Paying away frozen funds: a bank’s liability - update

10 January 2005

Jeremy Sharman

In April 2004 we reported on an important decision of the High Court in London in which the court considered, for the first time, whether a bank served with a court order freezing a customer’s account, owed a duty of care to a claimant to take reasonable steps to ensure that the funds were preserved in the account pending the outcome of the litigation (Commissioners of Customs & Excise v Barclays Bank plc [2004] EWHC 122 (Comm)) (Bird & Bird intelligence briefing - 30 April 2004).

In that case, Colman J came to the surprising conclusion that, notwithstanding that the bank had notice of the freezing order and notwithstanding that the monies appeared to have been paid out of the account in error, the bank could not be held liable in negligence to the claimant. The judge concluded that a bank could only be liable if it had assumed a responsibility to the claimant, for example, by informing the claimant that it would comply with the court order. On the facts of the case, although the bank had given the claimant such an assurance, it was not given until after the money had been paid out of the account and therefore no duty of care arose.

The Commissioners appealed to the Court of Appeal and that appeal has now been allowed (Commissioners of Customs & Excise v Barclays Bank [2004] EWCA (Civ) 1555). The Court of Appeal’s judgment will have important ramifications for all banks who receive court orders freezing customer accounts. In summary, the Court of Appeal decided:

  • A bank served with a court order freezing a customer’s account is not in a position similar to the parties involved in the litigation (as Colman J had decided). The bank’s interest lies in co-operating with the claimant and in ensuring that it does not knowingly permit the defendant to breach the freezing order.
  • Once a bank has been served with a freezing order its customer’s mandate is revoked with regard to the amount which is frozen in the customer’s account.
  • It is fair and reasonable to impose on a bank, with notice of a freezing order, a duty of care to the claimant to ensure that its customer’s funds are not dissipated in breach of the order. If the bank fails to take reasonable care then it can be held liable in negligence to the claimant. It is not necessary for a duty of care to exist for the bank to have voluntarily assumed a responsibility to the claimant.
  • The fact that a bank may be in contempt of court for paying away money in breach of a freezing order is not a good enough policy reason for preventing the imposition of a duty of care. Not only do contempt proceedings fail to provide an adequate remedy for an aggrieved claimant (their purpose being to punish the party in contempt rather than to compensate the claimant) but banks should not be faced with contempt proceedings save in the plainest of cases. So, for example, contempt proceedings will be inappropriate where the error has occurred through negligence but may be appropriate where there has been wilful default on behalf of the bank.
  • Although the courts recognise that freezing orders do create problems and burdens for banks that it is why banks are entitled to charge claimants a reasonable sum for their co-operation.

In conclusion, if a bank allows money to be paid out of a frozen account in error once it has notice of a freezing order then it can be held liable in negligence to the claimant for the loss suffered as a result. Depending on the size of the claim, and the amount paid out of the frozen account, such losses could be significant. This case highlights the importance of banks having in place adequate systems and procedures to ensure that, as soon as a freezing order is received, the relevant accounts are blocked.

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