Customs & Excise v Barclays Bank Plc [2004] EWHC 122 (Comm) (03 February 2004)

Customs & Excise obtained freezing injunctions against two companies with accounts at Barclays Bank. After the bank was notified of the orders, it negligently permitted substantial fund transfers from both accounts. The court held that the bank owed no duty of care to the claimants merely by receiving notice of the freezing injunctions, as proximity required an assumption of responsibility which had not occurred before the transfers.

Facts

The Commissioners of Customs & Excise obtained freezing injunctions against Brightstar Systems Ltd and Doveblue Ltd in respect of outstanding VAT debts. Both companies held current accounts with Barclays Bank which were in credit. The orders specifically prohibited disposal of funds in the identified accounts.

After the orders were made, the claimants’ solicitors served notice of them on the bank by fax. In the case of Brightstar, the order was served at 12:33 on 29 January 2001, and in the case of Doveblue, at approximately 11:38 on 30 January 2001.

Approximately two hours after service of each order, the bank permitted substantial transfers out of the accounts. For Brightstar, payments totalling £1,240,570 were released due to admitted operator error. For Doveblue, payments totalling £1,064,289 were made through the bank’s Faxpay system before amendments could be implemented to prevent such transfers.

The claimants subsequently obtained judgment in default against both companies and garnishee orders against the bank for the remaining funds in the accounts. The shortfall from each judgment debt far exceeded the amounts that had been transferred out.

Issues

Primary Issue

Whether the bank owed a duty of care to the claimants to prevent payments out of its customers’ accounts after receiving notice of freezing injunctions.

Secondary Issues

What test should be applied to determine the existence of such a duty of care in cases of pure economic loss, and whether receipt of notice of a freezing injunction alone, or the bank’s subsequent acknowledgement letters, could give rise to such a duty.

Judgment

Mr Justice Colman held that the bank was under no relevant duty of care to the Commissioners on the facts pleaded.

The Applicable Methodology

The court conducted an extensive analysis of the appropriate methodology for determining duty of care in pure economic loss cases. The judge concluded that where the relationship between claimant and defendant is too oblique or indirect to bear analogy with contract, the threefold test of foreseeability, proximity, and fairness, justice and reasonableness provides the appropriate analytical guideline, supplemented where appropriate by reference to comparable situations in decided cases.

The Relationship Between Bank and Claimant

The court found that the relationship between the Commissioners and the bank was materially different from cases involving negligent misstatements or negligent provision of services. The Commissioners had not acted to their detriment in reliance on any information or services provided by the bank. Rather, they had sustained economic loss through being deprived of the ability to enforce their judgments.

Effect of Court Orders and Litigation Context

Drawing on authorities including Business Computers International Ltd v Registrar of Companies and Connolly-Martin v Davis, the court held that adverse parties to litigation do not owe a duty of care to each other in relation to the conduct of the litigation absent an assumption of responsibility. Since a defendant given notice of a freezing order owes no duty of care to the claimant merely by virtue of that notice, it would be inconsistent to conclude that a bank holding the defendant’s assets would owe such a duty upon receiving notice of the same order.

Assumption of Responsibility

The court held that unless the bank had by its conduct objectively assumed responsibility to the Commissioners before releasing the funds, it could be under no liability in negligence. Such assumption must cross the line between the parties at a point before the conduct causing loss.

Regarding the bank’s acknowledgement letters, the court found that if received before the funds were released, they would have constituted an assumption of responsibility capable of giving rise to a duty of care. However, on the facts pleaded, the Brightstar letter bore a mail opened stamp dated 31 January 2001 (after the funds were released on 29 January), and the Doveblue letter was dated 31 January 2001, after the transfers on 30 January.

Implications

This case established important principles regarding the relationship between banks and parties who obtain freezing injunctions:

• Receipt of notice of a freezing injunction does not of itself create a duty of care between the notified party and the party who obtained the injunction
• The contempt jurisdiction remains punitive in nature and may not provide effective compensation for those who suffer loss from breach of freezing orders
• Banks may assume a duty of care through their subsequent conduct, particularly by sending letters confirming compliance with court orders, but only if such communications reach the claimant before any breach occurs
• The case represents a significant gap in the protection available to parties who obtain freezing injunctions against negligent third-party facilitation of breach

Verdict: The bank owed no relevant duty of care to the Commissioners on the facts pleaded. The bank’s acknowledgement letters, which if received before release of funds would have constituted an assumption of responsibility giving rise to a duty of care, were not delivered until after the funds had been released. The bank did assume a duty of care only in respect of funds remaining in the accounts after the transfers.

Source: Customs & Excise v Barclays Bank Plc [2004] EWHC 122 (Comm) (03 February 2004)