On 18 January 2023, the Court of Appeal upheld the High Court’s decision allowing a takaful operator’s claim against loss adjusters appointed by the operator for breach of contract. The loss adjusters contended that the takaful operator could not recover damages for breach of contract because it was bound by the illegal acts of its own employee. JJNN acted for the takaful operator.
The arguments at the High Court and the Court of Appeal centered on whether the illegal “contract” between the takaful operator’s employee and the loss adjusters’ employee had “tainted” the contract between the insurer and the loss adjuster with illegality, resulting in the contract being illegal, void, and unenforceable. In this regard, the concepts of vicarious liability, illegality, attribution, and agency were canvassed before the Court.
After a full trial, the High Court allowed the takaful operator’s claim, holding that the contract between the takaful operator and the loss adjuster was legal, valid, and enforceable. The Court of Appeal affirmed the decision of the High Court.
The takaful operator had issued 12 takaful certificates to 12 different participants, providing cover for loss or damage to property as a result of fire. Following the issuance of the certificates:
(1) Fire loss or damage claims were submitted to the takaful operator in respect of all 12 certificates.
(2) The takaful operator appointed the loss adjusters to investigate each of these claims.
(3) The loss adjusters purportedly carried out the investigations and submitted the report of these investigations to the takaful operator.
(4) On the basis of these reports, the takaful operator paid out over RM1.3 million to the 12 participants.
It was subsequently discovered that that the investigation reports submitted to the takaful operator were all fakes and forgeries in that, (1) most of the premises at which the fires allegedly occurred did not even exist and (2) where the premises did exist, there had not been any fires. It later became clear that there had been a “rogue” employee working for the takaful operator and another “rogue” working for the loss adjusters. The fraudulent scheme had been worked out between these 2 individuals, who subsequently disappeared.
The takaful operator brought an action against the loss adjuster for breach of contract, on the basis that it had paid over RM1.3 million based on the fictitious investigation reports submitted to it by the loss adjusters. The loss adjusters brought third party proceedings against the 12 participants for being part of the fraudulent scheme.
At the trial, the loss adjusters contended that the claim should not be allowed because the contract between takaful operator and the loss adjuster was tainted by illegality. The loss adjuster also contended that the takaful operator ought to be “vicariously liable” for the its employee’s conduct.
The High Court disagreed with the loss adjuster’s contentions and found that the contract was legal and enforceable.
In arriving at this decision, the High Court observed that the doctrine of vicarious liability was irrelevant as there had been no tortious claim brought by the loss adjusters against the takaful operator’s employee. The Court observed that, if the loss adjusters was contending that its contract with the takaful operator was illegal because of the actions of the takaful operator’s employee, the appropriate principle to consider was the doctrine of attribution.
Under the principle of attribution, the loss adjusters would not be held responsible for the takaful operator’s losses if they were caused by takaful operator’s employee if that employee's conduct could be “attributed” to the takaful operator.
In allowing the takaful operator’s claim, the High Court applied the House of Lord’s decision in Rolls & Stone Ltd (In Liquidation) v Stephen Moores (a firm). In that case, the Court had employed the concept of the “directing mind” of a company, finding that the fraudulent conduct of a director could be treated as the conduct of the company or to be attributed to the company if the individual was the “directing mind” of the company.
Applying this principle, the High Court found that the employee’s actions could not be attributed to the takaful operator as the employee was not the “directing mind” of the takaful operator.
The Court also considered attribution from a principal-agent point of view but was of the view that an agent who acts against its principal’s interests cannot be said to be acting within his authority. The Court also held that an agent’s knowledge should not be attributed to his principal where the knowledge relates to the agent’s own breach of duty to his principal.
Finally, the High Court noted that the “very thing” argument also applied to the present case: illegality should not be raised to defeat a claim where the damage was caused by fraud which was the “very thing” the defendant was appointed to investigate in the first place.
In allowing the takaful operator’s claim against the loss adjusters, the Court also allowed the loss adjusters’ 3rd party claims against the 12 participants, who had participated (no pun intended) in the fraudulent scheme.
Court of Appeal
On appeal, the loss adjusters held steadfast to their position that the takaful operator ought to have been found vicariously liable for its employee’s actions.
The loss adjusters also contended that the High Court had erred in relying on Stones & Rolls Ltd, which has been criticised in more recent decisions by the Supreme Court of the United Kingdom. The loss adjusters asserted that the UK Supreme Court’s judgment in Singularis Holdings Ltd (in liquidation) v Dajwa Capital Markets Europe Ltd was now the prevailing law on the concept of attribution.
On the point of vicarious liability, the Court of Appeal affirmed the High Court’s finding that vicarious liability could not be used as a defence in the manner advanced by the loss adjusters (i.e., as a defence to a breach of contract, in the absence of any claim against a principal tortfeasor)
On the issue of illegality and attribution, on the takaful operator’s behalf, we argued that the that the High Court would not have reached a different conclusion even if it had applied the Singularis instead of Stones & Rolls.
In Singularis, the plaintiff company brought an action against an investment bank for making payments from moneys held to its account to 3rd parties. These payments were made on the instructions of a director and the sole shareholder of the plaintiff. The claim brought against the investment bank was for breach of its “Quincecare” duty of care (an implied term of a contract between a bank and its customer that the bank would use reasonable skill and care in executing customer orders).
The issue in Singularis Holdings Ltd was whether such a claim would be defeated if the instructions were given by the company’s director and sole shareholder who was the “dominant influence over the affairs of the company”. The UK Supreme Court was not inclined to apply the “controlling mind” or “dominant influence” test used in Stones & Rolls. Instead, the Court employed a “context and purpose” approach to attribution.
In applying this approach, the UK Supreme Court declined to attribute the fraudulent acts of the company’s director and sole shareholder to the plaintiff company. The Supreme Court held that:
“The context of this case is the breach by the company's investment bank and broker of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here. By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account. To attribute the fraud of that person to the company would be, as the judge put it, to 'denude the duty of any value in cases where it is most needed' (para ). If the appellant's argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step.”
Similarly, we argued that the “context” in the present case was the breach by the loss adjusters of its contractual duty towards the takaful operator. The “purpose” of that duty was to protect the takaful operator against incorrectly paying out on claims, which was the very thing that took place. Therefore, to attribute the employee’s fraud to the takaful operator would be to denude the loss adjusters’ duty of any value in cases where it is most needed. Therefore, the employee’s fraudulent actions ought not to be attributed to the takaful operator.
After hearing lengthy submissions from both parties, the Court of Appeal dismissed the appeal and upheld the decision of the High Court. In delivering its decision, the appellate Court did not provide its views on the doctrines of illegality and attribution. As of the publication of this article, the grounds of judgment are unavailable. Without the benefit of written grounds, it will be interesting to see how the doctrine of attribution (in the context of an “illegality” defence) will be treated and applied by the Courts moving forward, particularly with regard to the UK Supreme Court’s approach in Singularis.
Authors: Harish Nair and Casper Tey