House of Lords rules in favour of banks served with injunctions

The House of Lords has today held in HM Commissioners of Customs and Excise v Barclays Bank plc [2006] UKHL 28 that a bank, when served with a freezing injunction affecting an account held by one of the bank's customers, does not owe a duty to the party which obtained the order to take reasonable care to comply with the terms of the injunction. In so doing, the House of Lords overturned the Court of Appeal decision ([2005] 1 WLR 2082) and restored the decision of Colman J at first instance ([2004] 1 WLR 2027).

Accordingly, if in spite of receiving a freezing order a bank inadvertently pays funds out of the frozen accounts, it will not be liable in damages to the party which obtained the order. Their Lordships stressed, however, that the recipient remains liable for contempt of court if it knowingly assists in a breach of a freezing injunction.

Background

In January 2001 the Commissioners obtained freezing injunctions against two companies which were the subject of proceedings commenced by the Commissioners to recover large sums of unpaid VAT. In each case, the bank was served with the freezing order by fax. However, within hours of receiving each order, the bank authorised substantial payments out of the companies' accounts.

In due course the Commissioners were awarded judgment against the companies, but were unable to enforce against them. Accordingly, the Commissioners claimed that the bank had been negligent in permitting the payments to be made and sought damages against it in the amount of the sums paid out in breach of the freezing injunctions, plus interest.

The legal issue to be decided was whether the bank owed the Commissioners a duty of care. There has been a large amount of case law as to the circumstances in which a defendant sued for pure economic loss owes a duty of care to the claimant, and there are various overlapping tests that may be applied. At first instance, Colman J held that there was no duty of care because there had been no "assumption of responsibility" by the bank.

The Court of Appeal decision

The Court of Appeal reversed the decision at first instance. It held that there was a duty of care owed, considering that the relationship was "about as proximate as one could imagine" and the imposition of a duty was "eminently" fair, just and reasonable. The Court of Appeal seems to have been persuaded by two key factors; first, by the purposive argument that the usefulness of a freezing injunction would be reduced in the absence of such a duty and, secondly, that banks are entitled to charge a sum for their co-operation.

The House of Lords decision

The House of Lords was not persuaded by those arguments. It unanimously allowed the bank's appeal and restored the Judge's order. Although the reasoning of each Law Lord differs subtly, it is clear that their Lordships considered that it would not be fair, just and reasonable to impose what they regarded as a novel and potentially very substantial duty of care on third parties who receive notice of freezing orders. Third parties served with freezing injunctions cannot be said to have voluntarily assumed responsibility: they have simply received notice of an order with which they are obliged to comply.

Comment

This is an important decision for banks. When a freezing order is served on a bank it must take action to establish whether the order bites and to put in place procedures to ensure that the order is complied with. The same applies to any other third party served with a freezing order. The decision means that banks and other third parties are not liable in damages to the party which obtained the injunction if there is a failure in their procedures to ensure compliance with the order.

However, they must still take great care to abide by such orders. The bank or other third party remains liable for contempt of court if, with knowledge of a freezing order, it deliberately assists in a breach of the order. Their Lordships noted that the power to punish for contempt in such circumstances is no "mere paper tiger".