Lord Justice Longmore:
- Introduction
In the first edition of his invaluable Practice and Procedure of the Commercial Court (1983), Mr Anthony Colman QC said (page 70) "since 1975 a major part of the work of the Commercial Court has been the hearing of the applications for Mareva injunctions", cf 5th ed page 109. He recorded that there were then about 20 applications per month. It has now fallen to Colman J (as he has become) to decide whether a bank, served with notice of a freezing injunction (as, since the advent of CPR, it is now called), owes any duty of care to a claimant not to allow sums to be paid out of an account which is subject to such injunction. He correctly called it an unexplored and undecided point which "goes to the very heart of the law of negligence".
- The claimant Commissioners of Customs and Excise obtained freezing injunctions in respect of outstanding VAT against two companies both of which held current accounts with the defendant ("the Bank") which were at all material times in credit. The two orders each specifically prohibited disposal of or dealing with the debtor company's assets up to a stated amount including in particular any money in identified accounts at the Bank. After the orders were made, the claimant's solicitors gave notice of them to the Bank, sending a copy of the orders by fax.
- Some two hours later, each of the two debtor companies effected direct transfers of substantial sums from their respective accounts by use of the Bank's so-called Faxpay system by which a customer can send direct payment instructions to the Bank's payment centre as distinct from the customer's branch. The Bank failed to stop these transfers. In the result the amounts remaining in credit in each of the two debtor's accounts were considerably less than the outstanding indebtedness to the claimants. The claimants now claim damages for negligence against the Bank on the basis that they are unable to enforce judgments which they have subsequently obtained against the debtor companies as fully as if there had been no transfers out of their respective accounts at the Bank.
- It appears that the withdrawals may have been permitted, in the case of one debtor company, due to operator error and, in the case of the other company, because the Faxpay system was able to bypass the Bank's control facility. The Bank, however, denies that it owed any duty of care to the claimants to prevent these payments. That issue was ordered to be tried as a preliminary issue on the assumption that the facts alleged in the Particulars of Claim were true.
- The two debtor companies were Brightstar Systems Ltd ("Brightstar") and Doveblue Ltd ("Doveblue") both of which were by the beginning of 2001 heavily indebted to the claimant in respect of VAT. The judge has summarised the essential facts to be assumed so neatly and comprehensively that I can adopt his account of them as my own.
- Assumed facts in relation to Brightstar
On 26th January 2001 Pitchford J. granted a freezing injunction up to a value of £1.8 million. It provided specifically:-
"1. The Defendant must not remove from England and Wales or in any way dispose of or deal with or diminish the value of any of its assets which are in England and Wales whether in its own name or not and whether solely or jointly owned up to the value of £1,800,000.00.
This prohibition includes the following assets in particular, namely any money in the accounts numbered 01311633 at HSBC Bank, and account number 70845302 at Barclays Bank Plc."
- Under the heading GUIDANCE NOTES there appeared the following:
"1. Effect of this Order:
It is a Contempt of Court for any person notified of this Order knowingly to assist in or permit a breach of this Order. Any person doing so may be sent to prison, fined or have his assets seized.
2. Set off by Banks:
This injunction does not prevent any bank from exercising any right of set off it may have in respect of any facility which it gave to the Defendant before it was notified of this Order.
3. Withdrawals by the Defendant:
No bank need enquire as to the application or proposed application of any money withdrawn by the Defendant if the withdrawal appears to be permitted by this Order."
- This is the standard wording for such freezing injunctions. Having recited that the Judge had accepted the undertaking set out in Schedule B to the Order, the Order included in Schedule B the following undertaking:
"The Claimants will pay the reasonable costs of anyone other than the Defendant which have been incurred as a result of this Order including the costs of ascertaining whether that person holds any of the Defendant's assets and if the Court later finds that this Order has caused such person loss, and decides that such person should be compensated for that loss, the Claimants will comply with any Order the Court may make."
- The claimants served a copy of the Brightstar order on the Bank by fax at 12.33 on 29th January 2001.
- In an apparently standard form letter to the claimants dated 29th January 2001, but bearing a "Letter Opened" stamp dated 31st January 2001, Ms Julie Fisher, Legal Adviser at the Bank, stated:
"We confirm that the Bank will abide by the terms of the order and would be grateful if all future correspondence concerning this matter could be forwarded to this Office quoting our reference shown above.
Substantial costs are incurred in handling Freezing Orders. You will no doubt be aware that we are entitled to reimbursement and would direct your attention to the Practice Direction dated 28th October 1996, made by the Lord Chief Justice with the concurrence of the President of the Family Division.
Please find enclosed a schedule of the work typically involved, for your information. In this case our costs to date amount to £150 and we shall be pleased to receive your early remittance in settlement. Cheques should be made payable to "Barclays Bank Plc".
Where further work is required, for example on an amended Order, we reserve the right to claim reimbursement of any additional costs incurred."
- At about 14.30 on 29th January the Bank permitted three payments out of the Brightstar account and further debited the account with charges relating to two such payments overseas. The total paid out and debited was £1,240,570. When the Bank discovered what had happened, it informed the claimants by letter dated 31st January 2001, which explained these three substantial payments by reference to "operator error".
- On 8th May 2001 the claimants obtained judgment in default against Brightstar for £2,285,788.98. On 30th July 2001 they obtained a garnishee order absolute against the Bank in the sum of £563,124.46. That was all that remained in the Brightstar account. The shortfall on the judgment debt exceeded the sum of £1,240,570, which had been paid out of the account. Brightstar has itself paid nothing. The claimants claim this latter sum plus such interest as would have accrued on that amount between the date when it was erroneously paid out and the date of the garnishee order.
- Assumed facts in relation to Doveblue
On 30th January 2001 Cresswell J. granted to the claimants a freezing injunction to a maximum amount of £3,928,130.00. Like the Brightstar order, this injunction specifically prohibited disposal of funds in the Doveblue account with the Bank. It also included similar provisions and undertakings to those set out at paragraphs 6-10 above. It was served on the bank by fax at about 11.38 on 30th January 2001.
- At about 1400 on 30th January 2001 the Bank permitted payments out of the Doveblue account which with charges totalled £1,064,289.
- By letter dated 31st January 2001, the day after the order had been served, Ms Julie Fisher on behalf of the Bank wrote to the claimants acknowledging that the freezing order had been received and confirming that the Bank would abide by the terms of the order. The letter contained identical paragraphs relating to the Bank's handling costs to those in relation to Brightstar and stating similarly that the Bank's costs in the case of Doveblue amounted to £150 and asked for early remittance. However, the letter continued:
"Unfortunately a problem arose, shortly after the service of the Order, which we have been unable to resolve. The Order was served by fax at 11.38 am on 30th January 2001. Doveblue had the use of the Bank's 'Faxpay' system, enabling it to make direct transfers without reference to the branch. Steps were taken to amend the instructions on that system so that Doveblue could no longer make such transfers. However, at approximately, 2.00 pm, before the amendment could be put in place, funds were transferred from Doveblue's account under the 'Faxpay' system.
The Bank took immediate steps to recall the payments. A number of discussions took place with the recipient Banks. Unfortunately, the recipient Banks were unwilling to repay the sums transferred on the grounds that payments were in the ordinary course of their customers' businesses."
- On 23rd February 2001 the claimants obtained judgment in default against Doveblue for £3,944,095.85. Doveblue has failed to pay any of this debt. On 31st May 2001 the claimants obtained a garnishee order absolute against the Bank for £130,630.81, which was all that remained in Doveblue's account after the transfers out on 30th January. The shortfall of that amount from the judgment debt far exceeded £1,064,289 paid out of the account. The claimants claim this latter amount together with interest that would have accrued on it from the date of notice of the injunction to the date of the garnishee order.
- The judgment
The judge approached his conclusion in stages. He first set out the various tests which the courts have used in recent years to determine whether there is a duty of care. These are (1) what is called "the threefold test" of (a) foreseeability, (b) proximity and (c) whether it is fair reasonable and just to impose a duty of care ("fairness"), (2) the "assumption of responsibility" test and (3) the "incremental" test. These tests are often said to merge into each other and, in any event, provide a useful check on each other since each test should provide the same answer.
- The judge then applied the threefold test and concluded (para. 58) that there was "at least a provisional foundation for the proposition that there existed a proximity relationship between the Bank and the Commissioners". He next considered whether the fact that the relationship arose in the course of litigation which provided remedies and sanctions for the loss of the money in the defendants' accounts displaced that provisional foundation; in the course of that consideration he reminded himself (para. 66) that a party or his representatives in litigation could not owe a duty to the opposite party in the litigation unless there was an express or implied assumption of responsibility to that opposite party. This then led him to his first conclusion (para. 73) that a bank holding assets of a defendant could not, by virtue of being served with notice of a freezing order, be under any greater duty than a defendant who was himself subject to such a freezing order.
- The question he had to resolve was, therefore, whether the Bank had assumed such a responsibility and he held (para. 74) that there was no such assumption at the time of the order; the letters written by the Bank could, however, be regarded as such an assumption but, since there was no reliance until receipt of those letters and the payments were made before such receipt, the judge's final conclusion was that the Bank was under no duty at any relevant time (paras. 77-82).
- Submissions
Mr Philip Sales, for the Commissioners, maintained that a duty of care arose on the part of the Bank as soon as it was served with the freezing orders and submitted (inter alia):-
(1) it was plainly a foreseeable result of the Bank's compliance with their customers instructions that there would be breaches of the freezing orders and that the Commissioners (and no one else) would, as a direct result, suffer loss;
(2) once the Bank had been served with the freezing orders, the relationship between the parties was closely proximate. Indeed, the relationship between the parties was akin to a contractual one. The Bank knew, or ought to have known, that the Commissioners were relying directly upon it to protect their interests;
(3) the obligation to comply with the freezing orders was imposed by the court on the Bank for the specific benefit of the Commissioners. A duty of care will arise (provided it is fair, just and reasonable to impose such a duty) in favour of a claimant where a defendant is under an obligation (whether arising under contract, statute, by court order or otherwise) which is, to the defendant's knowledge, wholly or partly for the benefit of the claimant;
(4) in the present case, it was plainly fair, just and reasonable to impose a duty of care on the Bank. It would be a serious injustice to the Commissioners (and would undermine the intended protection for creditors which freezing orders are granted to confer) if they were left without a remedy against the Bank for its negligent release of the funds in the Brightstar and Doveblue accounts;
(5) insofar as a test of "assumption of responsibility" is relevant to determining whether a duty of care should be imposed, that is a purely objective test which reflects the circumstances in which the law deems that responsibility should be held to have been assumed by a defendant to a claimant;
(6) the judge accordingly erred in superimposing the further requirement that, in order for an assumption of responsibility to arise, there must be shown to have been express representations, by word or conduct, which "crossed the line" between the Bank and the Commissioners;
(7) the judge further erred in treating the relationship between the Commissioners and the Bank as indistinguishable to the relationship which exists between adversarial parties to litigation. At the relevant time, the parties were neither in litigation with one another, nor in any adversarial or antagonistic relationship. The Court itself, by the orders it had made, required the Bank to act as guardian of the Commissioners' interest with respect to preservation of the funds in the accounts;
(8) by operating a banking business, the Bank knew (or ought to have known) that it would be relied upon by parties obtaining freezing orders to preserve funds held in its accounts. Against that background, the learned judge ought to have held that the Bank had assumed responsibility towards the Commissioners as soon as it was served with the freezing orders. It is a feature of the operation of the banking systems – and banks must fully appreciate this – that in cases where they are given notice of freezing orders directed against accounts of their customers, they (the banks) are necessarily the only practical safeguard against dissipation of assets in those accounts by unscrupulous defendants, to the detriment of claimants with meritorious claims. Further or alternatively, the Bank should have been taken to have assumed responsibility towards the Commissioners at the latest when it took internal steps (albeit deficient ones) to comply with the freezing orders. Alternatively, in the case of Brightstar, there must have been a relevant assumption of responsibility as soon as the letter of 29th January 2001 was written.
- For the Bank Mr Brindle QC only sought to support the judge's judgment in a qualified way. He agreed with Mr Sales that it was artificial to treat the Bank's letters to the Commissioners as an assumption of responsibility and he sought to present his argument on a broader front. He submitted:-
(1) the threefold test for a duty of care was not satisfied;
(2) even if loss was foreseeable, the relationship between the Bank and the Commissioners was not sufficiently proximate;
(3) even if loss was foreseeable and there was a proximate relationship, it was not fair reasonable or just to impose a duty of care since the law itself gave a sufficient remedy (in the form of contempt proceedings) in the event of a bank paying away money at the request of a defendant subject to a freezing injunction;
(4) since, moreover, the requirement of an assumption of responsibility was a separate requirement that had to be fulfilled before a duty of care could be imposed in a case of economic loss, there could be no duty of care without such an assumption of responsibility;
(5) on no view could it be said that there was any assumption of responsibility by the Bank by virtue of the Bank being served with the freezing order;
(6) nor could it be said that the Bank was assuming any responsibility when it wrote to the Commissioners saying, in effect, no more than that it accepted it was bound by the court order so far as it affected the Bank;
(7) any question of any later reliance on such assumption of responsibility was, therefore, irrelevant;
(8) if, however, it was relevant, it had not occurred; to this extent only the judgment was supported.
- Although the Bank supported the Judge's conclusion (para. 73) that the Bank's position was analogous to that of a party to litigation, it naturally did not support his further conclusion (paras. 78-80) that the letters sent by the Bank on receipt of the court's order were to be considered an assumption of responsibility giving rise to a duty of care. It may therefore be said that neither party defended with any very great enthusiasm the actual reasoning by which the judge arrived at his final conclusion.
- Overview
The modern law of negligence derives primarily from four decisions of the House of Lords: Caparo v Dickman [1990] 2 AC 605, Henderson v Merrett [1995] 2 AC 145, White v Jones [1995] 2 AC 207 and Phelps v Hillingdon London Borough Council [2001] 2 AC 619. Caparo laid down the threefold test of foreseeability, proximity and fairness and emphasised the desirability of incremental development, see in particular Lord Bridge at pages 617-618. Henderson and White both emphasised the concept of assumption of responsibility in cases where the negligent performance of services had caused economic loss. In the light of these authorities this court has held that an appropriate course for ascertaining whether there is a duty of care at least in an economic loss case is to look at any new set of facts by using each of the three approaches in turn viz. the threefold test, the voluntary assumption of responsibility test and the incremental test
"If the facts are properly analysed and the policy considerations are correctly evaluated the several approaches will yield the same result"
see Bank of Credit and Commerce International (Overseas) Ltd v Price Waterhouse (No 2) [1998] BCC 617, 634 per Sir Brian Neill.
- In these circumstances I propose to treat the issues in the following order:-
(1) to examine the correctness of the judge's decision that there could not be proximity in the present case without an express assumption of responsibility, by virtue of the parties' position as quasi-adversarial litigants;
(2) if not, then to treat the matter afresh by applying the three-fold test as the first approach to a duty of care;
(3) secondly to consider the incremental approach;
(4) to consider the impact of the assumption of responsibility approach;
(5) to draw the threads into a conclusion.
- (1) No proximity without assumption of responsibility
Mr Brindle, while purportedly agreeing we should apply each of the three approaches in turn and come to the same result in the end, concentrated on the assumption of responsibility test; he submitted that the Bank never assumed any responsibility to the Commissioners and that, therefore, the threefold test could not be satisfied either. This has the flavour of an argument pulling itself up by its own bootstraps and is not, in my judgment, the correct approach. The danger is that all arguments in this area of the law tend to be somewhat circular since each of the approaches is supposed to lead to the same conclusion and it is difficult, once a particular approach has led to a particular conclusion, to adopt another approach without assuming it will, at any rate probably, lead to the same conclusion. The judge squared this circle by deciding that there was no proximate relationship in law between the Commissioners and the Bank "unless there is super-added to the relationship conduct amounting to an assumption of responsibility by that party" (para. 73), thus imputing the requirement of such an assumption into the definition of proximity. For this purpose he relied on the principle that adverse parties to litigation owe no duty to one another unless there is an assumption of responsibility, as there was, for example, in Al-Kandari v J R Brown & Co [1988] QB 665 where the defendant solicitors had agreed to be the custodian of the passport of their client who was himself a defendant in matrimonial proceedings. The judge then said:-
"It would be completely inconsistent with this analysis to conclude that, although a defendant given notice of a freezing order owed no duty of care to the claimant, by application of the threefold test, a bank holding the defendant's assets, upon being given notice of the same order, by that very notice, did owe a duty of care to the claimant."
- For my part I am, with respect, unable to agree with this passage of the judgment. First, the Bank is not a party to the litigation nor is it in my view in a position which can be described as adverse or quasi-adverse to the Commissioners in the litigation brought against the companies who have failed to pay their VAT. The Bank does not wish to play any part in this litigation; its only interest is in not knowingly permitting the debtor companies to breach the order which the court has made. Its interest is, if anything, more in the nature of a wish to co-operate with the claimants rather than to take any adverse position to them. Of course the debtor companies are defendants in the litigation and are the customers of the Bank but that does not make the Bank an adverse or quasi-adverse party to the Commissioners. Quite the contrary; once a Bank is served with notice of a freezing order the customer's mandate is revoked with regard to the amount which is frozen in the customer's account, see Z Ltd v A-Z and AA-LL [1982] QB 558, 574C per Lord Denning MR and 586D per Kerr LJ.
- Secondly, the main reason why one party to litigation owes no duty to the other is that their relationship, once litigation begins, is governed by the Civil Procedure Rules which provide remedies by way of court orders and various means by which such orders can be enforced. Moreover the main remedy any claimant has against any defendant is to proceed to judgment (as has happened in the present cases). None of these considerations applies to a Bank which is served with notice of a freezing order and wants as little to do with the litigation as possible.
- For these reasons the judge's method of squaring the duty of care circle, despite its undoubted ingenuity, does not seem to me to be right; there is, therefore, no alternative to considering the three approaches afresh.
- (2) The three-fold approach
The Bank accepts that the first element of foreseeability exists. That is plainly correct; if the Bank fails to put in operation any mechanism for preventing the defendants from withdrawing money from their accounts, it is plain that the Commissioners may not be able to collect the whole of the payable VAT.
- As far as proximity is concerned, once one has rejected the analogy of the rule of law that an adverse party in litigation owes no duty of care to the other, the relationship is about as proximate as one can envisage. Notice of the order has been served on the Bank where the defendants have their accounts. The Bank may not be particularly willing to have a relationship to the Commissioners; but once notice of the freezing order has been served, the Bank cannot but be aware that the Commissioners have a very active interest in trying to ensure that monies in the debtor companies' accounts are not transferred outside the jurisdiction. No doubt formal notification of the court's order is necessary for any proximity to arise but once that notification is given the relationship is plainly a proximate one rather than a remote one.
- It is the third requirement of fairness that is more debatable. The courts have recognised that the fairness part of the test is something of a "label" attached by the court if it decides that public policy requires a duty to care to be imposed. I can only say that it seems eminently fair, reasonable and just that the law should require a bank which receives notice of a freezing order to take care not to allow a defendant to flout such an order. The purpose of the order is to preserve a defendant's assets and the purpose of serving the order on the Bank in the present case was to secure its co-operation to that end. The reason why the defendants' accounts were identified by name and number in the freezing orders was to enable the Bank more readily than otherwise to prevent the defendants' assets from being dissipated. The courts recognise that freezing orders do create burdens and problems for banks but that is why banks are entitled to charge claimants a reasonable sum for their co-operation; that charge must partly be a recognition that the Bank should take care that their clients' assets should not be dissipated. The fact, moreover, that the court makes the freezing order in the first place shows that the court's concern is that a defendant's assets should not be dissipated. The court's order is liable to be made futile unless banks do, in fact, take reasonable care to ensure that sums of money in defendants' accounts are preserved until proceedings against them are concluded.
- The problems caused for banks by freezing orders were very fully considered by the Court of Appeal shortly after freezing orders were first introduced (or as Lord Denning MR might have said "rediscovered") in Nippon Yusen Kaisha v Karageorgis [1975] 1 WLR 1093 and Mareva Compania Naviera SA v International Bulkcarriers SA [1975] 2 Lloyds Rep 509. That was in Z Ltd v A-Z and AA-LL [1982] QB 558 already referred to, in which various banks instructed counsel to lay before this court a number of problems to which freezing order applications were giving rise. No doubt the most pressing concern of all was that banks might find themselves in contempt of court if freezing orders were not properly policed and that case did much to allay the bank's fears of contempt proceedings, because it was said that "a third party with notice of the terms of an injunction should only be liable when he knows that what he is doing is a breach of the terms of that injunction" see page 580 per Eveleigh LJ. Nevertheless it was assumed on all sides that a bank, once served with a freezing order, would take such steps as were reasonably open to it to ensure that it was not rendered futile by a defendant's instructions to pay money away from his account. As Lord Denning MR said at page 572G:-
"Even though the order has not then been drawn up - even though it has not then been served on the defendant - it has immediate effect on every asset of the defendant covered by the injunction. Every person who has knowledge of it must do what he reasonably can to preserve the asset."
Moreover, in the context of difficulties in relation to cheque and credit cards, which were held could be met by making clear in the freezing order that it would not preclude the debiting of a defendant's account in respect of transactions effected prior to the date of service of the order on the bank, Kerr LJ said (page 592D):-
"However, once the bank has been served, it will no doubt consider it prudent to take steps to withdraw such facilities from the defendant in so far as it is in its power to do so."
- These citations show that the court, in that case, expected the Bank to do what was reasonable to preserve a defendant's assets and they underline (what one might think is anyway the case) the fact that, in the absence of some powerful policy consideration, it would be fair, just and reasonable for banks to be expected to exercise reasonable care to help to preserve money in a defendant's account at the time notice of a freezing injunction is served.
- Is there then any policy consideration which might militate against the existence of such a duty? I have already said that I do not think that the involvement (such as it is) of a bank in litigation proceeding between parties with an adverse interest as between themselves is such a policy consideration. The only other possible policy consideration is one which I would reject for much the same reasons, namely that the law of contempt provides a remedy for breach of the order and the law should not impose any other (possibly competing) sanction. But there is no reason why the existence of the law of contempt should militate against the imposition of such a duty. The court in Z Ltd v A-Z was at pains to state that contempt proceedings will usually be inappropriate. It is true that immediately after the passage I have cited from Lord Denning MR above he goes on to say:-
"He must not assist in any way in the disposal of [any asset of the defendant]. Otherwise he is guilty of a contempt of court."
But that requires there to be "assistance" and Lord Denning does not suggest that negligence could be a ground for contempt proceedings. Eveleigh LJ was considerably more emphatic. Apart from remarking (583B) that a third party can only be liable for contempt when he knows that what he is doing is a breach of the terms of the injunction he said (page 583D):-
"Carelessness or even recklessness on the part of banks ought not in my opinion to make them liable for contempt unless it can be shown that there was indifference to such a degree that was contumacious . . . it seems to me to be undesirable that those who are not immediate parties should be in danger of being held in contempt of court unless they can be shown to have been contumacious."
Neither Lord Denning nor Kerr LJ expressly associated themselves with these dicta and in the very few cases where proceedings for contempt have been issued against a bank it seems that courts may have utilised a slightly lower standard of liability for contempt, see eg Z Bank v D [1994] 1 Lloyds Rep. 656. But the whole thrust of the judgments in Z Ltd v A-Z is that banks should not be faced with contempt proceedings save in the plainest of cases.
- To my mind this militates in favour of the imposition of a duty of care rather than against it. On no view does any possible liability for contempt cover the same field as the claimed duty of care; neither counsel submitted that it did. But if there is no room for a duty to take reasonable care to preserve the defendant's assets, there might be pressure for the law of contempt to be utilised. Even if that meant that contempt proceedings might be launched only to be defeated after the cost of a court hearing, that would be highly undesirable; any temptation to use the law of contempt speculatively in this area should be firmly discouraged. But that is no reason to place any arbitrary restriction on the application of tortious liability. Quite the opposite.
- (3) The incremental approach
For much the same reasons, the third approach to duty of care, viz. the incremental approach, yields a similar result. It was evidently contemplated in Z Ltd v A-Z that the banks could and would exercise reasonable care to preserve a defendant's assets and not allow them to be dissipated. It is but a short step to hold that they should be liable to a claimant who suffers loss if such reasonable care is not exercised. Moreover the sort of liability envisaged is not so very different from the kind of liabilities to which banks are well accustomed, eg liability to their own customer if money is paid away in error.
- (4) Assumption of responsibility
What then of the second approach, that of "assumption of responsibility", the phrase which derives from the speeches in Hedley Byrne v Heller [1964] AC 465. It was here that Mr Brindle for the Bank took his major stand saying that there was no such assumption of responsibility either when the freezing order was served or when the Bank wrote letters which acknowledged service of the order. In the absence of such assumption of responsibility, he submitted that no duty of care to avoid economic loss could arise.
- I have already observed that Mr Brindle's emphasis on assumption of responsibility has an element of relying on the answer you expect to get at the time of posing the question since it is using the absence of an assumption of responsibility to "trump" the inquiry. Each of the three approaches should lead to the same answer but, if a negative answer to the question whether the Bank assumed responsibility to the Commissioners is to be decisive, one need never rely on the other approaches at all.
- Nevertheless Mr Brindle skilfully analysed the authorities in an attempt to show that, at any rate in case of economic loss, the presence of an assumption of responsibility is a vital requirement before a duty of care can be imposed and that its absence renders otiose any inquiry based on the other approaches.
- There is, however, an initial difficulty quite apart from the fact that each of these approaches should lead to the same conclusion. It is the frank acceptance by the courts that all the approaches utilise what may be called "labels" which are conclusionary rather than steps in the arguments. Thus in the passage from Caparo v Dickman already referred to Lord Bridge said in terms that the concepts of proximity and fairness are not
"susceptible of any such precise definition as would be necessary to give them utility as practical tests, but amount in effect to little more than convenient labels to attach to the features of different specific situations which . . . the law recognises pragmatically as giving rise to a duty of care of a given scope." [1990] 2 AC 605, 618B.
Lord Roskill likewise said at page 628:-
"Phrases such as foreseeability, proximity, neighbourhood, just and reasonable, fairness, voluntary acceptance of risk, or voluntary assumption of responsibility will be found used from time to time in the different cases. But . . . such phrases are not precise definitions. At best they are but labels or phrases descriptive of . . . very different factual situations"
- This "label" aspect is particularly problematic for the phrase "assumption of responsibility" since some authorities have gone out of their way to say that it is a conclusory phrase used to describe the result of the imposition of a duty of care rather than an essential step in the reasoning to be used in progressing the argument on the question of whether a duty of care should arise. This appears most clearly from Smith v Bush [1990] 1 AC 831 in which the House of Lords decided that a surveyor instructed by a building society owed a duty of care to the intending purchaser of a house who might well (and, in fact, did) rely on the report commissioned by the building society. There was a disclaimer of liability which was held to fall foul of the Unfair Contract Terms Act 1977 but it was difficult, in any event, to say that the surveyor assumed a responsibility to the intending purchaser; it was also a case of economic loss; nevertheless the surveyor was held liable. Lord Griffiths said (pages 864-865) that he did not think that voluntary assumption of liability was a helpful or realistic test for liability and observed that, if the accountant in Candler v Crane, Christmas [1951] 2 KB 164 (which had been approved in Hedley Byrne v Heller) had been asked if he was voluntarily assuming responsibility for his advice to the purchaser of the shares, he would have replied that his responsibility was limited to the person who employed him. He added:-
"The phrase "assumption of responsibility" can only have any real meaning if it is understood as referring to the circumstances in which the law will deem the maker of the statement to have assumed responsibility to the person who acts on the advice."
- Mr Brindle was able to show, however, that this rather dismissive attitude to the requirement of assumption of responsibility was not considered decisive in Henderson v Merrett [1995] 2 AC 145 where the House of Lords decided that economic loss to Lloyd's Names, suffered as the result of negligent underwriting on the part of the managing agents of syndicates to which the Names subscribed, was recoverable precisely because the managing agents had in an objective sense assumed responsibility to the Names for taking care in relation to the selection of the risks which had been underwritten. Lord Goff of Chieveley said (pages 180-181) that the criticism of the concept of assumption of responsibility in Smith v Bush was made in a case where the court was concerned to contain the category of persons to whom a duty of care was owed but that in cases where that problem did not arise there was no reason not to have recourse to the concept which had "after all" been adopted by all the speeches in Hedley Byrne. He then said (181C):-
"Furthermore, especially in a context concerned with a liability which may arise under a contract or in a situation "equivalent to contract," it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff . . . . In addition, the concept provides its own explanation why there is no problem in cases of this kind about liability for pure economic loss; for if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages [to] that other in respect of economic loss which flows from the negligent performance of those services. It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further inquiry whether it is "fair just and reasonable" to impose liability for economic loss."
So in a Hedley Byrne type of case of economic loss, "assumption of responsibility" is apparently the only necessary criterion. It is to be objectively assessed and its presence may be conclusive of liability; it does not, in my judgment, necessarily follow that its absence will be conclusive of the absence of a duty of care. The present case, moreover, is only doubtfully a Hedley Byrne type of case viz. one of negligent misstatement or the negligent performance of services. The Commissioners are not relying on any statement by the Bank nor are they saying that the Bank's services to its customer have been negligently performed. They do say that the Bank has a duty to preserve the money in the defendants' accounts but that is not accurately described as a performance of services; it is more a duty to assist in the monitoring of an order of the court.
- White v Jones [1995] 2 AC 207 was another case where the concept of "assumption of responsibility" provided the solution to the problem before the House; that was the case where a solicitor was held liable to an intended beneficiary of a will when the solicitor had negligently failed to carry out his client's instructions before the client died. The solution to the problems posed by the claim which was preferred by Lord Goff was (page 268C):-
"to extend to the intended beneficiary a remedy under the Hedley Byrne principle by holding that the assumption of responsibility by the solicitor towards his client should be held in law to extend to the intended beneficiary who . . . may . . . be deprived of his intended legacy in circumstances in which neither the testator nor his estate will have a remedy against the solicitor."
Once again, the presence of an assumption of responsibility was held to be a helpful and realistic test of liability and, even, the decisive factor. The case is not an authority for the proposition that there can be no duty of care in the absence of such assumption of responsibility. That is not to deny that there will be some categories of case where an assumption of responsibility will be required; Williams v Natural Life Health Foods [1998] 1 WLR 830 where the plaintiff sought to impose liability on a director of a company which had gone into liquidation is a good example. But that is a long way from the present case.
- Lord Goff's approach to assumption of responsibility is mirrored in the last of the four recent House of Lords cases mentioned in paragraph 23 above, Phelps v. Hillingdon London Borough Council [2001] 2 AC 619, in which it was held that local authorities could, in theory, be vicariously liable for failure of their educational psychologists to diagnose or treat dyslexia in children. The four cases before the House were very different from the present case on their facts but Lord Slynn giving a speech, with which the other 6 law lords sitting largely agreed, said this at page 654C:-
". . . where an educational psychologist is specifically called in to advise in relation to the assessment and future provision for a specific child, and it is clear that the parents acting for the child and the teachers will follow that advice, prima facie a duty of care arises. It is sometimes said that there has to be an assumption of responsibility by the person concerned. That phrase can be misleading in that it can suggest that the professional person must knowingly and deliberately accept responsibility. It is, however, clear that the test is an objective one: Henderson v Merrett [1995] 2 AC 145, 181. The phrase means simply that the law recognises that there is a duty of care. It is not so much that responsibility is assumed as that it is recognised or imposed by the law"
Thus while an assumption of responsibility may, on occasion, be sufficient for the imposition of a duty of care, as indicated by Lord Goff in Henderson v Merrett and, occasionally, required as in Williams v Natural Life, it cannot be said that it is always a necessary ingredient; it is rather the case that the law will use the phrase when it decides that there is to be a duty, see Merrett v Babb [2001] QB 1174, 1191 para 37 per May LJ.
- Mr Brindle submitted that Phelps should be distinguished because it was a case of personal injury not a case of economic loss; he submitted further that an assumption of responsibility was indeed necessary for the imposition of a duty of care in many cases of economic loss. It is true that in Phelps the House did decide that a claim for failure to diagnose or treat a congenital defect such as dyslexia could constitute a "claim for personal injuries to a person" for the purposes of the provision in the Supreme Court Act 1981 which enabled a court to order pre-action discovery. But there is no suggestion that this was considered significant in those passages of the speeches which considered whether a duty of care should be imposed. Lord Slynn in particular treated that question in general terms and thought that the concept of assumption of responsibility was useful as a term for the imposition of a duty of care in an appropriate case. In any real sense, moreover, the claims mounted by the children whose dyslexia had not been diagnosed or treated would be mainly for economic rather than for physical damage, the distinction between the two, in a case such as Phelps, not being very easy to discern.
- There will still be a question of the time when the duty of care arises. If one is attached to the idea of assumption of responsibility, one could say that the duty will arise in the present case when the Bank acknowledged service of the order of the court. That would not be right, in my judgment, because all the Bank was doing in these letters was to recognise that they had a duty to comply with the court order by reason of the existence of the order; they were not in any real sense assuming a responsibility apart from the fact that the order had been served upon them. I would prefer to say that the law imposes a duty of care by virtue of the fact that the order had been served upon them rather than by virtue of the Bank having written a letter acknowledging service of the order.
- If, however, it be said that an express or deliberate assumption of responsibility is necessary, I would hold that no such responsibility came into existence on the despatch of the letters, nor indeed when they were received.
- (5) Conclusion
I would, therefore, conclude, applying the three-fold test approach, that a duty ought to be imposed on the Bank, towards claimants who have obtained a freezing order, to take care that funds of a person whose account has been frozen pursuant to that order should not be dissipated in breach of that order. I would not be deterred by the apparent absence of any express or deliberate assumption of responsibility on the part of the Bank since I would hold that the law ought to decide that such responsibility should be imposed and that that, in accordance with Phelps, is sufficient. I do not believe that the absence of an express assumption of responsibility should be fatal to the conclusion reached by relying on the first approach. I further conclude, applying the third (incremental) approach, that the imposition of such a duty of care is not to impose on banks liabilities different in kind from the sort of liabilities to which banks have become used at the hands of their customers and others for many years.
- In these circumstances I would allow this appeal and make a declaration in appropriate terms.
Mr Justice Lindsay:
- I agree and wish to add brief comments on only three subjects.
- Firstly, Longmore LJ has at paragraph 44 above referred to Lord Slynn's speech in Phelps supra at 654c and to paragraph 37 of Merrett –v-Babb supra. Such citations illustrate that the expression "an assumption of responsibility" can be used to describe those circumstances in which the law recognises that a duty of care is present. But to regard the expression as serving no other purpose than providing some such synonym for the existence of a duty of care would be to overlook much of its utility. It is useful as it draws attention to the subjective facts: has the Defendant, in his conduct with the Claimant, done or said anything by which, in effect, he says to the Claimant "I'll see to it". His saying so is neither conclusive or necessary in every case but it is always likely to be relevant. The expression is useful, too, in requiring there to be an examination of the objective situation: there will be collocations of facts which can as fairly require the Defendant to be treated as if he had said "I'll see to it" as he would have been had he said it. Lastly, the expression draws attention to the possibility of a negative: was there a subjective disavowal of any assumption of responsibility? We have not been required to look into how the case would have taken shape had the Bank disavowed liability at the moment it was served with the respective orders. It would, at lowest, be surprising had the Bank then been heard to say "We do not accept that we can be relied upon carefully to honour the Court's order". Whilst conceptually there can, surely, be circumstances where no amount of disavowal would prevent the surrounding circumstances from imposing a duty of care, in so saying I would certainly not wish to be taken to be indicating any view, either way, as to what the outcome would have been had there some express disavowal by the Bank in the case before us. But the expression "assumption of responsibility" is a useful reminder that an express or implied disavowal of such an assumption is always likely to be material and could often be conclusive. For these reasons I would not wish "assumption of responsibility" to be merely subsumed within other tests as to a "duty of care" or to be abandoned as a separate head of inquiry.
- Secondly, Longmore LJ refers (paragraph 25) to Mr Brindle's argument that, as all three tests can be expected to arrive at the same result, the fact (as he would have had it) that the assumption of responsibility test was failed necessarily meant that the three-fold test must also have been failed. On the facts of this case, no such shortcut is permissible either to conclude that there was or that there was not a duty of care. In a case such as the one at hand, where the debate concerns an area in which a duty of care has not previously been found, each of the tests is best regarded as a check on the conclusion provisionally reached upon the application of the other two. It is thus only when one test has been verified as correctly conducted by a finding that it leads to the same conclusion as do the others that it can safely be taken to be reliable. Thus even were the assumption of responsibility test to go the Bank's way, which it does not, it would, even so, be impossible to assert, merely on that account, that so also, without needing to apply it, should the three-fold test or the incremental test. The case would, even then, have been that the incremental approach and the three-fold test, had they been applied, could have shown that the provisional result of the assumption of responsibility test had been a false reading. Thus there is here no such shortcut as the Bank's argument suggested.
- Thirdly, Longmore LJ has referred in paragraph 30 above to "proximity" as part of the three-fold test. Proximity, in this context, requires a regard to be had to all surrounding circumstances and amongst those relevant (as is mentioned in paragraphs 10 and 15 of Longmore LJ's judgment above) are the facts that the Bank knew of, drew the Appellants' attention to and plainly intended, if necessary, to rely upon the Practice Direction of the 28th October 1996 as to recovery of its handling costs from those who had obtained the Freezing Order. It did so, moreover, not in language that reflected the comparative extra "distance" between parties that would obtain upon regard being paid to the fact that recovery of such costs, if not consensually provided for, could only be by way of the Court's intervention at the prompting of the Bank. Rather it did so in the peremptory way one might expect had the Bank enjoyed a direct route to recovery equivalent or akin to that between parties to a contract. If I may speak of "distance" as the opposite of "proximity" then I see the facts that the Bank had apparently standard form paragraphs or letters to be sent to those who obtained Freezing Orders and which they sent to the Appellant in both the Brightstar and the Doveblue cases as diminishing the "distance" between the parties.
Lord Justice Peter Gibson:
- I also agree that this appeal should be allowed. I add a judgment of my own in deference to the careful and lucid judgment of the judge and to the admirable arguments of Mr. Sales for the Commissioners and Mr. Brindle QC for the Bank.
- Nearly 30 years have elapsed since the Mareva injunction was first recognised as an available and useful remedy for claimants fearful that they would be robbed of the fruits of success in litigation by the dissipation by defendants of their assets. That remedy has been developed by the courts and its use extended from the Commercial Court to all the Divisions of the High Court as well as to the courts of other common law countries. The practice of identifying in the freezing order bank accounts holding monies of the defendants and notifying the banks concerned in accordance with the detailed guidance given by this court in Z Ltd. v A-Z and AA-LL [1982] QB 558 has become standard. Such is the prevalence of the remedy that it would be astonishing if errors had not been made by banks after notification of the freezing order, yet the industry of counsel has not produced any case in which a court has previously considered whether a duty of care is owed to the claimant by the bank so notified of the order. That cannot be explained on the basis that the contempt jurisdiction provides an adequate remedy to the claimant: plainly it does not. If and insofar as contumaciousness is required, as Eveleigh L.J. thought in Z Ltd., for a bank to be found to be in contempt of an order notified to it, that may well be impossible to establish against the bank, and in any event the purpose of the contempt jurisdiction is not to compensate the claimant but to procure obedience to court orders by appropriate sanctions. The absence of any reported case may be an indication of the perceived difficulties in the path of claimants like the Commissioners suing in negligence, or it may reflect the readiness hitherto of banks, whose error has allowed moneys to be transferred out of accounts the subject of a freezing order, to accept responsibility for the error.
- In the present case, the judge was deciding a preliminary issue and the facts are only assumed. But it is clear from the Bank's letter dated 31 January 2001 in the Brightstar case that its error, after it was served with the freezing order, resulted in the three payments out of the account which had been specified in the order:
"At approximately 2.30 pm on 29th January 2001 the relationship manager was informed that a "Faxpay" request for the authorisation of three payments had been made. Although he confirmed that these payments could not be made, as a result of operator error at the bank's "Faxpay" centre, the funds were unfortunately transferred."
In the Doveblue case, there was no acknowledgement by the Bank of error, but one notes that more than two hours had elapsed between the notification of the freezing order and the payments out of the account specified in the order. It is not suggested that the Bank was in contempt in either case.
- It is impossible to reconcile all the judicial statements on the correct methodology to be applied to novel situations in which a person is alleged to owe a duty of care to another. It is clear that the courts take a more cautious approach to imposing that duty where economic loss is claimed than in relation to physical damage. Throughout this area considerations of legal policy predominate in the determination of whether the law recognises a duty of care. Whilst eminent judges have from time to time suggested that the adoption of one test precludes the need to apply another test, I respectfully agree with the pragmatic suggestion of the editors of Clerk & Lindsell on Torts, 18th ed. (2000) at para. 7-95, that the most helpful approach is that taken by Sir Brian Neill in BCCI (Overseas) Ltd. v Price Waterhouse (No 2.) [1998] BCC 617 at p.634 to use in turn the threefold test (stated by Lord Griffiths in Smith v Bush [1990] 1 AC 831 at p.862), the assumption of responsibility test (expounded by Lord Goff in Henderson v Merrett Syndicates Ltd. [1995] 2 AC 145) and the incremental approach (explained by Phillips L.J. in Reeman v Department of Transport [1997] PNLR 618 at p.625).
- The threefold test
On the threefold test, foreseeability is rightly conceded. The judge would also have concluded that the test of proximity was satisfied but for the application of what he called the general principle that non-compliance with a court order should be dealt with only within the remedies and sanctions of the rules of procedure and this, he considered, was determinative also of the requirement of fairness, justice and reasonableness. The essence of the judge's reasoning, to be found in paras. 72 and 73 of the judgment, was that because an adverse party in litigation, or his legal representative, owes no duty of care to the opposite party unless he actually assumes responsibility (by words or conduct which "cross the line"), and because the defendant against whom a freezing order is made does not occupy a relationship of proximity vis-à-vis the claimant, a bank given notice of that order and holding the defendant's assets does not occupy a relationship of proximity vis-à-vis the claimant, and it is not fair, just or reasonable that it should owe a duty of care which its customer did not owe.
- I respectfully disagree with that reasoning. The bank is not in the same position as its customer who is an adverse party in hostile litigation. As Mr. Sales pointed out by reference to Business Computers International Ltd. v Registrar of Companies [1988] Ch 229 at p.239 per Scott J., Al-Kandari v JR Brown and Co. [1988] QB 665 at p.675 per Bingham L.J. and Elguzouli-Daf v Metropolitan Police Commissioner [1995] QB 335 at p.352 per Morritt L.J., there is an inherently antagonistic relationship between adverse litigants which makes it inappropriate for the law to recognise a duty of care by one adverse party, or his legal representative, to another party. The safeguards, as Scott J. said, in such a case must be found in the rules and procedures that govern litigation.
- The Commissioners and the Bank were not parties to litigation at the relevant time. They were not in an antagonistic relationship. The Bank, by being put on notice of the freezing orders, was placed in the position of being required by the court to prevent any transfer of money out of the specified accounts. The plain intention was to safeguard the Commissioners' interests against dissipation by Brightstar and Doveblue of their assets. As the judge rightly said (in para.57), "the Bank knows as soon as it receives notice of a freezing injunction that if it mistakenly releases assets in breach of the order, the party in whose favour the order was made may suffer loss irremediable by operation of the contempt procedure".
- Further, the relationship between the Commissioners and the Bank had some features which approximate to a contractual relationship. The Commissioners and the Bank knew that on the making of the freezing orders the Commissioners would have to reimburse the reasonable costs of the Bank. The standard letter sent out by the Bank on receipt of the notice of the freezing order set out its standard terms of business as the basis on which the Bank had handled and would continue to handle freezing orders.
- I am not persuaded that an actual assumption of responsibility is a necessary ingredient of the threefold test. Insofar as the judge relied on the observations of Lord Steyn in Williams v Natural Life Foods Ltd. [1998] 1WLR 830 at p.835 for the necessity in the present case to find words or conduct which "cross the line", in my judgment he was wrong to do so, as that case was plainly distinguishable. It was a case where the question was whether, in addition to the principal defendant (a company), the director of the company had also assumed a personal responsibility. In those particular circumstances it became necessary to see whether there had been dealings between the director and the claimant such as would give rise to a personal liability (see the analysis of Williams in Merrett v Babb [2001] QB 1174 at para. 45 per May L.J.). Those circumstances are far removed from the present case. No doubt if there are communications which "cross the line", proximity is readily shown, but on the facts of this case for the reasons given the test of proximity is in my judgment established.
- Would it be fair, just and reasonable in the circumstances for there to be a duty of care? In arguing for a negative answer to that question, Mr. Brindle pointed to three factors: the Bank is already subject to the contempt jurisdiction, the Bank has no means of limiting its potential liabilities and the freezing orders set out their effect on persons notified of the orders without mention of any liability in tort. I do not find any of those factors cogent. The contempt jurisdiction does not provide an adequate or any remedy for the Commissioners. The Bank ought to limit its exposure by taking proper steps to ensure compliance with court orders notified to it. The absence from the order of any reference to a potential claim in tort cannot preclude such a claim being brought. The weightiest factor in favour of an affirmative answer to the question is the absence otherwise of an adequate remedy for the Commissioners in respect of loss flowing from the errors of the Bank. I can see no sufficient reason why a bank, which makes a mistake leading to the dissipation by the defendant of its assets which the freezing order was designed to prevent, should not owe a duty of care to the claimant. Practical justice requires the recognition of such a duty.
- Assumption of responsibility
The relevant question is not whether the defendant has actually assumed responsibility but as May L.J. said in Merrett v Babb at para. 41, "whether the defendant is to be taken to have assumed responsibility to the claimant to guard against the loss for which damages are claimed …. The question in each case is whether the law recognises that there is a duty of care." With respect to the judge, to make the answer to that question dependent on the Bank's letter, whereby it confirmed that the Bank would abide by the terms of the freezing order, is unsatisfactory, as Mr. Brindle in effect accepted.
- For the reasons already given in relation to the overlapping threefold test, I would hold that there was such assumption of responsibility when the Bank received notice of the freezing orders. The law should recognise that a duty of care on the Bank arises at that point.
- The incremental approach
If one makes a comparison between the present case and established categories of negligence, the recognition that a person in the position of the Bank owes a duty of care to a claimant obtaining a freezing order does not, in my view, involve any significant extension to the law of negligence, the circumstances of the present case involving no more than a small extension of situations already covered.
- It is sufficient to refer briefly to two cases.
- In the Al-Kandari case solicitors were held liable in negligence to the claimant for having allowed their client, the claimant's husband, to gain possession of his passport which they were holding to the order of the court. They were liable for psychological injury to the claimant which flowed from the husband consequently kidnapping the children of the marriage and removing them from the jurisdiction. This court rejected the argument that the solicitors' duty to hold the passport was owed to the court and not to the claimant, Bingham L.J. saying at p.676, "I have no doubt that in this situation the defendants owed the plaintiff a duty of care, since the purpose of holding the passport at all was to protect her lawful rights."
- In Dean v Allin & Watts [2001] 2 Lloyds Rep 249 solicitors for the borrowers of monies were held by this court to owe a duty of care to the claimant lender, even though there was a conflict of interest between the borrowers and the lender, in respect of the provision of an effective security, the benefit of which, to the solicitors' knowledge, the borrowers wished to confer on the lender.
- The cross-check of looking at other cases on negligence seems to me to allow the recognition of a duty of care in the present case. In each of the two cases, as here, the purpose of the defendant's involvement was known to the defendant and the defendant's conduct defeated that purpose. In each of the two cases, as here, the fact that a duty was owed to another did not prevent a duty of care from arising.
- Conclusion
For these reasons, as well as those given by Longmore L.J., I would allow this appeal, set aside the order of the judge and declare, as requested by the Commissioners, that the Bank owed the Commissioners a duty of care at the time when monies were paid out of the Brightstar and Doveblue accounts in breach of the freezing order.
Order: Appeal allowed; it is declared that the respondent Commissioners owed a duty of care to the appellant at the time of the alleged breaches of duty by the respondent; formal order to be drawn up later, when the court has received submissions in writing from the parties about permission to appeal to the House of Lords.
(Order does not form part of approved judgment)
