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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    I further consider that the judgment in Garrett provides an answer to the submission that if there is a deliberate or reckless abuse of power which causes harm the injured party is entitled to recover damages whether or not the officer foresaw the harm. This view of the tort separates the abuse of power from the resultant harm and regards the unlawful exercise of the power, viewed in isolation from its consequences, as the essence of the tort, whereas the New Zealand Court of Appeal, rightly in my opinion, does not detach the unlawful conduct from its consequences but regards the abuse of power as consisting in the unlawful exercise of a power by a public officer with knowledge that it is likely to harm another citizen, when the power is given to be exercised for the benefit of other citizens. As the court stated, at p. 349:

    "The tort has at its base conscious disregard for the interests of those who will be affected by official decision making."

    In the present case Clarke J. and the Court of Appeal were of opinion that to constitute the tort of misfeasance there must be a dishonest abuse of power by the public officer. In the course of his submissions that the tort is established under the second limb in Bourgoin when a public officer knowingly acts unlawfully in the purported exercise of his power and the unlawful exercise of the power causes loss to the plaintiff, Lord Neill accepted that an improper motive is an essential ingredient and said that improper motive was alleged by the plaintiffs. On behalf of the Bank Mr. Stadlen Q.C. submitted that it was a requirement of the tort in every case that the public officer should have acted dishonestly. In considering this point it is necessary to recognise, as Mr. Stadlen did in his submissions, that in most cases, as a matter of reality, a finding by the tribunal of fact that a public officer knew that he was acting unlawfully and that his actions would probably injure the plaintiff would lead to a finding that he was acting dishonestly. Mr. Stadlen submitted that in most cases the element of dishonesty would permeate a finding of knowledge of unlawfulness and probability of harm, but he contended that dishonesty was an element which was always necessary and that there might be exceptional cases where, notwithstanding knowledge of unlawfulness and probability of harm, the plaintiff would fail in his action because he failed to prove dishonesty.

    My Lords, I consider that dishonesty is a necessary ingredient of the tort, and it is clear from the authorities that in this context dishonesty means acting in bad faith. In some cases the term "dishonesty" is not used and the term "in bad faith" or acting from "a corrupt motive" or "an improper motive" is used, or the term "in bad faith" is used together with the term "dishonesty". In Cullen v. Morris (1819) 2 Stark 577, 589, 171 E.R. 741, 745 Lord Abbott C.J. in directing the jury said:

    "The question for your consideration is, whether the refusal of the vote in this instance, was founded on an improper motive on the part of the defendant, it is for you to pronounce your opinion, whether the defendant's conduct proceeded from an improper motive, or from an honest intention to discharge his duty acting under professional advice."

The judgment of Buxton L.J. in Barnard v. Restormel Borough Council [1998] 3 P.L.R. 27 is a modern example of how the terms "dishonesty" and "bad faith" are used interchangeably. In that case where misfeasance in public office was alleged the learned Lord Justice in delivering his judgment said, at p. 33: "We bear in mind the need to establish dishonesty" and later, at p. 37 he referred to the strong emphasis placed "in the tort of misfeasance on the requirement of subjective bad faith." However, as the term "dishonesty" in some contexts implies a financial motive, I consider that the term "in bad faith" is a preferable term to use and, as I have stated, I consider that it is an essential ingredient in the tort.

    I agree with the opinion of Clarke J., at p. 583A of his judgement that the tort can be constituted by an omission by a public officer as well as by acts on his part. As Brennen J. stated in Mengel at p. 545: "Any act or omission done or made by a public official in purported performance of the functions of the office can found an action for misfeasance in public office." But whether the public officer is sued in respect of an act or an omission, it must be a deliberate one involving an actual decision and liability will not arise from injury suffered by mere inadvertence or oversight. I also agree with the opinion of Clarke J., at p. 583B and D that it is sufficient for the plaintiff to prove that the public officer foresaw that his action would probably injure the plaintiff; to require foresight of certainty of harm would be unrealistic and, being very difficult to prove, would give inadequate protection against abuse of power.

    I further consider that if the public officer knows that his unlawful conduct will probably injure another person, or is reckless as to that consequence, the plaintiff does not need to show, before liability can arise, some other link or relationship between him and the officer. The requirement of foresight of probable harm to the plaintiff, or recklessness as to such harm, is sufficient to ensure that the tort is confined within reasonable bounds.

    I have had the advantage of reading in draft the speeches which have been prepared by my noble and learned friends Lord Hope of Craighead and Lord Millett, and for the reasons which they give and with which I am in agreement, I would dismiss the appeal on the Community law claim and I would make the same order as that proposed by my noble and learned friend Lord Steyn.

LORD HOBHOUSE OF WOODBOROUGH

My Lords,

This appeal has raised two questions of law. The first is that relating to of the alleged breach of the First Council Banking Co-ordination Directive (77/780/E.E.C.) of 1977. I agree that the claim under this head cannot succeed in law for the reasons given by my noble and learned friend Lord Hope of Craighead and that the appeal under this head should be dismissed.

    The second is that relating to the definition of the tort of misfeasance in public office. On this, subject to what I will say in this speech, I am in substantial agreement with the views expressed by my noble and learned friends Lord Steyn and Lord Hutton. None of your Lordships are willing to accept the main submissions of the appellants on this aspect but it will be necessary, as your Lordships propose and I agree, to hear further submissions upon the actual pleaded allegations of the appellants before deciding what order to make. On the hearing of the appeal your Lordships have heard full argument upon what are the constituents of the tort. Their correct identification is of an importance which extends beyond the present case. Your Lordships have been greatly assisted by the judgments in this case of Clarke J. and the Court of Appeal which contain a careful examination of the authorities as have the written and oral submissions of counsel to which tribute should be paid. I am also indebted to the re-examination of the authorities in the speeches of my noble and learned friends Lord Steyn and Lord Hutton.

    The tort, concerning as it does the acts of those vested with governmental authority and the exercise of executive powers, has developed over the centuries as circumstances have changed. Terminology still tends to be used which is of little assistance to anyone not familiar with the legal history. The use of the word malice also causes confusion both as to its meaning in relation to this tort and the role it has in the analysis of the tort. The particular elements emphasised as being of the essence of the tort have varied from time to time. There has been little consistency of language. It is therefore right to take the opportunity to attempt to draw together the threads and assist a more definitive view to be taken. It is not necessary for this purpose to repeat the review of the authorities.

    I will start by putting the tort in its legal context. Typically, a tort involves the invasion by the defendant of some legally protected right of the plaintiff, for example, trespass to property or trespass to the person. Conversion is another example. Such conduct on the part of the defendant is actionable as such and the belief of the defendant as to the legality of what he did is irrelevant. It is no defence for the defendant to say that he believed that he had statutory or other legal authority if he did not. The legal justification must actually exist otherwise he is liable in tort. (Northern Territory v. Mengel 69 A.J.L.R. 527, 547)

    On the other hand, where the plaintiff is not entitled to complain of the invasion of such a right but bases his claim on some loss which he has suffered consequentially upon some act of the defendant which the defendant mistakenly believed was authorised by the law, the defendant's honest belief provides him with an answer to the plaintiff's claim notwithstanding any actual illegality. Thus the holder of a public office who acts honestly will not be liable to a third party indirectly affected by something which the official has done even if it turns out to have been unlawful. Illegality without more does not give a cause of action. (Lonrho Ltd. v. Shell Petroleum Co. Ltd. (No. 2) [1982] A.C. 173, 189; Dunlop v. Woollahra Municipal Council [1982] A.C. 158, 172; Mengel at p. 546) There is no principle in English law that an official is the guarantor of the legality of everything he does; but he is liable if he injures another by an act which is itself tortious if not justified and he is unable to justify it, however honestly he may have acted.

    The subject matter of the tort of misfeasance in public office operates in the area left unoccupied by these limits. It does not, and does not need to, apply where the defendant has invaded a legally protected right of the plaintiff. It applies to the holder of public office who does not honestly believe that what he is doing is lawful, hence the statements that bad faith or abuse of power is at the heart of this tort. Similarly, it covers the situation where the plaintiff has suffered some financial or economic loss and therefore raises the question what relationship between the plaintiff's loss and the defendant's bad faith is required: hence the use of such expressions as "targeted malice". It is necessary to locate these words and concepts in the right places in the analysis of the constituents of the tort otherwise confusion can and does occur.

    My Lords, features of this tort have to be found both in the origin and in the consequence. The official must have dishonestly exceeded his powers and he must thereby have caused loss to the plaintiff which has the requisite connection with his dishonest state of mind. The correct formulation of this nexus is one of the points of difficulty coupled with the formulation of what state of mind of the official has to be shown.

    It is not necessary to discuss further who comes within the description 'holder of a public office'. It is a broad concept (Calveley v. The Chief Constable of the Merseyside Police [1989] AC 1228, Henly v. The Mayor of Lyme 5 Bing 91, 107-8) and has been further extended by recognising that there may be a vicarious liability of the relevant governmental authority for the acts of the public official. (Racz v. Home Office [1994] 2 A.C. 45)

    The argument before your Lordships has touched upon the question whether omissions as well as acts can give rise to the liability in this tort. I would answer this question by saying that the position is the same as in the law of judicial review. If there is an actual decision to act or not to act, the decision is amenable to judicial review and capable of providing the basis for the commission of the tort. If there is a legal duty to act and the decision not to act amounts to an unlawful breach of that legal duty, the omission can amount to misfeasance for the purpose of the tort. (Reg. v. Dytham [1979] 1 Q.B. 722; Henly at p. 107) What is not covered is a mere failure, oversight or accident. Neglect, unless there is a relevant duty of care, does not suffice and the applicable tort would then be negligence not misfeasance and different criteria would apply. (X (Minors) v. Bedfordshire County Council [1995] 2 A.C. 633, Mengel at p. 547)

    The relevant act (or omission, in the sense described) must be unlawful. This may arise from a straightforward breach of the relevant statutory provisions or from acting in excess of the powers granted or for an improper purpose. Here again the test is the same as or similar to that used in judicial review.

    The official concerned must be shown not to have had an honest belief that he was acting lawfully; this is sometimes referred to as not having acted in good faith. In Mengel, at p. 546, the expression honest attempt is used. Another way of putting it is that he must be shown either to have known that he was acting unlawfully or to have wilfully disregarded the risk that his act was unlawful. This requirement is therefore one which applies to the state of mind of the official concerning the lawfulness of his act and covers both a conscious and a subjectively reckless state of mind, either of which could be described as bad faith or dishonest.

    The next requirement also relates to the official's state of mind but with regard to the effect of his act upon other people. It has three limbs which are alternatives and any one of which suffices.

    First, there is what has been called 'targeted malice'. Here the official does the act intentionally with the purpose of causing loss to the plaintiff, being a person who is at the time identified or identifiable. This limb does not call for explanation. The specific purpose of causing loss to a particular person is extremely likely to be consistent only with the official not having an honest belief that he was exercising the relevant power lawfully. If the loss is inflicted intentionally, there is no problem in allowing a remedy to the person so injured.

    Secondly, there is what is sometimes called 'untargeted malice'. Here the official does the act intentionally being aware that it will in the ordinary course directly cause loss to the plaintiff or an identifiable class to which the plaintiff belongs. The element of knowledge is an actual awareness but is not the knowledge of an existing fact or an inevitable certainty. It relates to a result which has yet to occur. It is the awareness that a certain consequence will follow as a result of the act unless something out of the ordinary intervenes. The act is not done with the intention or purpose of causing such a loss but is an unlawful act which is intentionally done for a different purpose notwithstanding that the official is aware that such injury will, in the ordinary course, be one of the consequences. (Garrett v. Attorney-General [1997] 2 N.Z.L.R. 332, 349-350)

    Thirdly there is reckless untargeted malice. The official does the act intentionally being aware that it risks directly causing loss to the plaintiff or an identifiable class to which the plaintiff belongs and the official wilfully disregards that risk. What the official is here aware of is that there is a risk of loss involved in the intended act. His recklessness arises because he choses wilfully to disregard that risk.

    It is necessary to add some footnotes. I have used the word 'intentionally'. This relates to the doing of the act and covers a similar point to that referred to earlier in relation to acts and omissions. It indicates that the mind must go with the act. It does not require any specific intent (except in so far as having a specific purpose under the first limb imports an intent).

    The tort is historically an action on the case. It is not generally actionable by any member of the public. The plaintiff must have suffered special damage in the sense of loss or injury which is specific to him and which is not being suffered in common with the public in general. The three alternative limbs reflect this. The plaintiff has to be complaining of some loss or damage to him which completes the special connection between him and the official's act.

    The use of the word 'directly' has a similar connotation. The act of the official may have a widespread economic effect, indirectly affecting to some extent a wide range of diverse persons. This does not suffice to give any of them a cause of action. The relevant plaintiff must be able to bring himself within one of the three alternative limbs.

    Subjective recklessness comes into the formulation at the first and last stage because it is in law tantamount to knowledge and therefore gives rise to the same liability. (See Mengel at p. 554.) The word reckless is not normally used in relation to this tort; other words are used including 'blind disregard'. At the first stage the phrase 'without an honest belief' in the lawfulness of his conduct best conveys the requisite state of mind covering both actual knowledge and dishonest disregard. At the last stage, the phrase 'wilful disregard' best describes the element of subjective recklessness in the third limb and the word 'risk' is the appropriate word to use in conjunction with it.

    The use of the words foreseen or foreseeable is to be avoided. They are concepts borrowed from the law of negligence. This tort concerns deliberate acts. Thus in the first limb the criterion is having a specific purpose, a different concept from foresight. In the second limb the concept is acting intentionally with the knowledge that the act will have a particular consequence in the ordinary course. This is like foresight but represents rather a state of mind which colours the intentional or deliberate act.

LORD MILLETT

My Lords,

1. The Community Law Claim.

    I have had the advantage of reading in draft the speech of my noble and learned friend Lord Hope of Craighead. I propose to set out my own reasons for agreeing with him that this claim must fail.

The objects of the Directive.

    In my opinion it is plain that the Directive does not have as one of its objects the protection of depositors. That is the function of the various national banking laws of the member states. In order to achieve their purpose these place restrictions on the freedom to provide banking services. Such restrictions are inherently anti-competitive and thus contrary to article 59 of the E.E.C. Treaty (now article 49 E.C.), but (as the recitals to the Directive itself expressly recognise) some restrictions are necessary if the interests of depositors are to be properly safeguarded. As they are imposed by national legislatures such restrictions vary from one member state to another, and this inevitably has a distorting effect on the operation of the single market. The object of the Directive was to begin the process of co-ordination of the national laws in order to remove anti-competitive barriers to the free provision of banking services throughout the single market so far as this could be achieved without weakening or impairing the protection of depositors. Thus the adequate protection of depositors was not an object of the Directive but rather operated as a constraint upon the extent to which its object could be achieved. That this is the case is in my opinion confirmed by the judgment of the Court of Justice in Société Civile Immobilière Parodi v. Banque H. Albert de Bary et Cie (Case C-222/95) [1997] E.C.R. 1-3899.

    The identification of the object of the Directive, however, is only of marginal relevance in the present case, where the question is whether the Directive confers rights on individuals. That question must be determined by reference to the particular provisions of the Directive which are relied on. What is decisive is not the interest which a Directive as a whole seeks to protect, but the interest sought to be protected by the provisions which are alleged to have been breached: see Sacha Prechal Directives in European Community Law (1995), p. 138. Attempting to identify "the underlying object" or "main object" of a Directive and to distinguish it from other subsidiary objects is in my opinion as unprofitable as it is illusory.

    There is a further consideration. The question whether a particular provision of a Directive confers rights on individuals is a secondary question. It does not arise until a breach of the provision in question has first been established. In the present case the plaintiffs allege breaches of articles 3, 6, 7 and 8 of the Directive. Unless the plaintiffs can establish a breach of any of these articles, the question whether it confers rights on individuals does not arise.

Article 3: breach of the alleged obligation to withhold initial authorisation.

    As every banking supervisor would recognise, there is a critical difference between (i) withholding authorisation from a credit institution which is about to commence business and (ii) withholding authorisation from or revoking the authorisation of a credit institution which is already carrying on business. The former cannot injure anyone, not even the credit institution itself; it merely deprives it of an opportunity for profit. The latter damages and may destroy an established business and cause irreparable injury to the institution and its existing depositors. In the case of an existing business, there is a perennial conflict between the need to protect potential depositors and the interests of existing depositors, and difficult questions of judgment are inevitably involved.

    The Directive is careful to draw this distinction. It lays down precise requirements which must be met by a credit institution before it commences business; but it recognises that it would be inappropriate and potentially harmful to the interests of existing depositors to fetter the discretion necessary to deal with an institution already carrying on business.

    Article 3(1) imposes an obligation on member states to require credit institutions to obtain authorisation before commencing their activities. The Directive is not retrospective. B.C.C.I. had commenced its activities in the United Kingdom before the Directive came into force, and accordingly article 3(1) has no application to it. Article 3(2), which limits the power of the member state to grant authorisation, deals with the same subject-matter, viz. the authorisation of credit institutions proposing to carry on business in a member state. It requires the member state to withhold authorisation from a credit institution which does not comply with the relevant criteria. In the context of article 3 this does not include an institution like B.C.C.I. which is already carrying on business in the member state concerned. If the article applied to credit institutions already carrying on business in the member state, it would be inconsistent with the provisions of article 10(4).

    Credit institutions which commenced business in a member state before the Directive came into force are dealt with by article 10. Such institutions are deemed to be authorised and are subject to modified requirements. Whereas article 3(1) obliges member states to require credit institutions to obtain authorisation before commencing their activities, article 10(4) permits them to require institutions which are legitimately carrying on business without authorisation to obtain authorisation for the future. The United Kingdom could have exempted B.C.C.I. and other credit institutions which had commenced business in the United Kingdom before the Directive came into force from any requirement to obtain authorisation. It did not do so, but went further than the Directive required (though not further than it permitted) by obliging such institutions to obtain authorisation. In these circumstances an unlawful grant of authorisation in breach of the provisions of the Banking Act 1979 will amount to a breach of United Kingdom law but not of Community law.

    The appellants rely on Wagner Miret v. Fondo de Garantía Salarial (Case C-334/92) [1993] E.C.R. 1-6911 for the proposition that where a member state voluntarily assumes obligations laid down by a Directive it cannot escape liability by reason of the absence of any Community requirement to assume them. But that case dealt with the converse situation. There the Directive applied, but permitted member states to exclude certain categories of case from its scope. Spain did not exercise this power, and accordingly the Directive applied. The Court of Justice held that the fact that Spain could have excluded the operation of the Directive was no defence to a claim under Community law when it had not done so. The fact that the legal obligation had been voluntarily assumed did not alter its source, which was Community law. But in the present case there is no applicable Community law: article 3(1) of the Directive does not apply. The United Kingdom was not obliged by Community law to require B.C.C.I. to obtain authorisation or to withhold authorisation from it. The United Kingdom chose to impose its own requirements. Any obligation to enforce those requirements arises from national law, not Community law.

Articles 6 and 7: failure to provide continuous and effective supervision.

    I cannot see that these articles impose any such obligation. They impose obligations of co-operation and the establishment of appropriate ratios with a view to eventual standardisation. They take the existence of supervisory regimes in the member states for granted.

    But it is not necessary to decide this, because it is obvious that an obligation to provide "continuous and effective supervision" is far too imprecise and leaves far too great a margin of appreciation in member states to be capable of conferring rights on individuals in accordance with the jurisprudence of the Court of Justice.

Article 8: failure to revoke authorisation.

    Lastly the appellants allege a breach of an obligation said to be imposed by article 8 of the Directive to revoke an authorisation in certain defined circumstances. But the article imposes no such obligation. It provides that the competent authorities "may withdraw the authorisation . . . only" in the circumstances prescribed. The word "only" is critical to the meaning. "May" sometimes means "must"; but "may only . . . if" means "must not . . . unless." The article is not permissive, let alone obligatory. It is prohibitory. It forbids the member state to withdraw authorisation from a credit institution, with the attendant risk of loss to existing depositors, except in the circumstances prescribed. Where those circumstances exist, the article does not interfere with the power of the member state to withdraw authorisation at its discretion. But it does not oblige it to do so without regard to any of the countervailing considerations to which I have referred.

 
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