Introduction

In our previous newsletters, “Employer’s Liability Towards Unauthorized Act of Employees” and “Employer Found Vicariously Liable for Assault Committed by Their Employees”, we discussed the “close connection” test in relation to an employer’s vicarious liability for employee’s unauthorized act. Time and again, the “close connection” test has been applied and affirmed by Hong Kong courts. In the recent case of Luk Wing Yan v CMB Wing Lung Bank Limited (previously known as Wing Lung Bank Limited) [2021] HKCFI 279, the Court of First Instance (“CFI”) discussed whether the “close connection” test serves as a blanket principle that is applicable in all circumstances.

Background

The plaintiff (“Customer”) was a customer of the defendant bank (“Bank”). The Customer was a victim of a fraud investment scheme perpetrated by one Ms Liu King Yee (“Employee”), who was employed the Bank as a manager in charge of securities at its North Point Branch. Since September 2010, for a period of over three years, the Customer engaged in what she thought were “internal investments” offered by the Bank that the Employee introduced to her. The Employee told the Customer that the “investments” were “internal” and only made available by the Bank to its staff/employees. In other words, the “internal investments” were not available to non-staff/customers. The investments apparently promised extremely high returns – frequently at 100% return over only a few months, and even some at an annualised rate in excess of 500%.

The Customer invested in around HK$35 million. Although she received payments totalling around HK$11.3 million, the remaining sum of around HK$23.8 million had never been returned and was completely lost. The monies invested by the Customer were transferred to the Employee’s personal account held with the Bank. The monies returned to the Customer were also received via the Employee.

The fraud was brought to light in March 2014. In October 2015, the Employee was convicted of three counts of fraud and was sentenced to imprisonment of 9 years and 4 months.

The Customer brought proceedings against the Bank for her losses.

The issue

The issue is can the Bank be held liable or legal responsible for the Customer’s losses as a result of the Employee’s fraud?

The Customer said the Bank should be held liable for a number of reasons. One of them was the Bank should be held vicarious liability for the Employee’s fraud.

The law: vicarious liability

The Customer submitted that the relevant test for determining vicarious liability in the context of an employment relationship is the “close connection” test as laid down by the Court of Final Appeal in Ming An Insurance Co (HK) Ltd v Ritz-Carlton Ltd (2002) 5 HKCFAR 569.[1] The test poses the question as to whether the employee’s tort is so closely connected with his employment that it would be fair and just to hold the employer vicariously liable.

On the other hand, the Bank argued that for cases such as the present case, where the issue is whether a principal is bound by the fraudulent conduct of an agent, the test for vicarious liability should be the “apparent or ostensible authority” test. The Bank relied on the English Court of Appeal’s decision in Lloyd v Grace, Smith & Co  [1912] AC 71, in which the English Court of Appeal held that an employer will be liable if the fraudulent conduct of the employee falls within the scope of the employer’s authority, be it actual or ostensible.

The CFI recognized that the “close connection” test is firmly established, but concluded that the correct test for cases such as the present case is the “apparent authority” test. Although the underlying relationship may be one of master and servant, the test of liability is authority (actual or apparent), rather than the course of employment. The CFI summarized that apparent authority is found where:

1. 1. a principal, by words or conduct, has represented to the third party that the agent has actual authority to enter into the kind of transaction in question;
   2. the third party enters into a transaction in reliance on that representation; and
   3. the reliance must be reasonable.

The CFI commented that the “close connection” test can indeed be reconciled with the “apparent authority” test in the sense that it is the apparent authority of the employee who makes the fraudulent representations that will identify the necessary close connection as might render it just to hold the employer vicariously liable.

The CFI’s findings

On the facts of the case, the CFI found that the Customer evidently knew she was seeking to take advantage of a private arrangement not really available to her if she had dealt with the Bank. Applying the “apparent authority” test, the CFI found that:

1. 1. there was no representation or holding out by the Bank that the Employee had authority to offer the alleged “internal investments” to the Customer, and the Employee could not clothe herself with apparent authority;
   2. there was anyway no actual reliance on any such apparent authority by the Customer; and
   3. the Customer’s understanding of the “internal investment” was in reality antithetical to authority, meaning that any reliance by the Customer on any apparent authority would not have been reasonable reliance.
      

The CFI concluded that the claim put forward by the Customer on the basis of vicarious liability must fail.

Takeaways

Whilst the “close connection” test stands as the relevant test for vicarious liability, and has survived challenges in Hong Kong courts, does the “close connection” test serve as a blanket principle that is applicable in all circumstances?

In Luk Wing Yan, the senior counsel representing the Bank argued that it does not, and it has no application at all in the circumstances of Luk Wing Yan.  The Judge took the view that there may be a need to reconcile the approach relating to “close connection” and that relating to “authority”. Insofar as it is necessary to reconcile the two tests, it seems to the CFI that it is the apparent authority of the employee who makes the fraudulent representations that will identify the necessary close connection as might render it just to hold the employer vicariously liable.

The “close connection” test is not always easy to apply. In Luk Wing Yan, the CFI commented that “[i]t has been recognised the lack of precision in the test is inevitable, given the infinite range of circumstances where the issue arises.” The test must be considered in light of the specific facts and circumstances of each case, and also guidance provided by previous court decisions. For cases that concern an agency relationship in furtherance to an employment relationship, the “apparent or ostensible” authority test comes into play.

Whether an employer can be held vicariously liable for an employee’s fraud or unauthorised act is not always straightforward. When in doubt, you should always consult your lawyers and seek legal advice.

[1] See “Employer’s Liability Towards Unauthorized Act of Employees” ONC Insurance & Personal Injury newsletter (May 2013)