In a lawyers' pub quiz, the answers to the above question would probably spring to the minds of most civil practitioners readily enough. One will say, 'assumption of responsibility.' The defendant assumed responsibility to the claimant. Hedley Byrne v Heller [1964] AC 465. Another will recall that since then the House of Lords in Caparo v Dickman laid down the threefold test: (a) was loss foreseeable; (b) was there sufficient proximity between defendant and claimant for a duty to arise? (c) is it fair, just and reasonable to impose a duty? Someone else might add that the approach in Caparo v Dickman [1990] 1 AllER 568 and elsewhere is not doctrinaire, the decision is driven by policy, and that courts will apply the 'incremental' test, so that the law develops by increments when a duty is imposed in a case similar with other cases where a duty has been imposed before. And all these answers are right.

In a recent case which went from Commercial Court (as Commissioners of Customs and Excise v Barclays Bank Plc [2004] EWHC 122 (Comm)), to Court of Appeal (as Commissioners of Customs and Excise v Barclays Bank Plc [2004] EWCA Civ 1555), and very recently to House of Lords (as Her Majesty's Commissioners of Customs and Excise v Barclays Bank Plc [2006] UKHL 28), these three approaches were laid out clearly. All 9 judges listed the tests, applied them, in lucid and uncomplicated judgments. The Court of Appeal unanimously reversed the very experienced Commercial Court judge. The House of Lords unanimously reversed the Court of appeal. So the question is not so simple!

Facts The question arose in this way. The Claimant was the VAT authority. They had a freezing order against two companies in a suit where they claimed unpaid VAT. They served the order on Barclays bank, so that the bank was forbidden from dealing with money in those companies' accounts. Within hours the bank had made errors and paid money out of the accounts. The VAT authority failed to get the money from the defendant companies so claimed it, or compensation for its loss, from the bank. The bank, they said, had negligently failed to implement the freezing order, and should compensate them. The bank said there was no duty of care in this situation. That single point was decided separately.

Outcome Before I come to the way the tests for duty of care worked in practice, it is worth going straight to the results. Colman J at first instance, said the bank owed no duty of care. But, and this is a big 'but,' according to him it could easily have gone the other way with a small change in facts. The bank sent the Claimant VAT authority their standard letter which use whenever they are served with a freezing order. The letter said in effect, 'We will comply with the order.' If that letter had hit the Claimant's desk or fax machine before the mistake was made, and the money paid away, there would have been an assumption of responsibility, and hence a duty of care. The Court of Appeal decided that there was a duty of care in any event, regardless of that letter. The House of Lords said there was no duty of care. They said so unambiguously, and unanimously; and they said that there would still have been no duty of care even after those letters promising to comply with the order had reached the claimant.

In summarising the way these tests for duty of care were used at various levels, I am going to oversimplify by summarising what the Court of Appeal said, and what the House of Lords said. The case is a little unusual because although the various levels of court came to very different conclusions, there is not a great deal to separate the three judgments in the Court of Appeal, beyond a certain difference in the intellectual style of the judges. The panel thought along the same lines as one another. And, very broadly speaking, the same is true of the five judgments in the House of Lords. However, one of the judges in the Lords, Lord Walker, did take a different approach: he said that he would have imposed a duty of care on a bank served with a freezing order if were possible to restrict that duty to banks, rather than extending to other persons, maybe private individuals, who would not have the experience, and certainly not the insurance, to cope with the duty without it seeming draconian and unfair.

The three tests. So there are three tests for the existence of a duty of care. They are the voluntary assumption of responsibility test; the threefold test (foreseeability; proximity; fair, just and reasonable to impose a duty); and the 'incremental' test. A problem arose in this case, because the bank had been served with a freezing order against one of its clients, and it would be stretching language to say that the bank had therefore made a 'voluntary assumption of responsibility.' Therefore, the courts had to ask how these three tests should be combined with one another, and how they interact. The courts also had to ask, just what does a voluntary assumption of responsibility amount to?

Combing the three tests: the method used at first instance. One way of dealing with the fact that high authority has laid down three different tests would be to say that you pick the one that seems to fit the present facts best. This would be too simple. Apart from anything else, there might be a case in which one test would lead to one conclusion and another test would lead to another conclusion. On one view, the present case was such a case. Colman J at first instance made a detailed examination of the authorities in order to decide how the tests relate to one another. What he said was this:

In my judgment, these authorities do not support the proposition that in every case where there has been negligent provision of a service which is said to have caused the claimant pure economic loss there has to be a relationship akin to contract before a duty of care can be imposed. If, objectively analysed, the relationship is too oblique or indirect to bear that analogy there can be an assumption of responsibility only in the artificial sense that a responsibility is imposed as a matter of law. However, when one comes to the void at which Lord Oliver arrived in Caparo at page 637G, the methodology appropriate to a relationship akin to contract has to be replaced and in those circumstances it is the threefold test which provides a broad analytical guideline towards the existence of a duty of care. However, there may be novel factual situations where it is appropriate to supplement application of the threefold test by reference to other comparable situations in which the courts have imposed or, as the case may be, declined to impose a duty of care. This supplementation has been explained by Phillips LJ. in Reeman v. Department of Transport [1993] PNLR 618 at page 625:
"When confronted with a novel situation the court does not … consider these matters [foreseeability, proximity and fairness] in isolation. It does so by comparison with established categories of negligence to see whether the facts amount to no more than a small extension of a situation already covered by authority, or whether a finding of the existence of a duty of care would effect a significant extension to the law of negligence. Only in exceptional cases will the court accept that the interests of justice justify such an extension."

In other words, first look for an analogy with a contract situation. If there is none, use the threefold test. Sometimes you may need to supplement the threefold test with the 'incremental' test. 'Voluntary assumption of responsibility' in some cases is almost a legal fiction, in the sense that where liability is imposed, 'voluntary assumption of responsibility' is deemed to have been undertaken, even it was not really.

The complicating factor at first instance. This looks simple enough But in Colman J's analysis there is was another layer of complexity in the present case. Apply the threefold test. Foreseeability of loss was not disputed: if the bank failed to comply with the freezing order, loss was foreseeable. Was there enough proximity? Possibly. But there was a massive roadblock which was relevant either to the proximity stage of the test, or the fair, just and reasonable stage. Under the order the bank should be in no worse position than the defendants themselves. Authority says that opposing parties' lawyers in litigation owe the adversary no duty of care by virtue of their involvement in the same case, unless on some specific point someone has assumed responsibility to an opposing party. If the defendants owed the claimants no duty of care, a fortiori neither did their bank. Unless their bank had assumed responsibility. Which it had not until its letter agreeing to comply with the order reached the claimant. Since the bank, with respect to the two freezing orders in this case, made its mistakes before their letters agreeing to comply with the orders reached the VAT authority, they escaped liability. After that letter (or two letters, one with respect to each of the two orders) arrived, a duty of care came into existence.

Neither the Court of Appeal nor the Lords made anything of this roadblock. The Court of Appeal noted that the bank can recover the costs of complying, and said there no useful comparison between the bank and an adverse party in litigation. Lord Hoffmann said that the fact the bank recovers costs is also irrelevant. The House of Lords agreed that this 'roadblock' is a red herring. So in the Court of Appeal and the House of Lords the interaction of the three tests is simpler to follow than in the first instance decision.

The answer in the Court of Appeal. So how did the Court of Appeal combine the three tests? Longmore LJ said the following:

In the light of these authorities this court has held that an appropriate course for ascertaining whether there is a duty of care at least in an economic loss case is to look at any new set of facts by using each of the three approaches in turn viz. the threefold test, the voluntary assumption of responsibility test and the incremental test
"If the facts are properly analysed and the policy considerations are correctly evaluated the several approaches will yield the same result"
see Bank of Credit and Commerce International (Overseas) Ltd v Price Waterhouse (No 2) [1998] BCC 617, 634 per Sir Brian Neill.

Court of Appeal applied the threefold test to the situation and it passed (in other words in this situation the bank does owe a duty of care). I will not rehearse the details. The Court of Appeal applied the 'incremental' test, and the situation passed that too. The Court of Appeal then applied the 'assumption of responsibility test.' Here it proved difficult to reconcile the cases. In some cases assumption of responsibility gave rise to a duty of care. In other cases, it was a label – the courts had decided in certain cases that there should be a duty of care, and said quite frankly that finding an 'assumption of responsibility' is merely a label, another way of saying there is a duty of care. The Court of Appeal got out of this problem by saying that assumption of responsibility in any real sense (albeit objectively measured – it has nothing to do with state of mind) is sufficient but not necessary. In some cases voluntary assumption of responsibility genuinely gives rise to a duty of care. In others, you can have a duty of care with respect to pure economic loss without any real assumption of responsibility (though you might or might not attach the 'assumption of responsibility' label). The Court of Appeal held that this was one such case: there was a duty of care without assumption of responsibility (and by the way, the letters agreeing to comply with the order would not amount to assumption of responsibility).

How did the House of Lords resolve this? I do not go into great detail. This case really is one to read. Although there are five judgments, the case in the House of Lords is neither dense nor complicated. A thumbnail summary: cases in which a duty of care arises to prevent economic loss are decided on the basis of policy questions. When faced with a novel situation it is a mistake to look for a 'compact underlying rule' to resolve it. The three tests are all useful pointers to draw attention to relevant policy considerations. In some cases 'assumption of responsibility,' and the 'proximity' test, are tools for limiting a potentially limitless number of claimants. That floodgates argument does not arise in the case of freezing orders where there is only a small class of persons to whom one could find oneself liable. Freezing injunctions work because the parties on whom they are served owe a duty to the court which the court can enforce. To dump that liability on a third party who has possibly done nothing to knowingly expose himself to the risks of contempt proceedings and other consequences is fairly onerous. To dump in addition a liability to pay damages on an 'unsuspecting' third party would be unfair, not in accord with the purpose of a freezing injunction of ensuring that court orders are complied with, and would be contrary to good policy. Some innocent third party, having made the kind of administrative slip which Barclays made in the present case, could be exposed to ruinous liability, without having done anything to put himself in the path of that kind, or that amount, of risk. In this sense, the question of whether the bank has made a 'voluntary assumption of responsibility' is indeed a useful signpost in the analysis of what is good policy. The bank (or possibly the private individual) on whom a freezing order is served has in the typical case done nothing to put himself in the way of a massive liability, it can come on him out of the blue, the risk of contempt proceedings, with a criminal standard of proof, but strict liability, is sufficient to ensure compliance. To add to that risk a civil liability to the successful applicant for the freezing order cannot be justified.

Dr John Birchall - Professional English, Legal English, and Common Law Training