The High Court's decision in Nayyar & Others v Denton Wilde Sapte & Another was handed down last month. In his judgment, Mr Justice Hamblen had to grapple with the two thorny issues of ex turpi causa and vicarious liability of a firm for the actions of its employees. This judgment will be of interest to law firms, particularly those seeking to expand into foreign markets, and their insurers.

Background

The claimants were travel agents, one of whom, Mr Nayyar, was acquainted with the second defendant, Ms Advani, a senior solicitor employed by Denton Wilde Sapte ("DWS") principally in a marketing capacity. It was alleged that in early 2004 Ms Advani informed Mr Nayyar that she could introduce him to a third party through whom he could obtain a contract to become the exclusive global sales agent ("GSA") for Air India in the UK. After various meetings and discussions, (most of which were disputed in the proceedings), the claimants agreed to make a payment of £2 million (said to include £250,000 in respect of legal fees), with an initial payment of £400,000 (variously referred to as a "consultancy" fee or "commission") which the claimants contended they believed was to be made to a third party (a Mr Yadav, former Minister of Tourism in the State of Uttar Pradesh in India), as a fee to assist them to obtain a "letter of appointment" as a precursor to appointment as the GSA. In any event, the claimants transferred various sums of money to Mr Yadav but never received the letter of appointment nor appointment as GSA. Having failed to recover the sums paid, the claimants turned to DWS and Ms Advani.

Ex turpi causa

The defendants submitted that the claim was barred on the basis of ex turpi causa non oritur actio. In essence, the defendants asserted that the claimants must have known that the sum paid to Mr Yadav was an illegal inducement to secure a preference over other applicants in relation to the GSA. Hamblen J held that an attempted bribe was sufficient to engage the ex turpi causa principle and concluded that: 'in their pursuit of the ''ultimate dream'' of a GSA the Claimants were prepared to make whatever payment was needed to secure it regardless of legalities.' The claim failed.

Vicarious liability and actual/ostensible authority

In addition, DWS contended that even if the claim did not fail on the grounds of illegality, the claim against it must nevertheless fail because the acts alleged to have been carried out by Ms Advani were not carried out in her capacity as a solicitor and/or with the actual or ostensible authority of the firm; consequently, they could not be held vicariously liable for her actions.

The law

Hamblen J summarised the relevant law as follows:

  • If an agent is expressly or impliedly authorised to carry out certain acts, their principal will be liable for the consequences of those authorised acts (even if carried out in an unauthorised manner) based upon the existence and scope of that actual authority (see for example, Poland v John Parr & Sons (1927)).
  • Ostensible authority is based upon a representation by a principal to a third party (either express or implied) to the effect that the apparent agent has their authority to act, even if the apparent agent did not in fact have the authority (see for example, Freeman & Lockyer v Buckhurst Park Properties (Mangal) Limited (1964)).
  • An employer is vicariously liable for the tortious acts of its employees if they are carried out 'in the course of employment'. The Court of Appeal in Gravil v Carroll (2008) stated that the essential question is whether the tort is so closely connected with the employment that it would be fair and just to hold the employer vicariously liable. This is an objective assessment: United Bank of Kuwait Limited v Hammoud & Ors (1988).

Submissions

The claimants alleged that Ms Advani's acts were within the scope of her employment as a solicitor or, alternatively, were so closely connected with what she was expressly authorised to do that it was fair and just to find the firm vicariously liable. In particular, the claimants relied upon the fact that she introduced Mr Nayyar to Mr Yadav; negotiated a reduction in the price of the GSA; secured agreement that legal fees of £250,000 would be paid if the GSA was awarded (albeit that it was never clear whether it was intended that such fees would be payable to Ms Advani personally, to DWS or to some other firm), drafted an application letter for the claimants and described herself throughout as their solicitor and guarantee.

The claimants argued in the alternative that the firm had clothed Ms Advani with apparent/ostensible authority to carry out these activities; they placed heavy reliance on the fact of her giving them her firm business card, referring Mr Nayyar to the firm's website for evidence of her expertise, and that she wrote some letters for them on firm notepaper.

DWS asserted the claimants were not and never had been clients of the firm and, moreover, that if Ms Advani had acted for the claimants in the manner alleged, her actions were outside the usual scope of a solicitor and therefore outside the terms of her employment.

Whilst DWS accepted that Ms Advani's role was principally a marketing and business development role, and that it was within the parameters of this role for her to introduce contacts who might be interested in doing business together, they argued that such a role would not and did not extend to the kind of deal brokering role alleged by the claimants. The firm submitted that, on the claimants' own case, Ms Advani had: actively promoted the deal, allegedly "guaranteed" the deal, encouraged them to make the payments, and dictated all of their actions. None of these activities were within either Ms Advani's marketing role as held out by the firm or within the ordinary course of a solicitor's business.

The decision

The crucial issue was whether Ms Advani had assumed a solicitorial or advisory role towards the claimants. Hamblen J held that Ms Advani's role was one of a deal broker; she had gone beyond introducing the business opportunity to the claimants and had actively encouraged and assisted them for personal gain. Of particular importance were the agreed fees of £250,000 which Hamblen J held could not have been a fee reflecting legal work done or to be done and must therefore have represented Ms Advani's commission for successfully brokering the deal. It was also noted that no engagement letter had been issued and Ms Advani had not instigated any file opening procedures.

Hamblen J unequivocally held that Ms Advani's actions were not within the ordinary role of a solicitor, nor of the role she had been employed to carry out. Further, it was held that the claimants ('experienced businessmen') knew that Ms Advani was not acting as a solicitor and that objectively it would be apparent to a reasonable and competent person in the claimants' position that she was not performing a solicitorial or advisory role. Accordingly, Hamblen J concluded that Ms Advani was not acting within her actual or ostensible authority as a solicitor employed by the firm and so the firm was not vicariously liable for her actions.

Practical implications

This case highlights the risk that innocent professional firms and their insurers face in circumstances where employees go on a frolic of their own. Whilst the firm was successful in demonstrating that Ms Advani's acts did not fall within her role as a solicitor in the case, the risk is that without clearly defined roles, professional insureds and insurers can be exposed to liability for the acts of their employees which, whilst not authorised, may be deemed to have been carried out within the course of employment.

This case, therefore, acts as a useful reminder of the need for setting out clearly what employees are engaged to do and to put in place a sensible framework for monitoring employees to seek to ensure that they do not overstep the limits of their individual roles. For international firms looking to expand into new markets, it is also important to be clear that there are likely to be differences in business practices in other jurisdictions, particularly at the start up stage where marketing rather than pure legal work is likely to be the focus.

Of course, if an employee takes steps to hide his/her conduct from his/her employer, there is little the employer can do. That situation may, however, lead to recoveries being sought from the employee.

The key point for insurers is whether it can be established at an early stage that the conduct complained of is outside the business of a solicitor. In those circumstances, a solicitors' policy will not respond, albeit that the decision not to afford an indemnity can be challenged. As with most cases, so far as possible, investigations should be conducted as early as possible with a view to establishing whether lengthy and expensive claims can be avoided.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.