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Media Centre :: Articles ::

Vicarious Liability of Employers for Fraud by an Independent Contractor

Jim Patterson and Maureen Ward
Bennett Jones LLP

Vicarious Liability: A Brief Summary

First published in Legal Alert, 22:5 (Carswell, Aug 2003).

There are two long-standing maxims that capture the theoretical bases for vicarious liability. They are:

  • Qui facit per allium facit per se (he who acts through another, acts through himself); and
  • Respondeat superior (the superior must answer)

Vicarious liability is the term used to describe the imposition of responsibility on one person for the tort of another by operation of law, even though the first person did not commit the act which constitutes a wrong. It is a form of liability imposed on one party for the misconduct of another in the absence of fault, knowledge, carelessness, recklessness, willful blindness, negligence, or any of the traditionally accepted bases of legal liability.

Contexts in which vicarious liability typically apply are:

  • where an employer is held responsible for the acts of an employee;
  • where a principal is held responsible for the acts of his or her agent.

 

The traditional test for imposing vicarious liability is known as the "Salmond Test" which can be summarized as follows:

  • An employee's wrongful conduct is said to fall within the course and scope of his or her employment where it consists of either:

  • acts authorized by the employer; or
  • unauthorized acts that are so connected with acts that the employer has authorized that they can be regarded as modes - although improper modes - of doing what has been authorized (followed in Canadian Pacific Railway Co. v. Lockhart, [1942] A.C. 591 at 599 (P.C.)).

     

    The Supreme Court of Canada on Vicarious Liability

    In the case of Bazley v. Curry, [1999] 2 S.C.R. 534, the Supreme Court of Canada upheld the British Columbia Court of Appeal's decision which found the defendant liable for the acts of its employee who had sexually abused children in his care. The defendant in this case was a non-profit organization that operated residential care facilities for emotionally troubled children.

    The Supreme Court of Canada established the following test for imposing vicarious liability:

  • The court should openly confront the question of whether liability should lie against the employer, rather than obscuring the decision beneath semantic discussions of "scope of employment" and "mode of conduct".
  • The fundamental question is whether the wrongful act is sufficiently related to conduct authorized by the employer to justify the imposition of vicarious liability. Vicarious liability is generally appropriate where there is a significant connection between the creation or enhancement of a risk and the wrong that accrues therefrom, even if unrelated to the employer's desires. Where this is so, vicarious liability will serve the policy considerations of the provision of an adequate and just remedy and of deterrence. Incidental connections to the employment enterprise, like time and place (without more), will not suffice. Once engaged in a particular business, it is fair that an employer be made to pay the generally foreseeable costs of that business. In contrast, to impose liability for costs unrelated to the risk would effectively make the employer an involuntary insurer.
  • In determining the sufficiency of the connection between the employer's creation or enhancement of the risk and the wrong complained of, subsidiary factors may be considered. These may vary with the nature of the case. When related to intentional torts, the relevant factors may include, but are not limited to, the following:

    • the opportunity that the enterprise afforded the employee to abuse his or her power;
    • the extent to which the wrongful act may have furthered the employer's aims (and hence be more likely to have been committed by the employee);
    • the extent to which the wrongful act was related to friction, confrontation or intimacy inherent in the employer's enterprise;
    • the extent of power conferred on the employee in relation to the victim;
    • the vulnerability of potential victims to the wrongful exercise of the employee's power.

 

In Jacobi v. Griffiths, [1999] 2 S.C.R. 570, the Supreme Court of Canada considered another British Columbia Court of Appeal decision concerning the issue of vicarious liability of a non-profit agency for the sexual assaults committed by one of its employees upon children in its care.

The Court reached a different result from that in Bazley. The Court found that Griffiths did not abuse his job-created authority in committing the assaults, since the assaults did not occur at the place of employment, but at the home of Griffiths. According to the Court, the intimate and trusting relationship that the Foundation had created in Bazley was not present in Griffiths. This decision stems from an historical reluctance of judges in Canada to fix employers with no-fault liability on the basis merely of job-created opportunity even where accompanied by privileged access to the victim. Generally, it does not matter if an employee has not been acting in furtherance of the employer's aims so long as there is a strong connection between the job and the tort, for example, where the employee is acting within the scope of his authority.

Vicarious Liability for the Fraud Committed by Independent Contractors

On May 15, 2003 the Supreme Court of Canada denied leave to appeal the British Columbia Court of Appeal's decision in the case of Thiessen v. Mutual Life Assurance Co. of Canada, [2002] 11 W.W.R. 637 (B.C.C.A.), without reasons. The Court of Appeal in this case faced the difficult question of who is to bear the risk of a defalcating life insurance representative who was considered a contractor by the insurance company.

In this case the Court of Appeal upheld the lower court's decision that found the insurance company vicariously liable for the theft of clients' money committed by its agent. A representative who exclusively sold life insurance and annuities for an insurance company was identified as an independent contractor in his agreement with the company. He did not have actual authority to bind the company to a contract but was allowed to accept money for remittance to the company.

The Court found that the system set up by the insurance company had given the representative apparent authority to make investments of clients' money such that the insurance company had created the opportunity for the theft. The customer was ultimately found to be "vulnerable" for a variety of reasons including:

  • The distribution system the insurer set up for the sale of accumulation annuities;
  • The powers it gave to its authorized representative and practice with regard to those annuities;
  • The trust its referral policy and approved advertising encouraged its customers to repose in its authorized representative;
  • The lack of any effort to supervise the performance of those representatives, and
  • The lack of notice to customers of any limitation on their authority to bind the insurer.

 

The Court in Thiessen reviewed and ultimately distinguished the Supreme Court of Canada's decision of 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983. The Supreme Court in that case upheld the trial decision that vicarious liability could not and should not be imposed on Sagaz for the tortious acts of its consultant, an independent contractor.

The Thiessen decision sends a warning that a company cannot rely on the contractual relationship with an agent to avoid liability if the facts of the matter create a "vulnerable customer" circumstance. Companies delegating authority to contractors should be aware of this case and look to it, along with the Supreme Court of Canada decisions discussed above, for some guidance when creating its working relationship with agents.