Duty of care - freezing injunctions


Commissioners of Customs and Excise v Barclays Bank Plc [2004] EWCA (Civ) 1555



The issue for the Court of Appeal in this case was whether a bank, which had been served with notice of a freezing injunction, owed a duty of care to a claimant not to allow sums to be paid out of accounts subject to the injunction.



The point in issue was a novel one on which there had been no previous authority. The Commissioners of Customs and Excise failed to establish a duty of care on a preliminary issue on assumed facts before Mr Justice Colman and appealed to the Court of Appeal.



The assumed facts of the conjoined appeals may be briefly stated. In the first case, a freezing injunction up to a value of £1.8 million was obtained on 26 January 2001 against company A. The injunction extended to assets in an account held by Barclays Bank. At 12.33pm on 29 January, the claimants served a copy of the order on the bank. At about 2.30pm on the same day the bank permitted three payments to be made out of company A's account in the total sum of £1,240,570.



On discovering that the payments were made, the bank wrote to the claimants by letter dated 31 January. The letter explained that the payments had been made as a consequence of operator error. The claimants obtained judgment in default against company A for more than £2.2 million. The claimants were unable to recover the full amount of their judgment debt and issued proceedings claiming damages in negligence against the bank for the sums paid out of the account.



In the second case, a freezing injunction to a maximum amount of £3,928,130 was obtained on 30 January 2001 against company B. The injunction prohibited disposal of funds held in the company's account with the bank. Notice of the injunction was faxed to the bank at 11.38am on 30 January 2001. At about 2pm the bank allowed payments out of the account in the total sum of £1,064,289.



The bank wrote to the claimants on 31 January explaining the circumstances behind the payments out of the account after receipt of the notice of injunction. Company B had a facility whereby it could make direct transfers without reference to its branch. Steps were taken to prevent it using that facility, but before those instructions were completed, company B had effected the payments out of the account.



The claimants obtained judgment in default against company B but were unable to recover the full amount of their judgment debt and issued proceedings claiming damages in negligence against the bank for the sums paid out of the account.



Recent authorities on the law of negligence have set out three different approaches to be used when establishing whether, on any given set of facts, a duty of care is said to arise. The three approaches are the three-fold test (foreseeability, proximity and fairness), the incremental approach and the assumption of responsibility approach.



In this case, the Court of Appeal, following BCCI v Price Waterhouse (No 2) [1998] BCC 617, 634, determined that an appropriate course for ascertaining whether a duty of care existed is to look at any new set of facts by applying each of the three approaches in turn. In so doing, the Court of Appeal held that a duty of care ought to be imposed on a bank, towards claimants who had obtained a freezing order, to take care that funds of a person whose account has been frozen should not be dissipated in breach of that order.



At first instance, a duty of care was found not to exist 'because an adverse party in litigation, or his legal representatives, owes no duty of care to the opposite party unless he actually assumes responsibility 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 customers did not owe'.



The Court of Appeal rejected this reasoning, arguing that a bank served with notice of a freezing order is not in the same position as its customer who is an adverse party in hostile litigation. Indeed, the position of an adverse party in litigation makes it generally inappropriate for the law to recognise a duty of care by one litigant to another.



In addition, there was no requirement that an actual assumption of responsibility was a necessary ingredient of the three-fold test. Thereafter, the court had little difficulty in finding that on each of the three approaches a duty of care existed. In so doing, the Court of Appeal emphasised that for the assumption of responsibility test to be satisfied, the relevant question 'was not whether the defendant has actually assumed responsibility... but whether the defendant is to be taken to have assumed responsibility to the claimant to guard against the loss for which damages are claimed'.



From the perspective of the law of negligence, this case reaffirms the position that it is inappropriate to adopt one or other of the approaches used to determine whether a duty of care exists. The appropriate approach is to use all three tests. Furthermore, each of the tests is to be regarded as a check on the conclusion provisionally reached on the application of the other two. Only when the tests reach the same conclusion can they safely be regarded as reliable.



This case is also significant from a banking perspective. Although the imposition of a duty of care may have been thought likely following Z Ltd v A-Z and AA-LL [1982] QB 558, the decision in this case cements the existence of a duty to exercise reasonable care to help preserve money in a defendant's account at the time notice of a freezing injunction is served.



Therefore, banks ought to ensure that reasonable systems are in place to ensure that any potential liability for negligence in these circumstances is minimised. No doubt future litigation will help to determine and refine what reasonable steps are likely to be required to avoid liability.



By Simon Sugar, barrister, 36 Bedford Row, London