Banks do not owe a duty of care to third parties to comply with freezing orders

The question of whether a bank owes a duty of care to a third party to comply with a freezing order is often misunderstood. With fraud occurring each day in Australia, the risk of freezing orders is likely to increase, meaning that banks are likely to find themselves at risk of potential claims if they inadvertently permit their customers to breach a freezing order.

It has only been in recent years that the legal position in Australia can be said to have been settled by a superior Court.

The position in the UK: Barclays Bank

In Customs and Excise Commissioners v Barclays Bank Plc [2007] 1 AC 181 (Barclays Bank), the Plaintiffs obtained freezing orders in respect of outstanding value added tax against two companies, both of which held accounts with the Defendant, Barclays Bank. The freezing orders prohibited disposal of or dealing with the companies’ assets up to a prescribed maximum amount, including money in bank accounts held with Barclays Bank.

Barclays Bank was served with a copy of the freezing orders. On being notified of the freezing orders, Barclays Bank sent to the Plaintiffs a standard letter confirming that it would abide by the terms of the freezing orders. Several hours after being served with the freezing orders, Barclays Bank authorised payments to be made out of the companies’ accounts.

The Plaintiffs claimed damages in negligence for pure economic loss in the sums paid out in breach of the freezing orders plus interest. The Plaintiffs alleged that Barclays Bank had been negligent in permitting the payments to be made after being notified of the freezing orders. The Plaintiff did not suggest that Barclays Bank intended to deliberately breach the freezing orders.

Barclays Bank did not deny that the transactions had been effected after it received notice of the freezing orders. One of the transactions was permitted because of operator error and the other because the process of effecting transfers by fax was designed to bypass the bank’s control systems. However, Barclays Bank denied that it owed the Plaintiffs any duty of care to prevent the payments, and hence the Plaintiffs could not make out a claim in negligence.

The House of Lords held that a bank, notified by a third party of a freezing order granted to the third party against one of the bank’s customers affecting an account held by the customer with the bank, owes no duty to the third party to take reasonable care to comply with the terms of the freezing order.

Relevantly, the House of Lords said that:

• The letter from Barclays Bank to the Plaintiffs was of no significance since Barclays Bank was bound to comply with the freezing orders irrespective of any confirmation of its part. The purpose of the letter, according to Lord Bingham, was to pave the way to reimbursement of the costs for compliance, incurred by Barclays Bank;
• Barclays Bank did not assume any responsibility towards the Plaintiffs. Nor did the Plaintiffs in fact rely on Barclays Bank in any meaningful sense;
• It was unjust and unreasonable for Barclays Bank to owe a duty of care to the Plaintiffs since:
  • the only duty owed by a notified party of a freezing order is to the court;
  • the characterisation of the relationship between the Plaintiffs and Barclays Bank was one of opposing parties in litigation and no duty is owed by a litigating party to its opponent; and
  • although a duty of care in tort may co-exist with a similar duty in contract or statute, a non-consensual court order alone does not  give rise to a duty of care owed to the party obtaining the order.
• A common law duty of care cannot be derived from a statutory duty. Therefore, by analogy, a common law duty of care cannot be derived from a court order or notification of the court order.

The position in Australia: Fitzsimons

In Fitzsimons v Commonwealth Bank of Australia [2012] NSWSC 660 (Fitzsimons), the Law Society of NSW obtained a freezing order over Mr Fitzsimons’ assets on 21 December 2005. The freezing order restrained Mr Fitzsimons from dealing with, or disposing of, any of his assets within NSW without first obtaining the leave of the Court. Mr Fitzsimons’ assets included a loan with the Commonwealth Bank of Australia (CBA) in the sum of $1,950,000 which was secured by a registered mortgage to CBA over certain properties. Payments in respect of the mortgages were made from a joint account of Mr and Mrs Fitzsimons (CBA Accounts).

After the freezing order was made, the Law Society of NSW wrote a letter to CBA informing it of the freezing order.
Notwithstanding the freezing order and CBA’s knowledge of it:

• Until August 2006, CBA permitted Mr Fitzsimons to operate the CBA Accounts. Periodic debits were made from the CBA Accounts in respect of the mortgages over the properties. There were insufficient funds in the CBA Accounts to meet all the mortgage payments; and
• On 27 February 2006, Mr Fitzsimons opened a trust account with CBA and deposited funds into that account (CBA Trust Account).

Mr and Mrs Fitzsimons argued that between January 2006 and August 2006 CBA acted in breach of the freezing order.

The Court:

• Held that it does not follow from the fact that a bank may be guilty of contempt by allowing a defendant to move money in breach of a freezing order, that the applicant for the freezing order, let alone any other party, thereby gains a cause of action against the bank for any loss that party may suffer as a result of the bank’s conduct¹; and
• Applied the position in Barclays Bank that a bank owes no duty of care to a third party to comply with a freezing order².

Conclusion

While the question of whether a bank owes a duty of care to a third party to comply with a freezing order has not been extensively considered by Australian courts, the decision of the Supreme Court of NSW in Fitzsimons to follow Barclays Bank suggests that the UK position is good law in Australia.

The question of whether a bank can be held guilty of a contempt of Court for inadvertently permitting a customer to breach a freezing order is beyond the scope of this article. The authors will consider this question in a future edition of this publication.

This article was written by Simon Crawford, Partner and Laura Limone, Solicitor.

^1. Fitzsimons v Commonwealth Bank of Australia [2012] NSWSC 660 at [87].
^2. Fitzsimons v Commonwealth Bank of Australia [2012] NSWSC 660 at [88].