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)

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    The issues have been canvassed in great depth in written and oral argument. Taking into account all the matters advanced the choice before the House can be narrowed down. So far as the majority was minded to adopt a stricter test than Clarke J., encapsulated in the words "knowing at the time that [the decision] would cause damage to the plaintiffs," they went too far. A test of knowledge or foresight that a decision would cause damage does not readily fit into the standard of proof generally required in the law of tort, and specifically in the case of intentional torts. Moreover, this test unnecessarily emasculates the effectiveness of the tort. The real choice is therefore between the test of knowledge that the decision would probably damage the plaintiff (as enunciated by Clarke J.) and the test of reasonable foreseeability (as contended for by counsel for the plaintiffs).

    It is now necessary to return to the Bourgoin case. While all judges are prone to error and imprecise language from time to time, it is difficult to say that Mann J. and Oliver L.J. used the word "foreseeable" when they meant "foreseen." It is sufficient to point out, as the majority of the Court of Appeal did, at p. 484D, that there was no focus in the Bourgoin case on the choice which is now before the House. In these circumstances the observations in Bourgoin on this particular issue do not greatly assist.

    It is true that Clarke J. made new law. He relied on the special nature of the tort. He reasoned from legal principle. It is true that the earlier decision of the majority in the Mengel case runs counter to the conclusion of Clarke J. But apart from the Mengel case there has however been no judicial support for a foreseeability test. And there has been no academic criticism of the view of Clarke J. that a test of foreseeability is not enough in this tort. Given that his ground-breaking first instance judgment has been pored over by many judicial and academic eyes, this is a factor of some significance. Nevertheless, it is necessary to consider the merits of the competing solutions from the point of view of principle and legal policy.

    Enough has been said to demonstrate the special nature of the tort, and the strict requirements governing it. This is a legally sound justification for adopting as a starting point that in both forms of the tort the intent required must be directed at the harm complained of, or at least to harm of the type suffered by the plaintiffs. This results in the rule that a plaintiff must establish not only that the defendant acted in the knowledge that the act was beyond his powers but also in the knowledge that his act would probably injure the plaintiff or person of a class of which the plaintiff was a member. In presenting a sustained argument for a rule allowing recovery of all foreseeable losses counsel for the plaintiffs argued that such a more liberal rule is necessary in a democracy as a constraint upon abuse of executive and administrative power. The force of this argument is, however, substantially reduced by the recognition that subjective recklessness on the part of a public officer in acting in excess of his powers is sufficient. Recklessness about the consequences of his act, in the sense of not caring whether the consequences happen or not, is therefore sufficient in law. This justifies the conclusion that the test adopted by Clarke J. represents a satisfactory balance between the two competing policy considerations, namely enlisting tort law to combat executive and administrative abuse of power and not allowing public officers, who must always act for the public good, to be assailed by unmeritorious actions.

    It is undoubtedly right, as counsel for the plaintiffs pointed out, that the mental element required for the tort of misfeasance in public office means that it is not an effective remedy to deal with state liability for breaches of Community law: Brasserie du Pêcheur S.A. v. Federal Republic of Germany; Reg. v. Secretary of State for Transport, Ex parte Factortame (No. 4) Joined Cases C-46/93 and C-48/93 [1996] Q.B. 404. This consideration cannot, however, affect the decision of the House on the tort. If there is a gap it must be for Community law to fill it. And our courts will loyally apply Community law.

Conclusion on misfeasance in public office

    For the reasons given the requirements of the tort are as set out.

COMMUNITY LAW

My Lords, I have had the advantage of reading in draft the speech of Lord Hope of Craighead. He has demonstrated with compelling logic that the Directive of 1977 was not intended to confer rights on individual depositors. I am persuaded that the matter is truly acte clair.

FUTURE COURSE OF THE PROCEEDINGS

It will be necessary to take account of the following matters:

1.

The question whether the existing re-amended statement of claim reveals a sustainable cause of action based on the tort of misfeasance in public office will have to be considered at a further hearing of the Appellate Committee.

2.

The next hearing will include the questions whether the Court of Appeal was right to affirm the decisions of Clarke J. who refused to allow proposed amendments and struck out the action.

3.

The shape of the case has been altered. The requirements of the tort, so far as relevant to the present case, have today been authoritatively stated. The allegations of breaches of Community law can no longer found a cause of action.

4.

In these circumstances I take the view that at a further hearing there should be available a new draft pleading by the plaintiffs reflecting the altered position. And I draw attention to the fact that the Court of Appeal referred to "the facts alleged or capable of being alleged", that being a reference to the circumstances in which it is proper to strike out an action.

Given this untidy procedural position, it may be necessary when the parties are ready for an Appeal Committee to consider the future progress of the matter.

Disposal

    For the reasons given by Lord Hope of Craighead, I would dismiss the appeal on Community law issues. In the light of my statement of the requirements of the tort of misfeasance in public office I would adjourn this part of the appeal for further argument.

LORD HOPE OF CRAIGHEAD

My Lords,

    I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Steyn and Lord Hutton. As regards the tort of misfeasance in public office, I am in full agreement with what they have said as to the essential elements of the tort and the requirements which must be satisfied. The question with which I wish to deal is whether the appellants have a basis for an action of damages against the Bank in Community law.

Community Law

    The appellants' claim that they are entitled to damages for losses caused by breaches of Community law is based upon the following allegations. First, it is alleged that in June 1980 the Bank granted to B.C.C.I. S.A. a full licence to carry on business as a deposit-taker deliberately contrary to the scheme laid down by the First Council Banking Co-ordination Directive (77/780/E.E.C.) of 12 December 1977 on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions ("the Directive of 1977") and the Banking Act 1979 when it knew that the relevant criteria in Schedule 2 to the Act of 1979 were not fulfilled. Then it is alleged that, at all times after the grant of the licence in June 1980 until the eventual closure of B.C.C.I. S.A., the Bank continued to act contrary to the scheme laid down by the Directive of 1977, the Act of 1979 and the Banking Act 1987 in the respects described in paragraphs 40 - 44 of the re-amended statement of claim. The essence of this further allegation is that, contrary to the scheme laid down by the Directive of 1977, the Act of 1979 and the Act of 1987, the Bank concluded that it had no discretion or power to revoke the licence to carry on business as a deposit-taker when it knew that B.C.C.I. S.A. had conducted and was conducting its affairs in a way which threatened the interests of its depositors. Furthermore, it permitted B.C.C.I. Overseas to carry on a deposit-taking business when it knew that the business of that company was carried on in a manner which might affect the soundness of B.C.C.I. S.A. and place its depositors at risk. It is also alleged that throughout this period the Bank failed to supervise both B.C.C.I. S.A. and B.C.C.I. Overseas to the detriment of the depositors.

    Shortly put, and based upon these allegations, the appellants' Community law argument proceeds along these lines. Under the E.E.C. Treaty the Directive of 1977 has direct effect in the United Kingdom. The United Kingdom discharged its obligations under the Directive by enacting the Banking Acts of 1979 and 1987. The Bank was at all material times the supervisory authority in the United Kingdom for the purposes of both the Directive of 1977 and the Act of 1979 and the Act of 1987. The Bank as an emanation of the state is liable to the depositors for failing in its functions as supervisory authority to give full effect to the Directive of 1977. National courts are required by Community law to protect the rights which individuals derive from Community law, including those which are derived from a Directive. Accordingly the appellants are entitled, as parties who were intended to benefit from the Directive of 1977, to rely upon its terms against the Bank in order to obtain damages.

    The appellants maintain that the Directive of 1977 was intended and designed to protect the savings of depositors. They say that, in order to achieve this purpose, it imposed certain well-defined Community law obligations on the competent authorities of member states in relation to the authorisation and supervision of banks, and that it conferred on depositors and potential depositors corresponding Community law rights against the competent authorities to have these obligations fulfilled. That being so, their Community law rights under the Directive of 1977 must prevail over the requirement in national law to prove bad faith or dishonesty as a prerequisite of the tort of misfeasance in public office under the common law. And they must prevail over the Bank's right to seek exemption from liability under section 1(4) of the Banking Act 1987, which provides:

    "Neither the Bank nor any person who is a member of its Court of Directors or who is, or is acting as, an officer or servant of the Bank shall be liable in damages for anything done or omitted in the discharge or purported discharge of the functions of the Bank under this Act unless it is shown that the act or omission was in bad faith."

    The main issue of Community law which arises in this appeal from these allegations is whether the Bank is capable of being liable to the appellants in damages for violations of the Directive of 1977, on the assumption that the facts pleaded in the re-amended statement of claim are true.

The conditions of liability

    There appeared to be no real dispute between the parties on this point in the course of the argument which was presented to your Lordships, and both the majority judgment in the Court of Appeal [2000] 2 W.L.R. 15, 70E - 80D and the judgment of Auld L.J., pp. 106G - 110G have dealt with the whole matter in great detail and with admirable clarity. Nevertheless I think that it is necessary for me to explain at the outset of this chapter the criteria which must be fulfilled before a Directive can be relied upon as a source of rights before a national court.

    Community law, as it has been developed by the European Court of Justice, is capable of conferring upon individuals the right to claim damages from a national authority by one or other or both of two distinct routes. The purpose of the right to claim damages is to ensure that provisions of Community law prevail over national provisions. This is because the full effectiveness of Community law would be impaired if individuals were unable to obtain redress in the national courts of the relevant member state when their rights were infringed by a breach of Community law: Brasserie du Pêcheur S.A. v. Federal Republic of Germany; Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (No. 4) (Joined Cases C-46/93 and C-48/93) [1996] Q.B. 404, 495, para. 20. The first route by which the right to claim damages against the state or an emanation of the state for the non-implementation or misimplementation of a Directive may be asserted is based upon the principle of direct effect. This is the principle which was established in Community law by N.V. Algemene Transport- en Expeditie Onderneming van Gend & Loos v. Nederlandse administratie der belastingen (Case 26/62) [1963] E.C.R. 1. The second route is based upon the principle of state liability.

    In the van Gend & Loos case it was held that article 12 of the E.E.C. Treaty (now article 25 E.C.) prohibiting customs duties on imports and exports had to be interpreted as producing direct effects and creating individual rights which national courts must protect. The decision in that case has been applied by the European Court in a large number of cases to other articles of the Treaty which the Court has construed as having direct effect in member states. Later decisions of the European Court have made it clear, in the light of the provisions of the third paragraph of article 189 of the E.E.C. Treaty (now article 249 E.C.) which provides that a Directive shall be binding as to the result to be achieved upon each member state, that Directives as well as articles of the Treaty are capable of conferring directly effective rights upon individuals provided certain conditions are satisfied. In Becker v. Finanzamt Munster-Innenstadt (Case 8/81) [1982] E.C.R. 53, 70-71 the court made the following observations as to the conditions for the application of the direct effect principle to a Directive:

    "22. It would be incompatible with the binding effect which article 189 ascribes to Directives to exclude in principle the possibility of the obligations imposed by them being relied on by persons concerned.

    "23. Particularly in cases in which the Community authorities have, by means of a Directive, placed member states under a duty to adopt a certain course of action, the effectiveness of such a measure would be diminished if persons were prevented from relying upon it in proceedings before a court and national courts were prevented from taking it into consideration as an element of Community law.

    "24. Consequently, a member state which has not adopted the implementing measures required by the Directive within the prescribed period, may not plead as against individuals, its own failure to perform the obligations which the Directive entails.

    "25. Thus, wherever the provisions of a Directive appear, as far as their subject matter is concerned, to be unconditional and sufficiently precise, those provisions may, in the absence of implementing measures adopted within the prescribed period, be relied upon as against any national provision which is incompatible with the Directive or in so far as the provisions define rights which individuals are able to assert against the state."

    Two things should be noted about the observations which the European Court made in paragraph 25 of its judgment. The first is that in order for there to be liability under this principle, which the Court of Appeal in the judgments in this case has described as Becker-type liability, the rights said to have been conferred by the Directive must be "unconditional and sufficiently precise". The second is that a distinction is made between relying upon a Directive to nullify some provision in national law which is incompatible with the Directive in order to give effect to rights under Community law, and relying upon Community law itself to give a right to claim damages in the national courts for breach of an obligation of Community law. The appellants seek to rely on each of these two branches in this case.

    In Francovich v. Italian Republic (Joined Cases C-6/90 and C-9/90) [1995] I.C.R. 722 the European Court established the conditions for state liability, which is described in the judgments in the Court of Appeal as Francovich-type liability. The European Court had to deal with two issues in that case. The first concerned the direct effect of the provisions of Council Directive 80/987/E.E.C. which determined the rights of employees in the event of their employers' insolvency and which Italy had failed to implement: this was Becker-type liability. The second concerned the existence and scope of the liability of the state for damage resulting from Italy's breach of its obligations under Community law: this was Francovich-type liability. In regard to the direct effect route the Court said at p. 768, para. 12 that there were three points to be considered, in order to see whether the provisions of the Directive which determined whether the rights of employees were, in Becker-type liability terms, "unconditional and sufficiently precise" to enable them to recover under this route. These were:

    "the identity of the persons entitled to the guarantee provided [by the Directive,] the content of that guarantee and the identity of the person liable to provide the guarantee."

    In regard to the conditions for state liability for failure to implement a Directive, the European Court made these observations, at p. 772:

    "39. Where, as in this case, a member state fails to fulfil its obligation under the third paragraph of article 189 of the Treaty to take all the measures necessary to achieve the result prescribed by a Directive, the full effectiveness of that rule of Community law requires that that there should be a right to reparation provided that three conditions are fulfilled.

    "40. The first of these conditions is that the result prescribed by the Directive should entail the grant of rights to individuals. The second condition is that it should be possible to identify the content of those rights on the basis of the provisions of the Directive. Finally, the third condition is the existence of a causal link between the breach of the state's obligation and the loss and damage suffered by the injured parties.

    "41. Those conditions are sufficient to give rise to a right on the part of individuals to obtain reparation, a right founded directly on Community law."

As Lord Slynn of Hadley said in Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (No. 5) [1999] 3 W.L.R. 1062, 1072E, state liability is conditional on there being a grant of rights to individuals by the Directive, that the contents of these rights is clear and that the loss suffered is shown to be caused by the state's breach.

    In Dillenkoffer v. Federal Republic of Germany (Joined Cases C-178/94, C-179/94, C-188/94, C-189/94 and C-190/94) [1997] Q.B. 259 the Court restated the conditions for state liability in the light of a number of cases with which it had dealt subsequently to the Francovich case. It did so in a manner which, in paragraph 22 of the judgment, applied the tests which Francovich had laid down for the direct effect, or Becker-type, route to the state liability, or Francovich-type, route. The relevant paragraphs are set out in the judgment at pp. I-4878-9:

    "20. The court has held that the principle of state liability for loss and damage caused to individuals as a result of breaches of Community law for which the state can be held responsible is inherent in the system of the Treaty: Francovich v. Italian Republic (Joined Cases C-6/90 and C-9/90) [1995] I.C.R. 722, 772, para. 35; Brasserie du Pêcheur S.A. v. Federal Republic of Germany; Reg. v. Secretary of State for Transport, Ex parte Factortame Ltd. (No. 4) (Joined Cases C-46/93 and C-48/93) [1996] Q.B. 404, 496, para. 31; Reg. v. H.M. Treasury, Ex parte British Telecommunications Plc. (Case C-392/93) [1996] Q.B. 615, 654, para. 38 and Reg. v. Ministry of Agriculter, Fisheries and Food, Ex parte Hedley Lomas (Ireland) Ltd. (Case C-5/94 [1997] Q.B. 139, 160, para.24. Furthermore, the court has held that the conditions under which state liability gives rise to a right to reparation depend on the nature of the breach of Community law giving rise to the loss and damage: Francovich [1995] I.C.R. 722, 772, para. 38; Brasserie du Pêcheur [1996] Q.B. 404, 497, para. 38, and Hedley Lomas [1997] Q.B. 139, 160, para. 24.

    "21. In Brasserie du Pêcheur, at p. 499, paras. 50 and 51; British Telecommunications [1996] Q.B. 615, 655, paras. 39 and 40, and Hedley Lomas, at p. 160, paras. 25 and 26, the court, having regard to the circumstances of the case, held that individuals who have suffered damage have a right to reparation where three conditions are met: the rule of law infringed must have been intended to confer rights on individuals, the breach must have been sufficiently serious, and there must be a direct causal link between the breach of the obligation resting on the state and the damage sustained by the injured parties.

    "22. Moreover, it is clear from the Francovich case which, like the present cases, concerned non-transposition of a Directive within the prescribed period, that the full effectiveness of the third paragraph of article 189 of the Treaty requires that there should be a right to reparation where the result prescribed by the Directive entails the grant of rights to individuals, the content of those rights is identifiable on the basis of the provisions of the Directive and a causal link exists between the breach of the state's obligation and the loss and damage suffered by the injured parties.

    "23. In substance, the conditions laid down in that group of judgments are the same, since the condition that there should be a sufficiently serious breach, although not expressly mentioned in Francovich, was nevertheless evident from the circumstances of that case."

    In the Court of Appeal it was observed in the majority judgment [2000] 2 W.L.R. 15, 77C that the main difference between the parties, as to the basic principles to be applied, was as to whether a Directive, once it has been transposed into national law, ceases to be the immediate source of rights enforceable by an individual claimant in his national court. For the Bank it was submitted that there is a clear and well-established principle that the Directive is supplanted at that stage by rights under the national law. For the appellants it was submitted that, as the obligation on member states is to ensure that the Directive is applied in practice, a Directive can be the immediate source of enforceable rights under the Becker-type principle even if it has been transposed, and correctly transposed, into national law. This is in order to ensure its effectiveness as to the result to be achieved in conformity with the third paragraph of article 249 (ex 189) E.C..

    The majority in the Court of Appeal [2000] 2 W.L.R. 15, 80A-B found some support in Norbrook Laboratories Ltd. v. Ministry of Agriculture, Fisheries and Food (Case C-127/95) [1998] E.C.R. I-1531 for the view that there may be a category of Directives in relation to which a member state's obligation of proper implementation is not restricted to a once-for-all legislative process, but also requires a continuing administrative process. Auld L.J., who was of the opinion that the appellants were entitled to rely on Francovich-type liability, regarded the debate on this point as academic: p. 139E. But, in the course of his development of this point at pp. 139F-142B, he gave two further reasons for rejecting the Bank's argument that implementation of the Directive deprived the appellants of recourse to the Directive under the Becker-type principle of liability to which, in my view, great weight should be attached. Although the debate on this issue did not receive the same prominence in the arguments which were presented to your Lordships as Mr. Lasok Q.C. for the Bank addressed the main part of his submissions to the terms of the Directive, I think that Auld L.J.'s observations are worth recording here in order to set the scene for an examination of the Directive.

    The first point which Auld L.J. made was that it could be said that the precondition of liability for damages of bad faith on the part of the Bank or its officers in a common law action for misfeasance in public office and as introduced in section 1(4) of the Banking Act 1987, to the extent that they derogate from the Directive: p. 141B, "misimplement" the Directive: p. 139F. His second point was that recent decisions of the European Court, including the Norbrook case, indicate that in the main the Court is indifferent to the precise route by which it gives effect to a Directive. As he pointed out at p. 141E-G, neither the Act of 1979 nor the Act of 1987 transposed the Directive of 1977 word for word, and the rights of redress which he found in the Directive were wider than those dependent on proof of bad faith as required by section 1(4) of the Act of 1987 and the common law action of misfeasance in public office. Having noted the differences between the two approaches - one that the United Kingdom legislation properly construed effectively implemented the Directive, the other that it did not fully implement the Directive with the consequence that the United Kingdom courts must have direct recourse to it - he concluded at p. 141H-142C:

    "As Josephine Steiner observed in 'Coming to Terms with E.E.C. Directives,' [(1990)] 106 L.Q.R. 144, 146 the question whether a Directive has been correctly implemented can only be assessed by reference to the Directive itself, with the result that it can rarely be disregarded. Clearly, as a result of the court's ready application of the Francovich principle, the two approaches can shade into one another. Whichever route is taken, the answer on matters of Community law should be the same, with the result that it should prevail over United Kingdom law, including the common law as to misfeasance in public office and section 1(4) of the Act of 1987, where the latter frustrates it: see Amministrazione delle Finanze dello Stato v. Simmenthal S.p.A. (Case 106/77) [1978] E.C.R. 629, 643-645, paras. 16-26; the Brasserie du Pêcheur case [1996] Q.B. 404, 502, paras. 72-73."

    In the result, although the appellants' case under Community law is put in different ways and is based upon both types of liability, the conditions which the appellants must satisfy in order to establish a right to damages against the Bank under each route are so closely analogous that they can be taken to be, at this stage of case, the same. The critical questions in this appeal, following the language of paragraph 22 of the judgment in the Dillenkofer case, are whether the Directive of 1977 entails the grant of rights to individual depositors and potential depositors and whether the content of those rights is identifiable on the basis of the provisions of the Directive.

The legislative basis and purpose of the Directive of 1977

 
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