White SW Computer Law
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It is not uncommon for an employer to be found liable for the acts of its employees, but in the matter Houghton v Arms, the High Court, on appeal from the Federal Court, considered whether an employee could be found liable, in addition to their employer, for misleading or deceptive statements made in the course of their employment.
In Australia, misleading or deceptive conduct in trade or commerce is governed by the Trade Practices Act 1974 (Cth) (“the TPA”) and corresponding State and Territory Acts. In Victoria, the relevant State Act is Fair Trading Act 1999 (Vic) (“the FTA”).
Mr Arms commenced Federal Court proceedings against WSA Online Limited (“WSA”) and two of its employees seeking declaratory relief and damages in respect of alleged misleading and deceptive conduct.
WSA was subject to a deed of company arrangement, a factor that may have limited the extent to which any damages awarded against it would have been recoverable by Mr Arms.
At trial, Mr Arms obtained judgment against WSA in the sum of $58,331, but his claims against the employees were dismissed.
Mr Arms successfully appealed against the dismissal of his claims against the employees and before the Full Federal Court on the basis that an employee acting within the scope of their actual authority could be liable for misleading or deceptive conduct. As a result, judgment in the sum of $58,331 was entered against WSA and the two employees.
The two employees appealed the decision of the Full Court to the High Court.
Mr Arms traded as “Australian Cellar Door” and planned to offer an online “cellar door” sales service to small to medium independent wineries with the aim of reducing the sales tax on wine sales and the commission normally payable to agents or distributors.
WSA was engaged for web site design, construction and administration services. The two employees, Mr Student and Mr Houghton were described as the “WSA Online project manager” and the “guru of interactive website design and development” respectively.
Various representations were made by Mr Houghton to Mr Arms about the credit card payment system that could be implemented for Mr Arms’ business, which were incorrect. Mr Arms was only informed about the true nature of the proposed credit card payment system days before the website was due to be launched.
To preserve the credibility and goodwill of his business with the wineries, Mr Arms made various changes to his proposed business structure which resulted in the business operating at a loss for 12 months, after which a new business structure was adopted and the business began making a profit.
At first instance, Ryan J found that, had Mr Arms known the true position, he would have adopted the new business structure seven months earlier, and consequently would not have lost the sum of $58,331.
However, Ryan J found that there was no case to answer by the employees as they had not engaged in trade or commerce on their own account as distinct from being an employee of WSA. The High Court did not agree with Ryan J on this point.
The High Court found that despite the fact that the employees were not themselves business proprietors and that their activities were an element of WSA’s trade or commerce not their own, they were nevertheless engaged in conduct in the course of trade or commerce and therefore were within the ambit of the FTA.
As noted by the High Court, in other areas of law such as tort law, the status of an individual as an employee does not divest that person of personal liability for wrongful acts committed while an employee.
The High Court saw no good reason for treating the FTA any differently, particularly when the main purposes of the FTA include the promotion and encouragement of “fair trading practices”. The High Court considered that the exclusion of employees from the misleading or deceptive conduct provisions of the FTA would not promote that object.
This decision substantially increases the exposure of employees to claims, as misleading and deceptive conduct (s52, TPA) has no mental element, in that it is not a prerequisite for such claims that the employees knew that the conduct was misleading or deceptive, it is enough that they were engaged in the conduct innocently or otherwise. Previously the employees would have had to have known that conduct was misleading and deceptive (s75B, TPA).
The employees’ appeal to the High Court was dismissed and they were ordered to pay the Mr Arms’ costs.
It is important for both employees and business proprietors to realise that they are not able to use the business as a shield against their own misleading and deceptive conduct and should consider such claims a real risk, particularly in circumstances where the business is insolvent.
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© White SW Computer Law 2007
This article is a guide only and should not be used as a substitute for proper legal advice, readers should make their own enquiries and seek appropriate legal advice.