Houghton v Arms: High Court Holds Employees Can Be Personally Liable for False and Misleading Conduct
Introduction
The Trade Practices Act, and related legislation, prohibits persons from making false and misleading representations. In most cases the "person" making the false and misleading representation will be employees or agents of a corporation. In such circumstances the corporation is liable. Where the corporation is a limited corporation and its funds are insufficient to pay a damages award, or where the corporation is insolvent, can the plaintiff sue the employees of the corporation? In Houghton v Arms [2006] HCA 59 the High Court of Australia held employees can be personally liable for false and misleading conduct.
Facts
Houghton v Arms [2006] HCA 59 concerned the development of a business strategy by Mr Arms. Mr Arms retained WSA Online Ltd to develop the plan. Mr Houghton and Mr Student were employees of WSA Online Ltd. Mr Houghton and Mr Student were involved with false and misleading representations to Mr Arms which resulted in damages calculated by the court at $58,331.00.
Mr Arms was successful at first instance against WSA Online Ltd, but had his suit against Mr Houghton and Mr Student dismissed. As WSA Online Ltd was under a deed of company arrangement with its creditors, and as a consequence was potentially unable to satisfy any judgment, the action against the employees was especially relevant.
Mr Arms appealed to the Full Court of the Federal Court which held Mr Houghton and Mr Student were jointly liable for the damages. The Full Court's decision was appealed to the High Court of Australia.
High Court judgment
Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ examined the particular legislative framework in question. Their honours determined an action lied against any "person" who had made "false or misleading representations"in the course of "trade and commerce"br> Mr Houghton and Mr Student contested they had not made the representations in the course of trade and commerce, but in the course of their employment. At paragraph 41, Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ, held, at paragraph 41, that the application of "person"should not be read down to exclude employees. Such an approach, their honours held, would not promote the object of the legislation. Mr Houghton and Mr Student were clearly people in the general use of the word and were persons for the act.
The fact Mr Houghton and Mr Student had made false and misleading representations was not contested.
Mr Houghton and Mr Student argued they had not made the representations in the course of trade or commerce, but in the course of their employment. At paragraph 34, Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ applied Justice Kirby's ratio, from Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594, that statements made by a person not himself or herself engaged in trade or commerce may answer the statutory expression if, they are designed to encourage others to invest, or to continue investments, in a particular trading entity. Their honours held at paragraph 41,
As a general proposition...in the world of tort the status of an individual as an employee does not divest that person of personal liability for wrongful acts committed while an employee. Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ held the acts of Mr Houghton and Mr Student were acts by persons which were false and misleading and made in the course of trade or commerce. At paragraph 47, their honours held, it was immaterial to the liability of the employees, whether or not their employer was also liable. As a consequence, Mr Arms was not forced to join other creditors in WSA Online Ltd's deed of company arrangement with their creditors. Mr Arms could pursue Mr Houghton and Mr Student in their personal capacity to obtain compensation.
Conclusion
Houghton v Arms [2006] HCA 59 sends a message to all employees that they could be personally liable for any false and misleading representations they make in the course of their employers trade or commerce. While plaintiffs will generally only sue corporations, where the corporation is unable to pay its debts, employees could be liable for their false and misleading representations. In Houghton v Arms [2006] HCA 59 the employees had made an error about the procedural requirements of a third party. There conduct was not malicious, only negligent. Employees who advise clients should contact a solicitor to explore options to reduce their personal exposure.
