Business and Corporate Law: Vicarious Liability, Privity of Contract, Restraint of Trade, Types of Companies in Australia

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Business and Corporate Law

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Part A
Issue
Martin is an employee of Swimmingpool Co, and he was entering into contracts with clients
on behalf of the company. Later it was found out that Martin was giving wrong advice to
clients, and he also did not deposit all the money to the company’s bank account. Thus, the
first key issue raised in this case is whether Swimmingpool Co can be held liable based on
vicarious liability. Since the clients have received wrong advice from Martin, and he has also
taken their money rather than depositing into the bank account of the company, the second
issue raised whether the element of privity of contract applies in this scenario. The job of
Martin was to quote the prices to customers regarding construction of pools and forming
contracts on behalf of the company. He was also authorised to deposit the money into the
bank which is paid by the customers. Therefore, the third issue raised in this case is whether
the conduct of Martin is outside the terms of the employment and whether any actions can
be taken against him by Swimmingpool Co. It was also found out that Martin is planning to
start his new business in order to compete with Swimmingpool Co. Therefore, the fourth
issue raised in this case is whether Swimmingpool Co can impose a restraint of trade on the
new business of Martin.
Rule
The doctrine of vicarious liability provides that a person can be held liable for the torts of
another individual even if such person has not committed the act itself. The principle applies
in the case of employer and employee relationship. It provides that the employer is held
liable in case the employee has failed to ensure care which resulted in causing damages to
third parties. In New South Wales v Lepore (2003) HCA 4 case, the court provided that a
negligent act of the employee which is committed during the ordinary course of
employment will result in holding the employer liable (Giliker, 2013). Moreover, this
doctrine did not exclude the liability of the employee, and the employer can hold him liable
to recover the damages paid as given in Lister v Romford Ice & Cold Storage (1957) AC 555
case (Arizon and Semark, 2014). In common law, the doctrine of privity of contract applies
which provides that rights and obligations of a contract cannot be imposed on a party who is

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not part of the contract. This principle was recognised in Tweddle v Atkinson (1861) 1 B&S
393 case in which the court rejected the claim for recovering of the benefit of the contract
by a third party (Liu, 2015). Another key element is that if the employee acts outside the
terms of employment, then the employer has the right to hold the employee liable for its
actions and demand compensation for violation of any employment terms (Fitzpatrick et al.,
2017). Furthermore, in Smith v Nomad Modular Building Pty Ltd (2007) WASCA 169 case,
the court provided that a post-employment restraint clause can be implemented on an
employee if the legitimate interests of the employer should be violated which include
leaking of trade secrets, losing of customers, staff members and others (Nicholls, 2015).
Application
In the given scenario, Martin was working as a salaried employee for Swimmingpool Co, and
he was forming contracts on behalf of the company. Martin has failed to provide correct
information to the clients due to which they suffered losses as their pools are sinking into
the ground. Martin also took the money paid by customers and did not deposit into the
bank account of the company. Based on these facts, Swimmingpool Co can be held liable for
vicarious liability due to the failure of Martin to maintain a standard of care (New South
Wales v Lepore). The contract was formed by Martin on behalf of the company; therefore,
he is not the part of the contract. Thus, based on the principle of privity of contract, he
cannot be held personally liable by the customers to pay for the damages (Tweedle v
Atkinson). Since Martin violated the terms of his employment agreement by giving false
information and failing to deposit the money in the company’s bank account. Therefore,
Swimmingpool Co has the right to hold Martin liable for violating the terms of the
employment contract since his liabilities are not excluded based on the vicarious liability
(Lister v Romford Ice & Cold Storage). Martin is opening a new business which can adversely
affect the operations of Swimmingpool Co because Martin can take the customers with him
and leak the trade secrets. He also acted on behalf of the company which a mislead
customers to sign a contract with him, thus, Swimmingpool Co can impose restraints of
trade on him to stop him from setting up a rival business (Smith v Nomad Modular Building
Pty Ltd).