LLYOD V. GRACE SMITH & CO.(1912)

Case Name: LLYOD V. GRACE SMITH & CO.(1912)

CITATION : AC 716 UKHL 1 

Court and jurisdiction: The House Of Lords, England & Wales

Bench : Lord Macnaghten, Earl Loreburn LC

Acts, provisions and sections involved: Law of Torts| Section 238 of the Indian Contract Act 1872 |

Previous Judgements(Precedents):

1. Yewens v Noakes (1881) 6 QBD 530
2. State Bank of India V. Shyama Devi AIR 1978 SC 

Introduction:

The dispute betweenLloyd Pauper v. Grace Smith and Corporation (1912) gives  a new concept regarding vicariousliability in a master-servant or principal-agent relationship. A person  may be found vicariously liable for an offence committed by another person, depending on the type of  relationship between the two. In this scenario, the issue is whether or not the master will be  held liable for the wrongdoing carried out by hisservant. According to Section 238¹of the Indian Contract Act of 1872, any misrepresentations or fraud committed by an agent acting for a principal in  the course of their business shall be deemed to have been committed by the principal itself.

Facts:

Emily Lloyd, a widow of modest means, approached the Liverpool-based solicitor firm Grace,  Smith & Co. to seek legal advice concerning her property. At the firm’s office, she was attended to by a  clerk named Sandles, who was not a partner but held a position of significant authority within the firm.  Mr. Smith, one of the partners, later admitted that Sandles was effectively “second in command,” which  led Mrs. Lloyd to reasonably believe that he was a partner or someone with sufficient authority to act on  behalf of the firm.

During their interaction in January 1910, Mrs. Lloyd handed over certain property deeds to  Sandles, believing she was executing a legal transaction under the firm’s guidance. Sandles,  however, deceived her by making her sign documents that effectively transferred her property  to him as a gift. He then sold the property and personally profited from the proceeds. At the  time of this fraudulent transaction, Sandles provided Mrs. Lloyd with a receipt in his own  name, even though she had believed the documents were being dealt with officially by the  firm.

The fraud remained undiscovered for several months until April 1910, when Sandles was  dismissed from the firm for an unrelated act of irregularity. It was only then that Mrs. Lloyd  realized her property deeds were missing and uncovered the fraudulent nature of the  transaction. Notably, she was in possession of a receipt issued in the firm’s name for the 1238.

Misrepresentation made or frauds committed, by agents acting in the course of their business for their principals,  have the same effect on agreements made by such agents as if such misrepresentations or frauds had been made  or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which  do not fall within their authority, do not affect their principals. deeds she had surrendered, reinforcing her belief that she had been dealing with an authorised  representative of the firm.

Subsequently, Mrs. Lloyd initiated legal proceedings against Grace, Smith & Co., arguing  that the firm should be held liable for the deceitful conduct of their managing clerk. The trial  court ruled in her favour, reasoning that when a servant, acting in a position of authority  delegated by the master, causes harm through actions that benefit himself, the master must  bear responsibility because they also benefit from the authority and trust conferred upon the  servant.

However, the Court of Appeal overturned this decision and found in favour of the firm. Mrs.  Lloyd then appealed to the House of Lords, which ultimately held that Grace, Smith & Co.  were vicariously liable for the fraudulent acts of their clerk. The Lords emphasized that since  the fraudulent act was carried out by a person who appeared to have the authority of the firm  and was acting in the course of his employment, the firm must be held responsible, even  though the acts were committed for the clerk’s personal gain.

Issues:

1. Whether the principal should be held responsible for the agent’s fraud? ²
2. Was the appeal court right in overturning the trial court’s decision?
3. Whether the employee’s conduct benefit his own interest or his firm’sInterest?

Rules:

Rule 1: Principle of Vicarious Liability in Master-Servant Relationship In the context of vicarious liability, a master may be held legally responsible for the wrongful  acts committed by their servant, provided such acts occur within the scope of employment.  This rule is grounded in the idea that the master exercises control over the servant’s duties  and, therefore, must bear the consequences of any harm resulting from the servant’s conduct  while performing those duties.

Rule 2: Application of the Maxim Qui Facit Per Alium Facit Per Se

This legal maxim, meaning “he who acts through another does the act himself,” supports the  premise that the employer (master) is liable for acts carried out by the employee (servant) on  their behalf. When a servant performs a task under the direction of the master and causes  harm or damage in the process, the law considers it as though the master committed the act  personally.

Rule 3: Doctrine of Respondent Superior

The doctrine of Respondent Superior reinforces the accountability of superiors for the actions  of their subordinates. It affirms that the employer must answer for any misconduct or  negligence by the employee done in the course of employment, reflecting the hierarchical  nature of authority and responsibility in an employment relationship.

Judgement:

In light of the facts, their Lordships concluded unanimously that the defendants should be  held vicariously liable for the fraud. Lord Mac-naghten was convinced that a principal was  liable for the fraud of his agent if the fraud was committed in the course of the agent’s  employment ³and did not go beyond the scope of his agency. This was the case regardless of  whether the fraud was committed for the benefit of the principal or not. The client had been  invited by the firm to deal with their managing clerk. The fact that the agent acted dishonestly  for his own benefit was irrelevant. And it can be said that the underlying basis for the decision is well expressed in the notion  that the fraud of the agent was closely related to his position as conveyancing manager, and  that the principal created the risk of the fraud being committed by putting him in that  position. In other words, the House of Lords arrived at this conclusion after finding that the  firm had ostensibly delegated authority to the managing clerk to carry out certain types of  business by allowing him to deal with clients. He looked after conveyancing which is a part  of the ordinary business of solicitors. As a result, the firm was responsible for the fraud.

Tests for determining Vicarious Liability

Traditional Test – The Control Test

The classical method for identifying a master-servant relationship is known as the control  test, which was laid down in the case of Yewens v. Noakes (1881) 6 QBD 530. This test  focuses on the employer (master) has the authority not only to direct what work is to be done  but also how it should be carried out. If such a degree of control is present, it indicates the  existence of a master-servant relationship.

Modern Approach – The Multiple Test

In today’s working environment, where employment often involves formal contracts, the  courts have adopted a broader test known as the multiple test to better reflect these  arrangements. This test distinguishes between employees and independent contractors by  examining the nature of their contracts. Specifically, employees typically operate under a  “contract of service,” while independent contractors work under a “contract for service.”

Ready Mixed Concrete Case – Threefold Criteria

The case of Ready Mixed Concrete v Minister of Pensions and National Insurance (1968) 2  QB 497 set out three essential criteria to determine whether a contract qualifies as one of  employment. First, the individual must agree to perform work or provide a skill in return for  remuneration. Second, the person must accept a sufficient degree of control by the employer  over how the work is performed. Finally, the terms of the contract must be consistent with a  service relationship rather than that of an independent contractor.

Analysis:

Smith claimed that he is a solicitor by profession. In this case, he showed a lack of  concern for the business. Smith also claimed that his employee had the authority to  manage the firm and could also make deals on behalf of the principal. Additionally, according to Mr. Smith, his employees informed him, or  were supposed to inform him, of the daily operations of the business. In this  case, the employee (agent) was the one who committed the fraud, but the owner of the  firm was also held liable for the act committed by an agent because of the  relationship that existed between the two as a principal-agent relationship or a master savant relationship. So, we can say that if any misrepresentation or fraud is committed by an  agent, the principal will be responsible because, according to the law, that act  was committed by the master himself. Whether the action was taken to benefit the  principal or not is irrelevant to the principal, and the principal was also unable to fulfil his  role as a principal because one of his employees committed fraud. In his defence, the  defendant claimed that it was a private transaction between the employee  and the plaintiff. The only fact is that they both committed this dealing in his office; therefore, it cannot be considered a private dealing. Consequently, this case concerns the idea of vicarious liability, where the  principal will be held accountable for the crime of his agent, and in this  case, an agent was acting in his due course of business.

References(S):

1. https://www.isurv.com/directory_record/5134/lloyd_V_grace_smith_co 2. https://www.legalserviceindia.com/legal/article-10771-lloyd-v-s-grace-smith-1912-ac 716.html
2. https://www.juscorpus.com/vicarious-liability-of-principal-llyod-pauper-v-grace-smith and-corporation-1912/
3. https://knowledgesteez.com/2023/05/case-analysis-lloyd-v-grace-smith-co-1912/

¹ Effect, on agreement, of misrepresentation or fraud by agent.—

²https://lawbhoomi.com/vicarious-liability-master-and-servant-and-the-doctrine-of-common-employment/

³ https://repository.law.umich.edu/cgi/viewcontent.cgi?article=12805&context=mlr