Fast freeze

Freezing orders are a well-known and increasingly well-used tool for commercial litigators. A claimant, if it's in time, can stop assets being paid away where otherwise it might have been left chasing shadows. The claimant with a freezing order needs, of course, to serve it on any third parties that may be holding a defendant's assets. Ordinarily, that is all relatively straightforward and accounts and so on are frozen, but what if something goes wrong and assets are paid away in error?

The House of Lords, on 21 June 2006, ruled on this point in HM Commissioners of Customs and Excise v Barclays Bank plc [2006] UKHL 28. The issue was whether a bank, here Barclays, notified by the Commissioners of Customs & Excise of a freezing order against two of its customers, owed a direct duty of care to the Commissioners to act in accordance with the terms of the freezing order.

In 2005, the Court of Appeal had said that the bank did owe a duty. It had assumed a responsibility and so was liable to the Commissioners for the amounts they would have recovered in litigation had the payments never been made. The House of Lords has now unanimously overturned that judgment, ruling that a bank does not owe a duty of care to a third party to comply with a freezing order.

The decision is an important one. It clarifies duties not only owed by banks but by any entity notified of a freezing order. More generally, however, it has wider implications because of the Law Lords' discussion of what test to apply in considering whether one party owes a non-contractual duty to another in cases of economic loss.

Freezing orders breached

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 to a total value of over £5.7m to prevent the companies from removing their assets from the jurisdiction. In the usual manner, the Commissioners notified the bank of the orders. Nonetheless, shortly after receiving the notifications, the bank, in error, authorised payments totalling just over £2.3m to be made out of the two accounts.

The Commissioners obtained judgment against the two companies, but were unable to recover the sums paid out of the accounts 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 Commissioners were seeking to recover those payments from the bank.

No duty of care

The House of Lords decided 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.

The decision was a unanimous one, but, as seems now to be increasingly common, each of the Law Lords came out with slightly different reasoning. The prevailing theme, however, was ultimately a policy one: that it was not fair, just and reasonable to impose a duty in this scenario. Key relevant factors in that judgment included the following:

• The bank had no choice but to comply with the freezing orders as it was bound by law to do so. It had not, objectively speaking, assumed any voluntary responsibility towards the Commissioners. The bank had to act, but, as Lord Bingham put it, 'merely because the court compels it to do so '“ on pain of punishment. It gets its reasonable costs, but makes no profit out of performing its duty'.
• Freezing orders are concerned with duties of compliance owed to the court and are enforceable only by the courts. The purpose of a freezing order is not to give a potential claimant a form of security for a claim. 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.
• The Law Lords accepted that a duty of care in tort could in theory co-exist with a duty owed to the court to comply with a freezing order; however, there have been no comparable situations where a similar duty has been imposed. There was no analogy with this case and previous decisions.
• Some of the Law Lords (Lords Bingham, Rodger and Mance) referred to a parallel with the general rule that opposing parties in litigation do not owe each other a duty of care. The bank's customers who were the subject of the orders did not owe a duty of care to the Commissioners, as they were adversaries in litigation. If that was right, it made little sense for the bank to owe a duty where its customers did not. It would be, Lord Bingham said, 'a strange and anomalous outcome if an action in negligence lay against a notified party who allowed the horse to escape from the stable but not against the owner who rode it out'.
• Although some of the Law Lords appeared to have little sympathy for banks (which are well used to dealing with freezing orders), 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. This could lead to unfair, unjust and unreasonable results.
• 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 is a welcome one for banks and other parties in receipt of freezing orders. A finding against the bank could very well have led to even larger exposures in similar cases in the future. Beyond the facts of the case though, the Lords' decision has important ramifications, as it discusses at some length the appropriate tests to be used for imposing a duty of care 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 recent Court of Appeal decision in Riyad Bank v Ahli United Bank (UK) plc [2006] EWCA Civ 780 (13 June 2006) (a case about a tortious duty owed even though contractual arrangements had been structured so as to avoid a direct link between claimant and defendant) and the Barclays Court of Appeal judgment.

2. A 'three-fold test' (see Caparo Industries Plc v Dickman [1990] 2 AC 605); 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, in all the circumstances, it must be fair, just and reasonable to impose a duty of care (a consideration of public policy).

3. Whether the facts of the case in question have any analogies with existing case law. That is, whether the recognition of a duty of care would be 'incremental' upon any existing duty or previous legal developments (the 'incremental test').

Implications

So what is now the appropriate test? The Law Lords were reluctant to opt for one approach above all others. There was no single common denominator by which liability could be determined. 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 focused on duties that the defendant has voluntarily accepted. In this case, the obligation on the bank was imposed by the court order and the bank did nothing that could be categorised as voluntary. The incremental test, while of little value in itself, was useful as a cross-check on any other approach, say, where a particular set of facts was out of kilter with previous case law. The apparent emphasis in this decision, 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.

In practice

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 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 '“ some arguments along those lines were run here, but no doubt parties receiving freezing orders will be careful to steer well clear of that.

The decision is obviously of less comfort for claimants 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. Claimants will only be able to rely on the courts to ensure that the terms of a freezing order are complied with. Aside from contempt proceedings, where the breach of the order has to be shown to be intentional, they will have no cause of action directly against a bank.

As to the general test for the duty of care, this is an example of the courts narrowing the circumstances in which a duty is owed. Recent cases, for example, Riyad Bank, appeared to have been pulling in the other direction. The Barclays Court of Appeal judgment had suggested that the 'assumption of responsibility' test was sufficient in itself to establish a duty. The House of Lords now seems to have moved away from that.

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 the practical sense of certainty for future cases. To use the quote that Lord Rodger in this case took from Anns v Merton London Borough Council [1978] AC 728, the courts' approach seems to be: 'Seek simplicity, and distrust it.'