UK: A Freeze on Duties of Care?

The House of Lords this week delivered an important judgment in HM Commissioners of Customs and Excise v Barclays Bank plc (21 June 2006) in which the issue was whether a bank, notified by a third party of a freezing order against one of the bank's customers, owes a duty of care to the third party to comply with the terms of the order.

The Court of Appeal's judgment in 2004 ruled that Barclays Bank plc ("the Bank") was liable to the Commissioners of Customs and Excise ("the Commissioners"), for negligently making payments notwithstanding a freezing order. It was a judgment which left the door open to the possibility of very large claims against any party served with a freezing order. The House of Lords has now overturned that judgment.

The decision is clearly important as it clarifies a bank's duties in relation to freezing orders but, more generally, because of the law lords' discussion of what test to apply in considering whether one party owes a noncontractual duty to another in cases of economic loss.

The Commissioners were owed large sums of unpaid VAT by two companies, both holding accounts with the Bank. In January 2001, the Commissioners were granted freezing orders against each of the companies. In the usual manner, the Commissioners notified the Bank of the orders. Nonetheless, shortly after receiving the notification, the Bank authorised payments totalling just over £2.3 million to be made out of the two accounts. The Commissioners obtained judgment against the two companies but were unable to recover the money which had been paid by the Bank in breach of the orders. For the purposes of this case, it was assumed that the Bank had been negligent in paying out the funds.

The House of Lords unanimously allowed the appeal and held that the Bank owed no duty of care to the Commissioners. Notification of the freezing order imposed a duty on the Bank to respect the order of the Court; however, it did not of itself generate a duty of care to the Commissioners. Each of the law lords came out with slightly different reasoning for their decisions but the key relevant factors for the decision included the following:

• The Bank had no choice but to comply with the freezing orders. It had not, objectively speaking, assumed any voluntary responsibility towards the Commissioners.

• Freezing orders are concerned with duties of compliance owed to the court. If the Bank had intentionally or knowingly failed to comply with the order (which was not alleged), the Bank could have been held in contempt of court. The Commissioners could expect that any responsible bank would respect the order, but it could not rely on the Bank doing so.

• No similar duties have been imposed on parties in previous cases.

• Although some of the law lords appeared to have little sympathy for banks (which are well used to dealing with freezing injunctions), to impose a duty here would potentially open the door for claims to be made against any third party in receipt of a freezing order.

• The Commissioners could not have been said to have relied to their detriment on anything said or done by the Bank; there is nothing more that the Commissioners could have done in any event beyond obtaining a freezing order from the Court.

The decision no doubt comes as some relief for banks and their insurers. Whilst a duty to comply with terms of the freezing order would have imposed a significant liability on the Bank here, a finding against the Bank could very well lead to even larger exposures in cases on similar facts in the future.

Beyond the facts of the case though, the House of Lords' decision has important implications as it discusses at some length the appropriate tests to be used for imposing a duty of care on a third party in cases of economic loss. This is something that, perhaps unsurprisingly, the courts have struggled with historically, most recently wavering between three broad approaches or "tests":

1. Whether a defendant has, objectively speaking, assumed responsibility to the claimant. This test has received some prominence in recent case law, such as the Court of Appeal decision in Riyad Bank & Ors v Ahli United Bank (UK) plc (13 June 2006) and the Court of Appeal judgment in this Barclays case.
2. A "three-fold test" (see Caparo Industries Plc v Dickman (1990)); namely, that the loss suffered by the claimant must have been reasonably foreseeable; the relationship between the parties must be one of sufficient proximity; and it must be fair, just and reasonable to impose a duty of care.
3. Whether the facts of the case in question have any analogies with existing case law (the "incremental test").

So what is now the appropriate test? The law lords were reluctant to opt for one approach above all others. Each, they said, operated at a "high level of abstraction" in any event. They should serve as practical guides but it was not realistic to formulate a definitive test that worked in all situations.

The assumption of responsibility test was useful in that it focussed on duties the defendant has voluntarily accepted. However, in this case the obligation on the Bank was imposed by the court order and the Bank did nothing which could be categorised as voluntary. The incremental test, whilst of little value in itself, was useful as a crosscheck, say, where a particular set of facts was out of kilter with previous case law.

The apparent emphasis in this case, however, was on the three-fold test. That provided the answer here because, taking into account the factors above, it was not "fair, just and reasonable" to impose a duty on the Bank.

Aside from an academic debate, what does all this mean in practical terms?

With freezing orders now a routine and regular feature of banking, banks and their insurers can breathe a sigh of relief. The case appears to have left open the possibility that a bank could assume a duty if it engaged in lengthy correspondence, assuring a third party that it would deal with the freezing order in a particular way. We have no doubt banks will be careful to steer clear of that.

The decision is obviously of less comfort for parties with the benefit of a freezing order. The risk of an error by a bank in complying with the order is one that they will continue to bear. Aside from contempt proceedings, they will have no cause of action directly against a bank.

As to the general test for the duty of care, this is a useful example of the courts narrowing the circumstances in which a duty of care is owed. Recent cases, for example the Riyad Bank case, appeared to have been pulling in the other direction. It is perhaps not surprising that the court has veered away from one determinative test (it has been tried unsuccessfully before) even if that is unhelpful in terms of certainty for future cases. To use the quote that Lord Rodger of Earlsferry in this case took from Anns v Merton London Borough Council (1978): "Seek simplicity, and distrust it."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.