Frederick v Positive Solutions (Financial Services) Ltd

The Court of Appeal dismissed the appellants' challenge to the Deputy High Court Judge's order entering summary judgment for the respondent under CPR Part 24. The principal legal question was whether the respondent was vicariously liable for fraudulent acts committed by its agent, Mr Warren, and whether the respondent owed the appellants a direct duty of care. Applying the modern two-stage test from Various Claimants (the "Christian Brothers" case) as explained in Cox v Ministry of Justice, the court held that vicarious liability did not attach because Warren's wrongful acts arose from a recognisably independent business (a property investment fraud) and were not an integral part of the respondent's business nor carried out for its benefit. The court also held that receipt of commission, an indemnity in the agency agreement and mere access to an online portal did not establish the necessary closeness of connection. Finally, applying the Caparo three-stage test, the court held there was no sufficient proximity and it was not fair, just and reasonable to impose a direct duty of care on the respondent.

Background and parties. The appellants were four members of the same family who, in 2008, were induced to re-mortgage properties and make short-term loans to a property development scheme. The re-mortgages were arranged via applications submitted by a man called Mr Warren. The respondent, Positive Solutions, is an authorised financial services company that engaged Mr Warren as a "Registered Individual" under an Agency Agreement. Warren submitted mortgage applications through an online portal that he could access as the respondent's agent, but the applications contained dishonest information and the advanced funds were misappropriated.

Procedural posture and relief sought. The appellants sued the respondent alone asserting vicarious liability for Warren's wrongdoing and, in the alternative, a direct duty of care. The respondent applied to strike out the claim under CPR 3.4 or for summary judgment under CPR Part 24. The Master granted summary judgment to the respondent except on vicarious liability. On the respondent's appeal to HHJ Dight, summary judgment was entered for the respondent on vicarious liability and the appellants' cross-appeal on duty of care was dismissed. The appellants obtained permission to appeal to the Court of Appeal.

Issues framed by the court.

• Whether the respondent was vicariously liable for Warren's fraudulent acts.
• Whether the respondent owed the appellants a direct duty of care in negligence.

Court's reasoning. The court analysed the vicarious liability issue against the modern framework in the Christian Brothers decision and Lord Reed's restatement in Cox, identifying two elements: (1) whether the wrongdoer carried on activities as an integral part of the defendant's business and for its benefit rather than as part of an independent business; and (2) whether the defendant created the risk by assigning such activities to the wrongdoer. The court concluded that, on the pleaded facts, Warren was "moonlighting" in a recognisably independent fraudulent enterprise; his use of the portal was merely the operative means to obtain funds and did not make the fraud an integral part of Positive Solutions' business. The court held that other facts relied upon — automatic receipt of commission, an indemnity clause in the Agency Agreement, and the fact Warren had access to the portal only as an agent — did not establish the closeness of connection required. The court also held that, applying Credit Lyonnais and Dubai Aluminium, all acts necessary to make Warren personally liable did not occur in the course of his agency. On the duty of care point, the court applied Caparo and concluded there was no sufficient proximity or assumption of responsibility and it would not be fair, just and reasonable to impose a duty on the respondent.

Context and implications. The court observed that while the modern development of vicarious liability has produced solutions in rare contexts (for example, institutional abuse or where impecunious tortfeasors cannot compensate victims), that jurisprudence had not been extended to impose vicarious liability in commercial fraud cases on the pleaded facts before the court.

Appeal dismissed. The Court of Appeal upheld the Deputy High Court Judge's entry of summary judgment for the respondent: (1) vicarious liability did not attach because the agent's fraudulent acts arose from a recognisably independent enterprise and were not an integral part of the respondent's business or for its benefit, and the other factual indicators (commission, indemnity, portal access) did not establish the necessary closeness of connection; (2) no direct duty of care arose because there was insufficient proximity or assumption of responsibility and it was not fair, just and reasonable to impose such a duty.

Appeal to the Court of Appeal from His Honour Judge Dight (sitting as a Deputy High Court Judge), Chancery Division (CH-2016-000213; [2017] EWHC 643 (Ch)). The Court of Appeal delivered judgment on 13 March 2018, neutral citation [2018] EWCA Civ 431.