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Focus: Corporate Governance – November 2006

Employee liability for misleading or deceptive conduct

In brief: The appeal to the High Court arising out of the Full Federal Court decision in Arms v Houghton [2006] FCAFC 46 is challenging the notion that where an employee engages in misleading or deceptive conduct in the course of their employment, the employee can in certain circumstances be held personally liable and cannot hide behind the corporate veil. Partner Steve Clifford(view CV) and Articled Clerk Chris Carr discuss the Full Federal Court decision, the appeal and the possible implications of this case.

How does it affect you?

  • Depending on the position ultimately taken by the High Court on appeal, this case may have relevance to all employees, especially those at higher levels, who make representations as part of their employment.
  • If the High Court upholds the Full Federal Court decision, there will be uncertainty, especially in Victoria, as to the extent of the liability of employees for their conduct undertaken in the workplace in the name of their employers.
  • This case signals potential further erosion of the protection afforded by the corporate veil for employees who act in the name of their employers.

Background

In 1999, Mr Arms wanted to set up an online wine distribution business, through which wineries would sell wine to retail customers. Mr Houghton and Mr Student worked for WSA, a company that provided services during the establishment of the business. Mr Houghton and Mr Student represented to Mr Arms, on behalf of WSA, that to implement his business plan Mr Arms would require a transaction system needing only minimal administration. They also represented on behalf of WSA that the signing of certain bank forms would suffice for wineries to join and that the process would be easy. Mr Houghton further represented that Mr Arms would not be required to pay any sales tax on the wine sales.

Mr Arms relied on those representations and proceeded to travel around Australia repeating them to wineries in order to induce them to participate. Shortly before the launch of Mr Arms' business, it was revealed that the system for wineries to join up to his distribution business was not so simple. In order to overcome these difficulties, Mr Arms was forced to structure the business differently, which in turn meant he was buying the wines from the wineries and on-selling to the retail customers. Consequently, Mr Arms would not have been able to avoid paying sales tax and the business became unviable.

Mr Arms sued for losses incurred and recovered at trial against WSA, but failed against Mr Houghton and Mr Student. WSA was found liable for damages in respect of misleading or deceptive conduct under section 52 of the Trade Practices Act 1974 (Cth). The claim against Mr Houghton and Mr Student for misleading or deceptive conduct under s9 of the Fair Trading Act 1999 (Vic) was dismissed. At the time that the representations were made, the Fair Trading Act did not contain any provision which allows persons to be held liable as accessories (a provision to this effect was contained in the Trade Practices Act (s75B) but was not mirrored in the Fair Trading Act at that stage), so Mr Arms sued Mr Houghton and Mr Student as principal defendants under s9 of the Fair Trading Act. The trial judge found that the employees could not be liable under s9 because there were no independent trading or commercial activities attached to their conduct. The matter was then appealed to the Full Federal Court. 

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The problem for the Full Federal Court

The question before the Full Federal Court was whether an employee who was making representations in the course of their employment could be personally liable if those representations were misleading or deceptive. Where this case provokes interest is that Mr Houghton and Mr Student (the Respondents) made the representations within their authority and on behalf of their employer. 

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The decision of the Full Federal Court

The Full Federal Court decided unanimously that it is possible for an employee to be personally liable for the representations they make, even when in the course of their employment.

The Full Federal Court decided Arms v Houghton based on its interpretation of the Fair Trading Act when the Act did not contain any accessorial liability provisions for individuals. Without any provision for individuals to be held liable as accessories, it was open for the court to decide, as it did, that the Fair Trading Act intended that individual employees, as well as their employers, could be principally liable when employees engage in misleading or deceptive conduct in the name of their employers. In forming this view of the Fair Trading Act, the court regarded the question as to whether the employees were themselves engaged in trade or commerce as being peripheral to the question of law on appeal.

The Full Federal Court was only required to answer the question as to whether it is possible to hold employees liable because the appeal was against the finding of law on this question by the judge at first instance. The facts as to whether the respondents had made the misrepresentations was not contested on appeal. While the court decided it is possible, it did not, and was not required to, formulate a test for determining when an employee alone, an employer alone or both would be liable. In addition to its interpretation of the Fair Trading Act, the court applied the previous decision in Wong v Citibank [2004] NSWCA 396 as justification for the premise that employees could be held liable for misleading representations made in the name of their employers, but failed to articulate a test for when this should apply. In Wong, the case involved a director, whereas the Respondents were simply employees of WSA.

Both Wong and Arms v Houghton placed importance on the decision in Yorke v Lucas (1985) 158 CLR 661. In that case, liability for misleading or deceptive conduct depended on the type of representation being made. The intentions of employees were of less relevance than their level of knowledge about the information being represented. A distinction was drawn between parties merely acting as ciphers or passing on information and those who were taking on representations as their own. In Arms v Houghton the question of whether the Respondents had made the representations themselves or were passing on the information was not required to be answered, so the distinction set out in Yorke v Lucas was not further developed.

The combination of its interpretation of the Fair Trading Act as it stood, and pre-existing case law supporting the notion of employee liability for misleading or deceptive conduct, led the court to its conclusion that it was possible for Mr Houghton and Mr Student, as employees, to be principally liable.

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The lessons so far

The sky has not fallen, but this case does highlight the importance of accurate and complete disclosure by employees when making representations on behalf of their employers - liability will still only arise where information is misleading or is likely to mislead or deceive. It does appear though that employees can no longer make representations on their employer's behalf and expect automatic protection behind the corporate veil. If a third party construes that a misleading or deceptive representation was being made by a particular individual, even if being made in the course of their employment, the employee runs the risk of being principally liable.

The wording of the Full Federal Court judgment suggests that the court is eager to ensure that those making representations are accountable for them. Both Wong and Arms v Houghton reinforce existing law relating to passing on information. Employees who are merely conduits for information continue to be protected by the corporate veil. On the other hand, those who have knowledge of facts that may be misleading or deceptive may be liable, even if they do not intend to mislead or deceive. A senior barrister has recently detailed how employees are already at risk for accessorial liability.1 Arms v Houghton appears to be a relatively minor extension of that liability.

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The caveat

The long-term applicability of Arms v Houghton is uncertain as it may simply be an anomaly caused by a legislative oversight which has since been rectified.2  The Full Federal Court alluded to the possibility of a different interpretation of the Fair Trading Act now that it contains accessorial liability provisions (similar to s75B of the Trade Practices Act). This creates the possibility that there could be a different outcome for employees whose misleading or deceptive conduct has taken place after the inclusion of accessorial liability in the Fair Trading Act. If there is a difference, it may only remain relevant until the expiration of the limitation period for actions brought under the Fair Trading Act before the accessorial liability provision was amended. That period will expire in October 2009. The reason for the potential difference is that, now that the Fair Trading Act allows for individuals to be liable as accessories in a manner similar to that contained in the Trade Practices Act, courts are likely to be slower to impose principal liability (if at all) on employees. Given that the focus of the Trade Practices Act is on the conduct of corporations, it is quite unlikely that this decision will have any impact on the interpretation of the equivalent sections of that Act. Depending on the outcome of this case before the High Court, the interpretation of the related Trade Practices Act provisions may be more closely scrutinised in future cases involving the amended Fair Trading Act.

Ultimately, the question as to whether employees can in some circumstances be liable for representations made in the course of their employment and in the name of their employer will be determined by the High Court, which heard the matter on 5 October 2006. We must therefore wait to see whether the corporate veil will continue to be pierced in this way. Until the High Court hands down its decision, the current position will remain unsettled.

The uncertainty surrounding employee and employer liability is amplified by the recent Victorian Supreme Court case of ABC Developmental Learning Centres Pty Ltd v Joanne Wallace [2006] VSC 171. In that case, the court held that employers (in certain circumstances) can be liable for the criminal acts of their employees. Irrespective of the High Court decision in Arms v Houghton, these cases are bringing new developments in employer and employee liabilities, making it a good time for employers and employees to be informed and aware, but not to panic. Time may well prove that these cases have a very narrow application.

We will keep you updated on developments because, as Chief Justice Gleeson has already remarked, this 'does seem to be an issue of some significance'.3  

Footnotes
  1. Michael Pearce, SC, 'Accessorial Liability for Misleading or Deceptive Conduct' (2006) 80 Australian Law Journal 104.
  2. The former Fair Trading Act contained provisions for accessorial liability, yet for some reason the current Fair Trading Act when enacted did not. Accessorial liability was only included in the current Act by s58 of the Fair Trading (Amendment) Act 2003 (Vic), No. 30 of 2003 which came into effect after Mr Houghton and Mr Student made their representations.
  3. Transcript of Proceedings, Houghton & Anor v Arms (High Court of Australia, Chief Justice Gleeson, 4 August 2006 ).

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