Employer Liability for Employee Advice

The Wallace determination by the Ombud, discussed in last week’s Moonstone Monitor, contained reference to the FNB/Newlove case which was referred to the FSB Appeal Board, which ruled in favour of the Ombud’s decision to hold the bank vicariously liable for the client’s loss.

It has subsequently come to light that this ruling was referred to the High Court, who overturned the ruling and found in favour of the bank.

This is a very important matter for each employer of representatives, whether you are a corporate entity, employing thousands of representatives, or a small FSP, with one or two.

In essence, the issue at stake is whether you are liable for damages resulting from actions performed by an employer outside the scope of an employment contract or mandate.

An important precedent used by the Appeal Board in the Newlove case concerned the Feldman (Pty) Ltd v Mall case:

Caution should be exercised when employees commit unauthorised acts. There are instances when the employer is held accountable even when the employee commits unauthorised acts. I refer to Feldman (Pty) Ltd v Mall supra at p.739: “In all these cases it may be said, as it was said here, that the master has not authorised the act. It is true he has not authorised the particular act, but he has put the agent in his place to do that class of acts and he must be answerable for the manner in which the agent has conducted himself in doing the business which it was the act of his master to place him in”.

This same dictum was adopted in Minister of Police v Rabie 1986 (1) SA 117 (T) at p. 134: “It has also been suggested that while the scope of employment may be governed by the contract of service, the character of the deviation is not, and that it is the character of the deviation which determines whether the master is liable for the servant’s conduct during such deviation; if the deviation is such that it can be said to be a natural or likely result of the employment of the servant, then the master or is liable.

In a further reference to the Feldman (Pty) Ltd v Mall case, the Appeal Board quotes the following:

In my view the test to be applied is whether the circumstances of the particular case show that the servant’s digression is so great in respect of space and time that it cannot reasonably be held that he is still exercising the functions to which he was appointed; if this is the case the master is not liable. It seems to me not practicable to formulate the test in more precise terms; I can see no escape from the conclusion that ultimately the question resolves itself into one of degree and in each particular case a matter of degree will determine whether the servant can be said to have ceased to exercise the functions to which he was appointed.

The FNB representative had no “actual authority” to market the unauthorised product, but the Appeal Board also considered whether the employer could be held accountable on the basis of “ostensible authority”.

In other words, essentially the principal becomes liable if the principal by words or through conduct represents to the outsiders that the agent had authority to act as he had done. The onus to prove that ostensible authority existed was on Ms Newlove (the complainant).

An important final point, made by the Board, concerns internal rules and limitations, such as those contained in conditions and scope of employment:

FNB was aware that members of the public were not aware of their internal rules and procedures and would thus not be protected by them should they be presented by a dishonest advisor.

The fact that this decision by the Appeal Board was apparently overturned in the High Court could have a bearing an all future determinations with regards the liability of employers for the advice and service of representatives.

We have not been able to secure a copy of the High Court case, but will share this as soon as we do.

Click here to download the FNB/Newlove Appeal Board decision.

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