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Why Employees' Bad Acts Are (Almost) Always Imputed to Corp.


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2/24/2016
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Although we've written about the concept of an employer being held legally, or vicariously, responsible for the acts (or omissions) of its employees that were committed in the scope of the performance of their job, which is referred to in my circles as "respondeat superior" (see, e.g., "Why A School Was Deemed Responsible For A Science Experiment That Went Awry"), there is a very important exception to this rule in the corporate realm that should be relatively self-evident, and is grounded in notions of fundamental fairness:

The employer, or principal, should not be held liable for wrongful actions (such as fraud) that the employee committed solely for his own benefit, and outside the scope of his employment (or agency). 

In legal speak, this concept is referred to as in pari delicto, or, the "adverse interest" doctrine.

HOWEVERNew York's courts have construed this exception very narrowly. But, in order to appreciate the exception, a brief discussion of the general rule is in order.

The General Rule

As a threshold matter, New York's courts have cited with approval the 

"[F]undamental principle that has informed the law of agency and corporations for centuries; namely, the acts of agents, and the knowledge they acquire while acting within the scope of their authority are presumptively imputed to their principals (see Henry v Allen, 151 NY 1, 9 [1896] [imputation is "general rule"]."

Applying this rule to corporations, New York's courts have stated that 

"Corporations are not natural persons. "[O]f necessity, [they] must act solely through the instrumentality of their officers or other duly authorized agents" (Lee v Pittsburgh Coal & Min. Co., 56 How Prac 373 [Super Ct 1877], affd 75 NY 601 [1878]). A corporation must, therefore, be responsible for the acts of its authorized agents even if particular acts were unauthorized (see Ruggles v American Cent. Ins. Co. of St. Louis, 114 NY 415, 421 [1889])."

And, there is a very strong public policy reason underlying this rule, namely:

"[I]mputation fosters an incentive for a principal to select honest agents and delegate duties with care."

The Narrow Instance When the Adverse Interest Exception Applies

More specifically, the adverse interest exception only applies when the agent has "totally abandoned" the principal's interests and is acting entirely for his own or another's purposes (see, e.g., Center v Hampton Affiliates, 66 NY2d at 785). 

As the Court of Appeals stated in Center

"To come within the exception, the agent must have totally abandoned his principal's interests and be acting entirely for his own or another's purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal." 

The same court further stated that 

"A fraud that by its nature will benefit the corporation is not "adverse" to the corporation's interests, even if it was actually motivated by the agent's desire for personal gain (Price, 62 NY at 384). Thus, "[s]hould the 'agent act both for himself and for the principal,' . . . application of the exception would be precluded."

The Court's Rationale for Limiting the Application of the Adverse Interest Exception

Fortunately, the Court of Appeals has been extremely clear in articulating its reasoning for the tight limits it placed on this doctrine, stating:

"To allow a corporation to avoid the consequences of corporate acts simply because an employee performed them with his personal profit in mind would enable the corporation to disclaim, at its convenience, virtually every act its officers undertake ...

"The crucial distinction is between conduct that defrauds the corporation and conduct that defrauds others for the corporation's benefit. "Fraud on behalf of a corporation is not the same thing as fraud against it"  ... and when insiders defraud third parties for the corporation, the adverse interest exception is not pertinent."

 



Category: Breach of Fiduciary Duty

Jonathan Cooper
Non-Compete, Trade Secret and School Negligence Lawyer

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