UK: Solicitors´ Liability Briefing Note

Vicarious Liability for the Dishonest Acts of Partners and Employees

In Dubai Aluminium Company Limited v Salaam, in which judgment was handed down on 5 December 2002, the House of Lords considered the issue of whether innocent partners are vicariously liable for the dishonest acts or omissions of their fellow partners, and in what circumstances and to what extent they may claim contribution from other wrongdoers. In this briefing note we report on the decision and examine whether the House of Lords has brought any certainty to this area of professional indemnity law.

The proceedings arose out of a complex fraud by which Dubai Aluminium Company Limited ("Dubal") paid out $50m under bogus consultancy agreements. Dubal brought claims against recipients of monies from the scheme, a solicitor who was alleged to have assisted in the scheme ("the Solicitor") and two firms in which the Solicitor had been a partner (which we refer to in this Briefing as "the Firm"). It was common ground that the Firm was innocent of any wrongdoing, so the only basis on which the Firm could be liable to Dubal was if it was vicariously liable for the alleged acts of the Solicitor.

During the course of the trial, Dubal’s claims against all the defendants were settled, and withdrawn in respect of the Solicitor, leaving outstanding a number of contribution claims. The contribution claims included the Firm’s claim against two of those found to be part of the dishonest scheme, Mr Salaam and Mr Al-Tajir (the "Defendants"), for recovery of the sum paid by it in settlement of the claim. For the purposes of the proceedings, it was assumed, pursuant to section 1(4) of the Civil Liability (Contribution) Act 1978 ("the Contribution Act"), that the Solicitor had been dishonest as was pleaded against him by Dubal. There was no finding of dishonesty against the Solicitor and in his judgment Lord Nicholls stated that "the case has proceeded on the assumption that [the Solicitor] was guilty of dishonesty as alleged. He has always denied this allegation. This issue has never been tried, and there has never been any finding that he acted dishonestly in any respect".

Mr Justice Rix found in favour of the Firm at first instance, and ordered that the Defendants give a full indemnity for the $10m paid in settlement of the claim by the Firm. Mr Salaam was ordered to pay $7.5m and Mr Al Tajir $2.5m. They were held jointly and severally liable for $5m to protect the Firm against insolvency. However, the Court of Appeal accepted the Defendants’ argument that the Firm was not vicariously liable for the Solicitor’s allegedly wrongful acts as they were outside the ordinary course of the Firm’s business. This was on the basis that it was alleged by Dubal that the Solicitor’s activities were dishonest. Therefore the Firm could not bring a claim for contribution against the Defendants. When the case reached the House of Lords, it had to consider:

• whether the Firm was vicariously liable for the alleged dishonest participation of the Solicitor in the bogus consultancy scheme in which case the Firm could claim a contribution to its settlement.

In order to claim a contribution from the Defendants under the provisions of the Contribution Act, the Firm had to establish that it was liable for the loss suffered by Dubal, pursuant to section 10 of the Partnership Act 1890, which provides that "where by any wrongful act or omission of any partner acting in the ordinary course of business of the firm … loss or injury is caused to any person…the firm is liable therefore to the same extent as the partner so acting or omitting to act." (emphasis added)

The Defendants argued that the Firm could not bring itself within the scope of section 10 for two reasons:

• a "wrongful act" for the purposes of section 10 was limited to claims in tort and did not extend to claims for dishonest assistance in breach of trust.

• The acts carried out by the Solicitor which formed the basis of Dubal’s claim against him were not carried out by him "in the ordinary course of business of the firm" as required by section 10 on the basis that they were alleged to be dishonest.

Meaning Of "Wrongful Act"

The House of Lords agreed with Mr Justice Rix and the Court of Appeal that "wrongful act" was not limited to claims in tort and other common law claims and, in particular, covered claims for dishonest assistance in breaches of trust and fiduciary duty. Both Lord Millett and Lord Nicholls, who wrote the leading judgments, held that Section 10 was written in the widest terms and that it would be nonsensical to restrict it as contended for by the Defendants.

Meaning Of "Acting In The Ordinary Course Of Business"

Dubal alleged that the Firm should be liable for the drafting of the agreements which formed the basis of the bogus consultancy scheme. Other allegations were also made against the Solicitor but were not pleaded against the Firm. The House of Lords had to decide whether the Solicitor’s actions were legally capable of being performed by a solicitor acting in the ordinary course of his firm’s business and whether the Firm was therefore vicariously liable for them. As the claims brought by Dubal had settled, the factual material available to the court was restricted to the matters set out in the Particulars of Claim, for which the Solicitor was presumed to be liable pursuant to Section 1 (4) of the Contribution Act.

Mr Justice Rix took the view that the solicitor had been acting in the ordinary course of business but his decision was reversed by the Court of Appeal. The House of Lords considered what constitutes the "ordinary course of business" in some detail and arrived at the following conclusions:-

• where a claim against a firm has been settled, its claim to contribution (in the absence of any judicial findings) must be determined solely by reference to the facts pleaded against the firm and additional facts pleaded only against the solicitor are irrelevant.

• The wrongful conduct must be so closely connected with the acts the partner or employee was authorised to do that the wrongful conduct may fairly and properly be regarded as done by the partner or employee while acting in the ordinary course of the firm’s business or the employee’s employment.

• There can be no conclusion that firms and/or employers will always be vicariously liable in cases of dishonesty. The House of Lords gave no definitive guidance as to what will constitute "acting in the ordinary course of business" in dishonesty cases. Instead, the Lords stated that the question of whether an act is carried out "in the ordinary course of business" is a conclusion of law which will be based on the facts of a particular case. It requires the court to make an evaluative judgment in each case, having regard to all the circumstances and guidance from previous authorities. Lord Nicholls referred to previous authorities and identified three categories of case inwhich liability might be found notwithstanding dishonesty but stated that the list was not exhaustive:

• Whilst it is necessary, in order to establish vicarious liability, that all the acts or omissions necessary to make the partner or employee personally liable took place whilst he was acting as a partner in the firm or within the course of his employment, it does not matter that he may also have done other additional acts whilst acting outside the ordinary course of the firm’s business. In making this finding the House of Lords dismissed the reasoning given by the Court of Appeal when they allowed the appeals of MrSalaam and Mr Al-Tajir.

In the case before the House of Lords, it had been pleaded that in drafting the consultancy agreements, the Solicitor had acted in his capacity as a partner. Lord Nicholls concluded that in this context, "acting in his capacity as a partner" could only mean that the Solicitor was acting for and on behalf of the Firm, as distinct from on his own behalf. On this basis, the Solicitor in this case had, on the assumed facts, been acting in the ordinary course of business. Drafting commercial agreements for a proper purpose would be within the ordinary course of the Firm’s business. Drafting the consultancy agreements, even for an allegedly dishonest purpose, was so closely connected with the acts the Solicitor was authorised to do that for the purpose of vicarious liability they could be regarded as done by him whilst acting in the ordinary course of the Firm’s business.

The fact that the Solicitor was alleged to have drafted the agreements which formed the basis of the scheme was sufficient to make the Firm vicariously liable. The fact that the Solicitor may allegedly have done some other acts which may not have been performed in the ordinary course of business was irrelevant because those acts had not been pleaded against the Firm.

Having decided that the Firm was vicariously liable the House of Lords went on to consider the level of contribution that could be recovered by the Firm pursuant to section 2(1) of the Contribution Act. This provides that the amount of contribution recoverable from any person "shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage". In doing so, they reviewed two factors which had been taken into account by Mr Justice Rix in awarding a full indemnity to the Firm:

• that the partners in the Firm were personally innocent of any wrongdoing. The judge contrasted this with the dishonesty of the Defendants.

• That the Defendants had not disgorged their full receipts from the fraud, notwithstanding their individual settlements with Dubal.

Relevance Of Personal Innocence

Mr Justice Rix held that it would be unjust if a defendant who was vicariously liable for the fraud of an employee could not have his innocence of dishonesty taken into account.

The House of Lords (following Lord Justice Evans in the Court of Appeal), disagreed with this analysis. The very nature of vicarious liability imposes liability on an employer who may be personally innocent on the basis that he is answerable for the wrongdoing of his employee. The Lords reasoned that, in any contribution proceedings, the employer must be treated as standing in his employee’s shoes, and the amount of contribution depends on his employee’s wrongdoing rather than his own. The personal innocence of the partners of the Firm was therefore irrelevant to the question of contribution.

Disgorgement Of Receipts

The House of Lords agreed with Mr Justice Rix’s conclusion that the fact that the Defendants, despite their individual settlements with Dubal, had retained some of their profits from the fraud should be taken into account in assessing the level of contribution recoverable from them.

The Lords rejected the Defendants’ argument that "responsibility" for damage as set out in section 2(1) did not cover undisgorged receipts, and concluded instead that a "just and equitable" distribution of the financial burden of meeting the claim required the court to take into account the net contributions each party had made. This included taking into account the amount of Dubal’s money which each party retained. The Firm had retained nothing, having only ever received a modest sum for their professional fees, whereas the Defendants had retained large sums of money which the House of Lords required them to disgorge.

Joint And Several Liability

The House of Lords also held that Messrs Salaam and Al-Tajir should be jointly and severally liable in the same sums as ordered by Mr Justice Rix. Lord Millet thought it fair that Messrs Salaam and Al-Tajir should bear the risk of the other’s insolvency to the extent of their undisgorged receipts.

The impact of the decision of the House of Lords is that it is no longer possible to conclude that a firm will not be held to be vicariously liable for the acts of a partner simply because he has been dishonest. The judgment has made it clear that a firm can, in the right circumstances, be responsible for dishonest actions of their fellow partners. However, that will not always be the case. If the acts complained of are closely enough connected to the business of the firm then liability is likely to exist. When a claim of this type is brought the firm and its insurers will have to consider carefully the acts pleaded against the firm in order to determine whether vicarious liability is likely to be found.

In terms of contribution the decision is ground breaking because the House of Lords has determined that in deciding what is a just and equitable contribution under the Contribution Act the courts can consider the receipts of each party involved in a dishonest act or scheme. Profit made will be taken into account in determining the amount that will be paid by each of the parties. In this case, this meant that the insurers of the Firm were entitled to recover from the Defendants the full amount which they had paid in settlement of the claim, notwithstanding the individual settlements which the Defendants had reached with Dubal.