Five ways that your company can be held liable for the actions of others
Five ways that your company can be held liable for the actions of others
In any business it is vital to know who is able to bind your company or your customers to an agreement. It can be the difference between being able to enforce a contract and not being able to enforce a contract.
This article focuses on the types of liability and the binding agreements that can occur through different types of legal capacity and the means by which your company can be held liable under and bound to a contractual arrangement.
Standard Company Capacity
A standard proprietary limited company is bound to an agreement:
- Where there is a sole director – by the sole director agreeing (in writing or orally); or
- Where there is a company with multiple directors – by two directors, or a director and director/secretary agreeing (in writing or orally).
In any case, a company can also utilise a common seal to sign documents, which also requires a signature by the sole director, or a director and director/secretary in the case of a company with multiple directors, however this method is often not utilised.
The company is then bound and liable under the terms of an agreement in its own capacity, provided that any of the above circumstances are met and there is no reason to suspect that a director has not complied with their obligations under the company’s constitution.
A company can also be bound to an agreement through the principles of agency, where one person acts on behalf of another person as their authorised agent. This type of relationship does not bind a company through an agent acting as the company, but rather as an agent acting in their own capacity on behalf of the company.
There are essentially three types of agency relationships that arise, each of which capable of binding the company:
- An express agency relationship;
- An implied agency relationship; and
- An ostensible agency relationship.
Actual express authority arises when a principal (the company in these circumstances) expressly instructs an agent to perform a certain act. The agent must then act within the scope of the authority given by the company in order to bind the company to an agreement.
Actual implied authority creates an agency relationship where the conduct or implications of the principal implies that the agent is authorised to perform a specific task. This implied authority can occur in a number of ways including:
- Authority to perform incidental tasks or enter into an agreement that forms part of the usual or customary authority of a person in a certain position (for example a car dealer being authorised to sell cars on behalf of the dealership company); and
- Authority to act on behalf of the company and enter into agreements based on a previous course of dealing allowed to occur previously by the company (for example a car dealing being allowed to loan cars to customers for a week at a time with the dealership company being aware of this conduct in the past).
Ostensible authority arises where no implied or express authority exists, however the authority is created by the principal (the company) representing to a third party, by words or conduct, that another person is their agent. In order for ostensible authority to be satisfied, there must be a representation made by the principal to a third party that the agent acts for them, reliance by the third party on the representation, and the third party has suffered loss as a result of the reliance. This type of authority can be proven even in the event that the Company stands idly by and makes no positive action to indicate that the agent has no authority.
Each of the aforementioned types of agency are capable of binding a company to an agreement, placing liability on the company itself.
A company can further be liable through the acts of an employee, however the employee cannot bind the company in contract.
An employer (the company) may be vicariously liable for the tortious actions of an employee where that act is committed during the course of employment. While this proposition is subject to a multi-facet test (determining the existence of control over the employee, how they are paid, the hours of work, etc.) subject to any clear positive action whereby it can be proven that the employee was acting outside the scope of their employment or was not an employee at all, the company will be held liable for the employee’s actions.
Corporate Attribution is a concept whereby a company is either deemed to be liable in its own capacity through the acts of a person related to the company, or is attributed to become liable through the acts of an agent or by express legislative means. There are three means under the concept of corporate attribution by which a company can become liable, in addition to the concepts noted throughout this article, for the actions or inactions of a third party pursuant to the rules of:
- Primary attribution;
- General attribution; and
- Special attribution.
Before detailing each of the above rules, it is important to note the key distinction between liability of a company through the principles of agency and vicarious liability. Whilst agency and vicarious liability concern the acts of a third party on behalf of a company, corporate attribution relates to the specific acts, intention and knowledge of a third party being the actual act, intention and knowledge of the company itself through primary liability.
Primary attribution is the concept whereby there is an action or inaction by the directors which entrusts the exercise of the company’s power to a third party, and it is found that this person is in actual control of the company and acts as an embodiment of the company itself. Any contract entered into by said third party is then deemed to be a contract entered into and liability assumed by the company directly.
An example of this concept may include a scenario whereby a company director has been absent for a number of years, and as a result a high level employee assumes the everyday running of the company. In this situation, it may be possible for a third party to be considered the directing voice and mind of the company, without any direct appointment being required.
General attribution attributes liability based on the conduct of a third party who is involved in the company and is in a position whereby they have the duty and/or authority to receive and communicate information to the company. The company is deemed to be in possession of this information and is liable for the consequences that flow from being in possession of it. Some exceptions apply to this principle in cases of fraud.
Finally, special attribution creates corporate liability through express statutory provision. For example, a company may be held liable for its agent or employees actions pursuant to sections 139B(1) and 139B(2) of Competition and Consumer Act 2010 (Cth) for certain breaches of the Australian Consumer Law.
Limiting your liability
It is important to ensure that you as a company director and your company, in its own right,:
- Place strict limits on the authority that a director in your company holds;
- Ensure that any party that your company deals with is aware of any limitations that a company director or agent may have;
- Limit the scope of authority of any agent that is appointed to act on your behalf, noting that the person your agent is dealing with should be made fully aware of the constraints and limitations imposed on the agent;
- Ensure any company employees are aware of limits in relation to binding your company and ensure safeguards are in place to protect your company from any claims against employees for which your company may be liable; and
- Be mindful that any persons associated with your company (including shareholders, directors, or other predominant members of your company) are not to be in a position whereby they are in direct control of your company.
If you are in a position where multiple people are signing agreements on behalf of your company, or even on behalf of you personally, you should ensure that you have a system in place recording who is signing documents and exactly what they are signing. SiG-IT: the Signature and Identity Guardian is an example of a record keeping system that Streten Masons Lawyers has been utilising for a number of years. This system allows you to track documents that are being signed and provides a unique identifier specific to each signature and makes it simple to determine the validity of the document, in addition to providing an online record of the person who signed on your behalf. You can also store an image of the document that you have signed on secure cloud based servers. If you would like to try this system in your company, or try it yourself then please get in touch.