed when "purporting to act in the course of business such as he was authorised, or held out as authorised, to transact on account of his principal": Earl Loreburn, in Lloyd v Grace Smith (at p.725); or, as Lord Denning MR in Morris v Martin, at p.727, summarised Lloyd v Grace Smith - the solicitor's clerk was "acting within the apparent scope of his authority".

ii) Treating apparent authority as, essentially, a species of estoppel by representation (see, at p. 503), Diplock LJ, in Freeman & Lockyer v Buckhurst Park, listed (at pp. 505-6) a number of conditions which must be fulfilled so as to entitle a contractor to enforce against a company a contract entered into on its behalf by an agent who had no actual authority to do so; insofar as here relevant these are as follows:

" (1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor:

(2) that such representation was made by a person or persons who had 'actual' authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

(3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; ….. "

iii) In Armagas v Mundogas, at p.783, Lord Keith said that it would be just for an employer to bear such loss in circumstances where:

" …..the employer by words or conduct has induced the injured party to believe that the servant was acting in the lawful course of the employer's business. "

Conversely, those circumstances do not exist where:

"…….such belief, although it is present, has been brought about through misguided reliance on the servant himself, when the servant is not authorised to do what he is purporting to do, when what he is purporting to do is not within the class of acts that an employee in his position is usually authorised to do, and when the employer has done nothing to represent that he is authorised to do it."

iv) It is instructive that in these passages considering apparent authority, Diplock LJ focused upon the authority of the agent to enter into "contracts of the kind" sought to be enforced and Lord Keith highlighted the "class of acts" that an employee in the position of the rogue is usually authorised to do. The representation, however made (whether by words or conduct), must of course emanate from the employer (or principal) rather than from the servant (or agent) himself.

21. Fourthly, another way of considering the same question is furnished by Lister v Hesley Hall, a case concerned with deliberate wrongdoing on the part of the employee, albeit not involving misrepresentation. This authority invites concentration upon the closeness of the connection between the work the employee had been engaged to do and the torts committed; if that connection is sufficient, then the torts may be regarded as having been committed within the scope of the employee's employment and the employer should be held vicariously liable for them: see the head note, at p.215. This analysis avoided the paradox that the greater the fault of the servant, the less the liability of the master: see, per Lord Steyn, at [24].
22. Fifthly and whichever analysis is adopted, when considering the scope of the employee's (or agent's) employment (or authority), a "broad approach" was to be adopted, as explained by Lord Clyde in Lister v Hesley Hall::

" 42. ….in considering the scope of the employment a broad approach should be adopted…..

43. If a broad approach is adopted it becomes inappropriate to concentrate too closely upon the particular act complained of. Not only do the purpose and the nature of the act have to be considered but the context and the circumstances in which it occurred have to be taken into account….. "

In this regard, Lord Clyde may perhaps be seen as echoing the observations of Lord Macnaghten in Lloyd v Grace Smith, at p.739, when disapproving of the Court of Appeal's reasoning:

" They look at the execution of the deeds by which Sandles cheated Mrs. Lloyd out of her property as if it were an isolated transaction – as a thing standing by itself; whereas the trick was so cunningly contrived as to seem to the victim of the fraud a mere matter of course – a trifling incident in the business about which the firm was being employed."

I would add that hindsight is to be avoided.

23. Sixthly, it is a necessary condition of the employer's liability to the third party for the deceit of the employee that the representation, as to the employee's authority in respect of the transaction in question, was relied upon by the third party: Freeman & Lockyer v Buckhurst Park, at p.506.

i) Plainly, there can be no reliance on such a representation if the third party did not have an honest belief in the employee's authority; so too, if the third party turns a "blind eye" to suspicions as to the apparent authority of the employee: see the discussion in Akai, at [49] – [62]. However, the touchstone is honest belief and, possibly, "irrationality" – a point conceded in Akai (ibid) and upon which it is unnecessary to express any concluded view.

ii) However and consistent with principle in the field of misrepresentation, the question of the "reasonableness" of the third party's belief is neither here nor there. As pithily summarised in Spencer Bower, Turner and Handley, Actionable Misrepresentation (4^th ed.), at para. 188:

" A man who has told an untruth, innocently or fraudulently, cannot complain that the representee acted on the faith of his misstatement in the manner in which he, the representor, intended that he should. He can never be heard to say that another should not have believed the lie that he was told for the purpose of inspiring that belief, or plead that if the representee had not been such a fool , no harm would have been done. The representee never owed any duty to the representor to be careful, to be active in suspicion, or diligent in research when it was the very purpose of the misrepresentation to put his mind at rest. "

The observations of Lord Neuberger in Akai, at [52] and the sources there referred to, are to the same effect.

iii) To my mind, an analysis founded on reliance and belief leaves little room for any consideration of whether the third party was "put on enquiry". If there is proper scope for such consideration, it would seem to arise as an aspect of whether the third party turned a "blind eye" to his suspicions as to the employee's apparent authority; possibly too, there could be debate as to whether the third party was put on enquiry if the employee was acting outside of the usual authority of a person holding the position he holds: see Bowstead and Reynolds on Agency (19^th ed.), at paras. 8-054 – 8-055. But on no view can it be said that the third party is put on enquiry because of mere unreasonableness in failing to see through the employee's deceit; a fortiori, if the transaction is within the class of acts that an employee in the position of the rogue is usually authorised to do.

DISCUSSION

24. In my judgment, once the relevant legal principles have been clarified then, in the light of the Judge's findings of fact, the conclusions in this case readily follow.
25. First and with respect to R's renewed argument to the contrary, the Judge was plainly right to conclude that K had apparent authority to sell the Red Jaguar to A and to deal with related matters of part exchange and financing. As the Judge underlined, with understatement, it would have been "very odd" if A had asked K for proof of his authority; had such a question been asked, the answer would have been that K was authorised by R to sell cars on its behalf. In my view, K's dealings with A both within and outside R's showroom were comfortably within the class of acts that an employee in K's position is usually authorised to do. Put another way and as also held by the Judge, the deceit practised by K on A was closely connected with K's employment as a car salesman by R.
26. Secondly, the Judge found as a fact – unchallenged on this appeal – that A and Mrs Quinn were "entirely honest witnesses" and that at no point did either of them consider that K was or might be acting outside the scope of his employment or authority. It necessarily follows from those fact findings that A believed and relied upon the representation that K had authority to sell the Red Jaguar to him and deal with the related matters of part exchange and financing. No question arises of A not having an honest belief in K's apparent authority to do so; nor, likewise, does any question arise of A turning a "blind eye" to any suspicions as to A's apparent authority.
27. Thirdly, I agree with A's argument on the appeal that the Judge fell into error in importing an "inquiry" test, a fortiori, in applying an objective "reasonableness" test in relation to the inquiry thus imported. Having regard to the conclusions which the Judge had already reached – both as to K's apparent authority and A's honest belief in and reliance upon R's representation as to that authority - there was neither room nor need for any "inquiry" test. That A and, for that matter, Mrs Quinn were taken in by K's deceit, whereas by the exercise of reasonable care they may not have been, is neither here nor there. The transaction involving the Red Jaguar was, it is to be emphasised, within the class of acts – and squarely so – that a car salesman such as K is usually authorised to do. This point does not benefit from elaboration and is sufficient, in my judgment, to decide the appeal in A's favour.
28. Fourthly, I would go further, even if it is not strictly necessary for the outcome of the appeal to do so. Both K's request for the additional £700 (and acceptance of £400, leaving the £300 balance to be paid later), together with the other factors relied upon by R as putting A on inquiry, are to be considered in context and without the benefit of hindsight. In the light of the Judge's earlier conclusions as to A and Mrs. Quinn, it is difficult, with respect, to see how any conclusion could be reached as to these matters – other than that they involved further manifestations of the apparently very helpful (and plausible) K doing everything he could to ensure delivery of the Red Jaguar in time for the 22^nd July wedding. To the extent that the Judge reached a different conclusion with regard to the £700, that conclusion is based on inference, rather than primary fact – and, with respect to the Judge, I am unable to agree. Accordingly, had it mattered, I would have concluded that A neither was nor ought to have been put on inquiry.
29. Fifthly, as a matter of policy, the conclusion to which I have come accords with the "old, robust and moral principle" spoken of by Diplock LJ and dating back to the observations of Holt CJ set out above. Granted that both A and R were innocent parties, on the facts of this case it is right that R, not A, should bear the loss occasioned by K's deceit.
30. With respect to the Judge's careful judgment and for the reasons given, I would allow the appeal.

LORD JUSTICE SULLIVAN:

31. I agree.

LORD JUSTICE MUMMERY:

32. I also agree.