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|Judgments - Three Rivers District Council and Others (Original Appellants and Cross-Respondents) v. Governor and Company of The Bank of England (Original Respondents and Cross-Appellants)
HOUSE OF LORDS
Lord Steyn Lord Hope of Craighead Lord Hutton Lord Hobhouse of Woodborough Lord Millett
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
THREE RIVERS DISTRICT COUNCIL AND OTHERS (ORIGINAL APPELLANTS AND CROSS-RESPONDENTS)
GOVERNOR AND COMPANY OF THE BANK OF ENGLAND (ORIGINAL RESPONDENTS AND CROSS-APPELLANTS)
ON 18 MAY 2000LORD STEYN
Before 1979, with limited exceptions, a deposit-taking institution in the United Kingdom required no licence or other authorisation before it commenced business. There was no statutory regulation of its subsequent performance. But the Bank of England operated an informal system of supervision. The Banking Act of 1979, enacted to give effect in domestic law to the First Council Banking Co-ordination Directive of 12 December 1977 (77/780/E.E.C.), introduced a statutorily based licensing system. Subsequently, the Banking Act 1987 replaced that system. For the purposes of the First Council Banking Co-ordination Directive of 12 December 1977 (77/780/E.E.C.), the Banking Act of 1979 and the Banking Act 1987 the Bank of England was the supervisory authority in the United Kingdom. On 1 June 1998, pursuant to the Bank of England Act 1998, the Financial Services Authority assumed the Bank's powers and responsibilities under the Banking Act 1987, for the supervision of deposit-taking institutions.
The Bank of Credit and Commerce International S.A. ("B.C.C.I."), a Luxembourg corporation, had carried on business in the United Kingdom as a deposit taking institution before the Act of 1979 came into force. When the Act of 1979 came into force B.C.C.I. came under the aegis of the new system. In June 1980 the Bank of England granted a licence to carry on business as a deposit-taking institution to B.C.C.I. Until 5 July 1991 B.C.C.I. carried on business at its principal place of business in the City of London, and at many branches elsewhere in the United Kingdom. On this date, the Bank petitioned the High Court to appoint joint provisional liquidators to B.C.C.I. The order was duly made. This resulted in the closure of B.C.C.I. in the United Kingdom, and led to the collapse of associated companies of B.C.C.I. in many jurisdictions. Thousands of depositors in the United Kingdom and elsewhere suffered substantial losses. The principal cause of the collapse of B.C.C.I. was fraud on a vast scale perpetrated at a senior level in B.C.C.I.
The plaintiffs are more than 6,000 persons who claim to have been depositors with United Kingdom branches of B.C.C.I. The action was started in May 1993. It is unnecessary to trace the earlier procedural history of this litigation. By August 1995 the claim was formulated in a re-amended statement of claim. This is a detailed and complicated pleading. It runs to 133 pages. In outline there are two alleged causes of action. The first is based on the tort of misfeasance in public office. The plaintiffs allege that named senior officials of the Banking Supervision Department of the Bank, but not two successive Governors of the Bank, acted in bad faith (a) in licensing B.C.C.I. in 1979, when they knew that it was unlawful to do so; (b) in shutting their eyes to what was happening at B.C.C.I. after the licence was granted; and (c) in failing to take steps to close B.C.C.I. when the known facts cried out for action at least by the mid 80s. The second cause of action is based on alleged breaches of Community law, and in particular breaches of the requirements of the Directive of 1977. The alleged breaches cover the initial licensing of B.C.C.I., failure to supervise B.C.C.I. and failure to revoke the licence of B.C.C.I. The total damages claimed are apparently of the order of £550m., plus interest. In a defence the Bank comprehensively denied the material allegations under both heads of claim.
On an application by the Bank, which was opposed by the plaintiffs, Clarke J. (now Clarke L.J.) ordered preliminary questions to be tried. This order was made on 19 July 1995 at a stage when discovery had not yet taken place. The judge directed that the questions should be tried on the assumption that the facts pleaded in the re-amended statement of claim were true. The preliminary issues were designed to test whether, if the pleaded facts are true, the causes of action based on the tort of misfeasance in public office and on breaches of community law are sustainable in law. The principal legal issues for decision were the precise ingredients of the tort of misfeasance in public office and whether the Directive of 1977 conferred rights of compensation on depositors.
The judge tried the preliminary issues as subsequently reformulated in stages. He delivered judgments on 1 April 1996, 10 May 1996 and 30 July 1997. The first two judgments are reported at  3 All E.R. 558 and 634. These impressive and careful judgments dealt with the preliminary issues. The judge ruled that both causes of action were unsustainable. The third is an unreported judgment which considered further proposed amendments to the plaintiff's statement of claim. The judge concluded (on the assumption that his earlier rulings were correct) that the plaintiffs' claim was bound to fail and that it should be struck out. On 2 October 1997 Clarke J. struck out the re-amended statement of claim and dismissed the action. He gave leave to appeal.
By a majority (Hirst and Robert Walker L.JJ.) the Court of Appeal dismissed an appeal and for broadly similar reasons affirmed the decisions of Clarke J. Auld L.J. dissented. These judgments are lengthy and carefully reasoned. The judgments are reported at  2 W.L.R. 15.
The present appeal to the House, described as the plaintiffs' legal appeal, is brought by the plaintiffs with the leave of the Court of Appeal given on 21 January 1999. The order of the Court of Appeal contemplated that the House would determine "the legal issues as to the correct test for misfeasance in public office . . . before any consideration of whether the facts alleged or capable of being alleged are capable of meeting that test". At the same time the legal appeal requires the House to consider whether properly construed the Directive of 1977 confers rights on depositors. Being the court of last resort in the United Kingdom the House may only determine the Community law issue if the matter is truly acte clair.
In a disappointingly uninformative joint statement of facts of issues the issues arising on the appeal are formulated as follows:(1)
A strategy which differentiates between the issues affecting the tort of misfeasance in public office and the Community law issues is necessary. It is certainly possible to state, so far as is relevant, the ingredients of the tort of misfeasance in public office. What will not be possible at this stage is to embark on the exercise contemplated by the agreed issues viz. to test at this stage the sustainability of the case pleaded in the re-amended statement of claim against the requirements of the tort as stated by the House. In granting leave to appeal the Court of Appeal realistically foreshadowed that it would be necessary to postpone the question "whether the facts alleged or capable of being alleged are capable of meeting that test" i.e. the tort enunciated by the House. That exercise will indeed require exploration at a further hearing. On the other hand, the Community law issue raises the question of interpretation whether the Directive of 1977 conferred rights of reparation on depositors. If the matter is acte clair, the House can rule dispositively on this part of the case.
MISFEASANCE IN PUBLIC OFFICE
The early history
The history of the development of the tort has been described by Clarke J. and in the judgments in the Court of Appeal: see also Arrowsmith, Civil liability and Public Authorities, (1992), pp. 226-234. It is traceable to the 17th century: Turner v. Sterling (1671) 2 Vent. 24. But the first solid basis for this new head of tort liability, based on an action on the case, is to be found in Ashby v. White (1703), best reported in 1 Smith's Leading Cases (13th ed.) 253. The view ultimately prevailed that an action would lie by an elector who was wilfully denied a right to vote by a returning officer. Despite the recognition of the tort in a number of cases in the 18th and 19th centuries, the Court of Appeal in 1907 denied the existence of the tort in Davis v. Bromley Corporation  1 K.B. 170. But by 1981 the Privy Council described the tort as "well established:" Dunlop v. Woollahra Municipal Council  A.C. 158, at 172F. An examination of the ingredients of the tort was still required. The first step towards that goal was the judgments in the Court of Appeal in Bourgoin S.A. v. Ministry of Agriculture, Fisheries and Food  Q.B. 716. The present case is the first occasion on which the House has been called on to review the requirements of the tort in a comprehensive manner. Your Lordships are however not asked to prepare an essay on the tort of misfeasance in public office but to state the ingredients of the tort so far as it may be material to the concrete disposal of the issues arising on the pleadings in this case.
The matrix of the tort
The coherent development of the law requires the House to consider the place of the tort of misfeasance in public office against the general scheme of the law of tort. It is well established that individuals in the position of the depositors cannot maintain an action for compensation for losses they suffered as a result of the Bank's breach of statutory duties: Yuen Kun-Yeu v. Attorney-General of Hong Kong  A.C. 175(P.C.); Davis v. Radcliffe  1 W.L.R. 821(P.C.) Judicial review is regarded as an adequate remedy. Similarly, persons in the position of the depositors cannot sue the Bank for losses resulting from the negligent licensing, supervision or failure to withdraw a licence: Yuen Kun-Yeu v. Attorney-General of Hong Kong; Davis v. Radcliffe. The availability of the tort of misfeasance in public office has been said to be one of the reasons justifying the non-actionability of a claim in negligence where there is an act of maladministration: Calveley v. Chief Constable of the Merseyside Police  A.C. 1228, at 1238F. It is also established that an ultra vires act will not per se give rise to liability in tort: X (Minors) v. Bedfordshire County Council  2 A.C. 633. And there is no overarching principle in English law of liability in tort for "unlawful, intentional and positive acts": see Lonrho Ltd. v. Shell Peroleum Co. Ltd. (No. 2)  A.C. 173, 187G in which the House refused to follow Beaudesert Shire Council v. Smith (1966) 120 C.L.R. 145, which was subsequently overruled by the Australian High Court in Northern Territory v. Mengel (1995) 69 A.J.L.R. 527. The tort of misfeasance in public office is an exception to "the general rule that, if conduct is presumptively unlawful, a good motive will not exonerate the defendant, and that, if conduct is lawful apart from motive, a bad motive will not make him liable": Winfield and Jolowicz on Tort, 15th ed., (1998), p. 55; Bradford Corporation v. Pickles  A.C. 587; Allen v. Flood  A.C. 1. The rationale of the tort is that in a legal system based on the rule of law executive or administrative power "may be exercised only for the public good" and not for ulterior and improper purposes: Jones v. Swansea City Council  1 W.L.R. 54, 85F, per Nourse L.J.; a decision reversed on the facts but not on the law by the House of Lords:  1 W.L.R. 1453, at 1458. The tort bears some resemblance to the crime of misconduct in public office: Reg. v. Bowden  1 W.L.R. 98.
The ingredients of the tort
It is now possible to consider the ingredients of the tort. That can conveniently be done by stating the requirements of the tort in a logical sequence of numbered paragraphs.
(1) The defendant must be a public officer:
It is the office in a relatively wide sense on which everything depends. Thus a local authority exercising private-law functions as a landlord is potentially capable of being sued: Jones v. Swansea City Council. In the present case it is common ground that the Bank satisfies this requirement.
(2) The second requirement is the exercise of power as a public officer:
This ingredient is also not in issue. The conduct of the named senior officials of the Banking Supervision Department of the Bank was in the exercise of public functions. Moreover, it is not disputed that the principles of vicarious liability apply as much to misfeasance in public office as to other torts involving malice, knowledge or intention: Racz v. Home Office  2 A.C. 45.
(3) The third requirement concerns the state of mind of the defendant.
The case law reveals two different forms of liability for misfeasance in public office. First there is the case of targeted malice by a public officer i.e. conduct specifically intended to injure a person or persons. This type of case involves bad faith in the sense of the exercise of public power for an improper or ulterior motive. The second form is where a public officer acts knowing that he has no power to do the act complained of and that the act will probably injure the plaintiff. It involves bad faith inasmuch as the public officer does not have an honest belief that his act is lawful.
The distinction, and the availability of an action of the second type, was inherent in the early development of tort. A group of cases which began with Ashby v. White (1703), reported in 1 Smith's Leading Cases (13th ed.) 253, concerned the discretionary refusal of voting rights: see also Drewe v. Coulton (1787) 1 East 563n; 102 E.R. 217; Tozer v. Child (1857) 7 El. & Bl. 377: 119 E.R. 1286; Cullen v. Morris (1819) 2 Stark 577; 171 E.R. 741. In the second group of cases the defendants were judges of inferior courts, and the cases concerned liability of the judges for malicious acts within their jurisdiction: Ackerley v. Parkinson (1815) 3 M. & S. 411; 105 E.R. 665; Harman v. Tappenden (1801) 1 East 555; 102 E.R. 214; Taylor v. Nesfield (1854) 3 El. & Bl. 724; 118 E.R. 1312. These decisions laid the foundation of the modern tort; they established the two different forms of liability; and revealed the unifying element of conduct amounting to an abuse of power accompanied by subjective bad faith. In the most important modern case in England the existence of the two forms of the tort was analysed and affirmed: Bourgoin S.A. v. Ministry of Agriculture, Fisheries and Food  Q.B. 716. Clarke J. followed this traditional twofold classification. He expressly held that the two forms are alternative ways in which the tort can be committed. The majority in the Court of Appeal commented on "a rather rigid distinction between the two supposed limbs of the tort" and observed that there was "the need to establish deliberate and dishonest abuse of power in every case:"  2 W.L.R. 15 at 67C-D. As a matter of classification it is certainly right to say that there are not two separate torts. On the other hand, the ingredients of the two forms of the tort cannot be exactly the same because if that were so there would be no sense in the twofold classification. Undoubtedly there are unifying features, namely the special nature of the tort, as directed against the conduct of public officers only, and the element of an abuse of public power in bad faith. But there are differences between the alternative forms of the tort and it is conducive to clarity to recognise this.
The present case is not one of targeted malice. If the action in tort is maintainable it must be in the second form of the tort. It is therefore necessary to consider the distinctive features of this form of the tort. The remainder of my judgment will be directed to this form of the tort.
The basis for the action lies in the defendant taking a decision in the knowledge that it is an excess of the powers granted to him and that it is likely to cause damage to an individual or individuals. It is, not every act beyond the powers vesting in a public officer which will ground the tort. The alternative form of liability requires an element of bad faith. This leads to what was a disputed issue. Counsel for the Bank pointed out that there was no precedent in England before the present case which held recklessness to be a sufficient state of mind to ground the tort. Counsel argued that recklessness was insufficient. The Australian High Court and the Court of Appeal of New Zealand have ruled that recklessness is sufficient: Northern Territory v. Mengel (1995) 69 A.J.L.R. 527; Garrett v. Attorney-General  2 N.Z.L.R. 332; Rawlinson v. Rice  2 N.Z.L.R. 651. Clarke J. lucidly explained the reason for the inclusion of recklessness  3 All E.R. 558, 581:
The Court of Appeal accepted the correctness of this statement of principle:  2 W.L.R. 15, 61G-62A. This is an organic development, which fits into the structure of our law governing intentional torts. The policy underlying it is sound: reckless indifference to consequences is as blameworthy as deliberately seeking such consequences. It can therefore now be regarded as settled law that an act performed in reckless indifference as to the outcome is sufficient to ground the tort in its second form.
Initially, counsel for the plaintiffs argued that in this context recklessness is used in an objective sense. Counsel said that the distinction was between subjective or advertent recklessness in the sense used in Reg. v. Cunningham  2 Q.B. 396 and objective recklessness as explained in Reg. v. Caldwell  A.C. 341 and Reg. v. Lawrence  A.C. 510. The latter ingredient is present where in a case of an obvious risk the defendant failed to give any thought to the possibility of its existence: see Smith and Hogan, Criminal Law, 9th ed., (1999) pp. 60-69. Smith and Hogan trenchantly observed, at p. 67:
Counsel argued for the adoption of the Caldwell test in the context of the tort of misfeasance in public office. The difficulty with this argument was that it could not be squared with a meaningful requirement of bad faith in the exercise of public powers which is the raison d'être of the tort. But, understandably, the argument became more refined during the oral hearing and counsel for the plaintiffs accepted that only reckless indifference in a subjective sense will be sufficient. This concession was rightly made. The plaintiff must prove that the public officer acted with a state of mind of reckless indifference to the illegality of his act: Rawlinson v. Rice  2 N.Z.L.R. 651. Later in this judgment I will discuss the requirement of reckless indifference in relation to the consequences of the act.
(4) Duty to the plaintiff
The question is who can sue in respect of an abuse of power by a public officer. Counsel for the Bank argued that in order to be able to claim in respect of the second form of misfeasance, there must be established "an antecedent legal right or interest" and an element of "proximity". Clarke J. did not enunciate a requirement of proximity. He observed  3 All E.R. 558, 584B):
The majority in the Court of Appeal held that "the notion of proximity should have a significant part to play in the tort of misfeasance, as it undoubtedly has in the tort of negligence:"  2 W.L.R. 15, 66A. Counsel for the Bank argued that both requirements are essential in order to prevent the tort from becoming an uncontrollable one. It would be unwise to make general statements on a subject which may involve many diverse situations. What can be said is that, of course, any plaintiff must have a sufficient interest to found a legal standing to sue. Subject to this qualification, principle does not require the introduction of proximity as a controlling mechanism in this corner of the law. The state of mind required to establish the tort, as already explained, as well as the special rule of remoteness hereafter discussed, keeps the tort within reasonable bounds. There is no reason why such an action cannot be brought by a particular class of persons, such as depositors at a bank, even if their precise identities were not known to the bank. The observations of Clarke J. are correct.
In agreed issue 4 the question is raised whether the Bank is capable of being liable for the tort of misfeasance in public office to plaintiffs who were potentially depositors at the time of any relevant act or omission of misfeasance by the Bank. The majority in the Court of Appeal and Auld L.J. held that this issue is unsuitable for summary determination. In my view this ruling was correct.
Causation is an essential element of the plaintiffs' cause of action. It is a question of fact. The majority in the Court of Appeal and Auld L.J. held that it is unsuitable for summary determination. That is plainly correct. This conclusion disposes of agreed issue 3 so far as it relates to the tort of misfeasance.
(6) Damage and Remoteness
The claims by the plaintiffs are in respect of financial losses they suffered. These are, of course, claims for recovery of consequential economic losses. The question is when such losses are recoverable. It would have been possible, as a matter of classification, to discuss this question under paragraph 3 in which the required state of mind for this tort was examined. It is, however, convenient to consider it under the traditional heading of remoteness.
On the assumption that the other requirements can be established, counsel for the plaintiffs argued that the plaintiffs should be able to recover all reasonably foreseeable losses suffered by them. In support of this argument he had the advantage of a powerfully reasoned dissenting judgment by Auld L.J. Counsel for the Bank argued that the rule is more restrictive. He supported the conclusion of the majority in the Court of Appeal. The judge had held that the plaintiffs must prove that the Bank actually foresaw the losses to the plaintiff as a probable consequence. This part of the judgment at first instance provided the reason for the judge refusing to allow the proposed amendments and striking out the claims. The majority observed  2 W.L.R. 15, 102A:
Counsel adopted this formulation as his primary submission. In the alternative he submitted that the test stated by Clarke J. should be adopted.
It will be necessary to give a brief account of the decisions in which this issue was considered. It was first touched on in Bourgoin S.A. v. Ministry of Agriculture  Q.B. 716. At first instance Mann J. had spoken of foreseeable losses. Oliver L.J. quoted and endorsed the relevant passage. In Northern Territory v. Mengel 69 A.L.J.R. 527, at 540 the majority in the Australian High Court adopted a test of "a foreseeable risk of harm" for which it relied on Bourgoin. In the present case Clarke J. concluded that in using the word "foreseeable" in Bourgoin Mann J. must have meant "foreseen" and that the same applies to the adoption of the relevant passage by Oliver L.J. Before the judgments in the Court of Appeal in the present case the Court of Appeal of New Zealand adopted the conclusions of Clarke J. as well as his explanation of Bourgoin: Garrett v. Attorney-General  2 N.Z.L.R. 332; Rawlinson v. Rice  2 N.Z.L.R. 651. In England the Court of Appeal and Divisional Court have on a number of occasions approved the reasoning of Clarke J. These decisions include the following: Lam v. Brennan  3 P.L.R. 22 (C.A.); Reg. v. Chief Constable of the North Wales Police, Ex parte A.B.  Q.B. 396 (D.C.); Barnard v. Restormel Borough Council  3 P.L.R. 27 (C.A.); W. v. Essex County Council  Fam. 90 (C.A.) While it is unnecessary to discuss these decisions it is relevant to point out that in the North Wales Police case the Lord Chief Justice expressed agreement with the view that the tort is only established if the officer had knowledge that he had no power to do the act complained of and that the act would probably injure the plaintiff. He paid tribute to the "extended consideration and most helpful summary" by Clarke J. at  Q.B. 396, 413B.