Three Rivers District Council v Governor and Company of the Bank of England (No. 3)

JurisdictionEngland & Wales
JudgeLORD JUSTICE AULD,Lord Justice Hirst,Lord Justice Auld,Lord Justice Robert Walker
Judgment Date04 December 1998
Judgment citation (vLex)[1998] EWCA Civ J1204-1
Docket NumberCase No: QBCMI 97/1391/3
CourtCourt of Appeal (Civil Division)
Date04 December 1998
Three Rivers District Council & Others
Governor & Company of the Bank of the England

[1998] EWCA Civ J1204-1


Lord Justice Hirst

Lord Justice Auld and

Lord Justice Robert Walker

Case No: QBCMI 97/1391/3





Lord Neill QC, Mr D.Vaughan QC, Mr R.Sheldon QC, Mr R.Dicker and Mr D.Dowley (instructed by Messrs. Lovell White Durrant) appeared on behalf of the Appellants

Mr N.Stadlen QC, Mr P.Lasok QC, Mr M.Philips, Mr B.Thanki, Mr R.Thompson and Mr B.Valentin (instructed by Messrs. Freshfields) appeared on behalf of the Respondent.


Hirst LJ

I Introductory sketch
II Banking regulation
III The rise and fall of BCCI
IV The proceedings before Clarke J
V Issues on the appeal
VI The issues and arguments in broad outline
VII The authorities in broad outline
VIII The old cases
IX Bourgoin v MAFF
X The Commonwealth cases
XI The English cases subsequent to Clarke J's decision
XII No duty of care—the two Privy Council cases
XIII Dishonesty, knowledge and recklessness
XIV Proximity
XV Conclusions
XVI Causation of loss
XVII Potential depositors
XVIII Introduction
XIX Did the 1977 Directive confer rights on depositors ?
XX Conclusions on EU Law
XXI Principles
XXII The plaintiffs' pleaded case
XXIII The Bingham report
XXIV The original authorisation
XXV June 1980 to December 1986
XXVI December 1986 to April 1990
XXVII April 1990 to July 1991
XXVIII Conclusions

Introductory sketch

This is the joint judgment of myself and Robert Walker LJ, to which we have both contributed.

This is an appeal (with the leave of the Judge) from an order of Clarke J. made on 2 October 1997. The order struck out the plaintiffs' re-amended statement of claim and dismissed the action. It also made declarations which reflected the Judge's three successive judgments (delivered on 1 April 1996, 10 May 1996 and 30 July 1997). The first two of those judgments (reported at 1996 3 AER 558 and 634) dealt with three preliminary issues of law which had been directed by the Judge's order of 19 July 1995. The third judgment considered various further amendments to the plaintiffs' statement of claim which had been proposed, and concluded (on the assumption that the earlier judgments were correct) that the plaintiffs' claim was bound to fail, and should be struck out.

The plaintiffs (the appellants in this court) consist of over 6000 persons from all over the world who were depositors with United Kingdom branches of Bank of Credit and Commerce International SA (BCCI SA) together with BCCI SA (in liquidation) as equitable assignee of the depositors' claims. The defendant (the respondent in this court) is the Governor and Company of the Bank of England (the Bank). As is notorious, BCCI SA and its associated companies collapsed in July 1991 with huge deficiencies, much of which resulted from fraud on a very large scale. As Lord Justice Bingham said in the published summary of the report of his inquiry (the Bingham report), paragraph 2.3,

"The systematic frauds now thought to have been practised in BCCI were on a scale which had never been known before".

BCCI SA was incorporated in Luxembourg, as was its holding company. The other principal company in the group, Bank of Credit and Commerce Overseas Ltd ("Overseas") was incorporated in the Cayman Islands. In this judgment we will use 'BCCI' to refer to the group or its managers generally, in contexts where it is unnecessary or inappropriate to refer to any particular group company. No group company was incorporated in any part of the United Kingdom. Nevertheless BCCI SA carried on a large-scale business as a deposit-taker in this country, and after a few years it became clear that its principal place of business was in London. Responsibility for supervision of its activities in this country was borne by the Bank (concurrently in some respects with the regulatory authorities in Luxembourg) under the Banking Acts of 1979 and 1987, which are referred to further in section II below.

The first plaintiff Three Rivers District Council (a local authority which made deposits with BCCI SA) and its co-plaintiffs other than BCCI SA itself commenced proceedings by a writ issued on 24 May 1993. BCCI SA was not joined as a claiming plaintiff until 30 November 1994, and then only after interlocutory skirmishing which reached this court (1995 4 AER 312). The plaintiffs' essential claim was for damages for the tort of misfeasance in public office.

On 19 July 1995 the Judge directed that the following questions (as later reformulated) should be tried as preliminary issues, on the assumption of the truth of the facts pleaded in the re-amended statement of claim:

(1) Is the defendant capable of being liable to the plaintiffs for the tort of misfeasance in public office ?

(2) Were the plaintiffs' alleged losses capable of being caused in law by the acts or omissions of the defendant ?

(3) Are the plaintiffs entitled to recover for the tort of misfeasance in public office as existing depositors or potential depositors ?

These are the first, second and third preliminary issues referred to in the three judgments which resulted in the order under appeal. The Judge's conclusions on these preliminary issues, and the further hearings leading up to the judgment of 30 July 1997, are summarised in section IV below. The issues on the appeal (as they appear from the plaintiffs' lengthy notice of appeal and the Bank's even lengthier respondent's notice) are summarised in section V below.

Before coming to those matters, however, it is necessary to give a brief outline of domestic and European legislation relating to banking supervision (section II) and the rise and fall, between 1972 and 1991, of BCCI SA and its associated companies (section III). This outline of the history will have to be filled in with more detail at a later stage. It is heavily indebted to the Bingham report, although the extent to which either party can rely on what that report says about controversial issues is a point to which it will be necessary to return.


Banking regulation

Until the enactment of the Banking Act 1979 (the 1979 Act) there was no formal and systematic regulation of banking in the United Kingdom. Regulation and supervision depended on the Bank's informal influence and on a disparate collection of statutory provisions, including Schedule 8 to the Companies Act 1948, under which banks recognised by the Board of Trade and the Bank obtained certain accounting privileges. The secondary banking crisis of 1973—4 was one matter prompting legislative activity in this area ; another was the impact of what is now the European Union (EU, which we use to include EEC and EC).

The 1979 Act was preceded by a White Paper in 1976 and also by the First Council Banking Co-ordination Directive of 12 December 1977, 77/780 (the 1977 Directive). The 1977 Directive was the first important step taken by the EU on the road to creating a common market in banks and other credit institutions. That is common ground between the parties, but there is acute controversy as to whether the 1977 Directive conferred any (and if so what) directly enforceable rights on depositors. The plaintiffs rely particularly on Articles 3, 7 and 8, which are in Title II (Credit institutions having their head office in a Member State and their branches in other Member States). Article 3 begins as follows :

"1. Member States shall require credit institutions subject to this Directive to obtain authorisation before commencing their activities. They shall lay down the requirements for such authorisation subject to paragraphs 2, 3 and 4 and notify them to both the Commission and the Advisory Committee.

Paragraphs 3 and 4 of Article 3 contain further provisions relating to authorisation, including (Article 3(3)(d), first indent) the security of savings as one of the aims of the general criteria for authorisation. Article 6 also refers to the protection of savings. Article 7 requires the competent authorities of the Member States concerned to collaborate closely in the supervision of credit institutions with their head offices in one Member State and their branches in another. They are to supply one another with information needed to facilitate supervision and monitoring of liquidity and solvency. Article 8 deals with the circumstances in which the competent authorities may withdraw an authorisation already granted. These include (Article 8(1)(c) and (d)) circumstances in which the institution no longer fulfils the conditions for authorisation, or no longer possesses sufficient own funds or can no longer be relied on to fulfil its obligations to its creditors.

The 1979 Act gave effect to the 1977 Directive, but went further than the 1977 Directive required in establishing a new statutory system of banking supervision in the United Kingdom. The 1979 Act drew a distinction between banks (which might be recognised under section 3(1) if satisfying the criteria in Schedule 2, Part I) and deposit-taking institutions (which might be licensed under section 3(2) if satisfying the criteria in Schedule 2, Part II). In order to be recognised as a bank an institution had to provide either a wide range of banking services or a highly specialised banking service. It had to enjoy a high reputation and standing (Schedule 2, Part I,...

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