In January 2005 we reported on a decision of the Court of Appeal in the case of Commissioners of Customs and Excise v Barclays Bank plc  EWCA Civ 1555 which had important consequences for a bank notified by a third party of a freezing order affecting an account held by the customer with the bank (Bird & Bird intelligence briefing - January 2005). In that case the Court of Appeal decided that a bank with notice of a freezing order owed a duty to the third party to take reasonable care to comply with the terms of the injunction. The decision meant that a bank could potentially be liable for sums transferred from a customer's account in breach of a freezing order. In the Barclays Bank case this potential liability was considerable.
The House of Lords has now unanimously overturned the decision of the Court of Appeal. In a judgment handed down on 21 June 2006 the House of Lords held that a bank with notice of a freezing order does not owe a duty to a third party which obtains the freezing order to take reasonable care to ensure that payments are not made out of its customer's frozen account.
Whilst the judgments of the five member panel emphasise different factors a number of common themes emerge which in their Lordships' views negated the existence of a duty of care, in particular:
- A bank which is not a party to litigation and which is served with a freezing order is not a willing participant in the proceedings. As such the bank does not voluntarily assume responsibility to the party which has obtained the order that it will monitor the account and ensure that funds are not transferred in breach of the order. This was a key consideration as a voluntary assumption of responsibility by one party to another in cases where no contractual relationship exists is a significant factor that courts consider when deciding whether a party should be held liable for purely economic loss.
- The only duty on a bank served with a freezing order is not to undermine the court's purpose in granting the order. That duty is owed to the court and whilst a bank which acts in a way which is designed to frustrate the purpose of the order may be held liable for contempt of court, no separate duty of care arises.
- It makes no difference to the bank's liability whether a transfer of funds from the frozen account takes place before or after it has notified the third party that it will comply with the order. At first instance the judge took the view that this might be a relevant consideration.
- In all the circumstances it was unjust and unreasonable that a bank should, on being notified of an order which it had no opportunity to resist, become exposed to a liability which could be considerable. If a duty of care was imposed on the bank in this situation then it would be imposed on any other person affected by notice of a freezing order. In many cases this would produce unjust and unreasonable results.
Much of the judgment is taken up with an examination of the various legal tests formulated by the courts over the years to determine whether a party should be liable in tort for purely economic loss. The conclusion reached by the House of Lords was that, whilst the various tests were useful pointers to the existence (or otherwise) of a duty of care, there was no single denominator by which liability could be determined and each case had to be decided on its own facts.
The decision will come as a significant relief to banks whose customers become involved in litigation and have their accounts frozen. The decision does not mean that banks can relax their own internal controls and procedures. It will still be incumbent on a bank served with a freezing order to take prompt steps to ensure that the relevant account is frozen as a failure to do so may expose the bank to the risk of contempt proceedings.
The decision also does not mean that a bank can never be liable in negligence to a third party should funds erroneously be paid out of a customer's frozen account. If the bank offered to assume a responsibility to the third party which went beyond what was strictly required under the terms of the order then the possibility of such a claim still exists. Such a scenario is, however, highly unlikely. Nonetheless banks still need to be careful as to the wording of any assurances that they may volunteer to the third party. The sensible practice is to limit the response to acknowledging receipt of the order, confirming that the bank will comply with the terms of the order and dealing with the third party's obligation to reimburse costs.
For further information on this issue please contact Jeremy Sharman or Jonathan Speed on 020 7415 6000 or by email at firstname.lastname@example.org or email@example.com
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