MISFEASANCE
IN
PUBLIC
OFFICE,
GOVERNMENTAL
LIABILITY,
AND
EUROPEAN
INFLUENCES
MADS
ANDENAS*
AND
DUNCAN
FAIRGRIEVE**
I.
INTRODUCTION
The
protection
offered to individuals
by
remedies in
public
law
and tort law is
developing
in
all
jurisdictions.
The
past
few
years
have
witnessed
an
increas-
ingly important
European
dimension to the tort
liability
of
public
authorities.
European
Union law and
European
Human
Rights
law have
added to the
constitutional
protection
of tort claims
against public
authorities
already
estab-
lished as
a
matter
of
domestic law
in
many
European
countries.
In
this
setting,
English,
French,
and
Italian courts have dealt with
the liabil-
ity
of
banking regulators
for lack of
supervision
of
banks.
Moreover,
there has
been
parallel litigation
before the
English
and French courts
concerning
liabil-
ity
of the
respective regulators
for
the
failure of
the Bank of
Credit and
Commerce
International
('BCCI').
In
this article it
is
argued
that the
expansion
of tort
liability
for
misfeasance
in
public
office
in
the House of Lords' recent decisions
in
Three
Rivers
District Council
v Bank
of
England1
may
contribute to
resolving
possible
conflicts
with
the
European
Convention
of Human
Rights.
It
may
also
reduce
the
differences
in the
protection
offered under
English
law
and EU law.
Finally,
it is
argued
that when it comes
to
establishing limiting
mechanisms
replacing
the ones that have been
eroded,
English
law
may
make
good
use of
French and EU law.
This
article is
organised
in
the
following way.
In
Part
II,
the
framework for
banking supervision
in the
United
Kingdom
is
examined,
and the
requirements
for
liability
under
English
law are set out.
Liability
under EU law
in
the
BCCI
case
is
discussed
in
Part
III.
Comparative
law material is introduced
in
Part
IV,
with reference
to
parallel proceedings
and
developments
in
other
European
jurisdictions.
In Part
V,
some EU
law
issues
are
revisited,
in
particular.
In Part
VI,
in
the
light
of
the EU
and
European
discussion,
we return to consider the
*
Director,
British Institute of International and
Comparative
Law, London;
Senior
Teaching
Fellow,
Institute
of
European
and
Comparative
Law,
and
Fellow,
Harris Manchester
College,
University
of
Oxford.
**
Fellow
in
Comparative
Law,
British
Institute
of
International and
Comparative
Law,
London;
Maitre
de
Confirences
invitd,
Universit6
de Paris
1,
Sorbonne.
1
Three Rivers District Council
and
others
v
Governor
and
Company of
the Bank
of England
[2000]
2
WLR
1220;
Three Rivers District Council and others
v
Governor and
Company of
the
Bank
of England
[2001]
UKHL 16.
[ICLQ
vol
51,
October 2002
pp
757-780]
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758 International and
Comparative
Law
Quarterly
broader
implication
of misfeasance
in
public
office and its role
in
relation to
English negligence
liability.
II.
ENGLISH LAW: STATUTORY IMMUNITY
AND MISFEASANCE
The case of Three Rivers District Council
v
Bank
of England2
arose out of
alleged
misfeasance
by
the
Bank of
England
in
supervising
the Bank of
Credit
and Commerce International
(BCCI).
After
BCCI
went into
liquidation depos-
itors
brought
damages
claims which were
struck out
in
the
High
Court and
Court of
Appeal.3
In
the House of
Lords,
the
first
hearing
was restricted to two
questions
of
law.4 The first
question
concerned
the
exact
ingredients
of
the
tort
of misfeasance
in
public
office. The
way
the relevant elements of this
tort were
dealt
with,
in
four
separate speeches,
has not aided the
process
of
clarification.
It illustrates the
process
of
development
of the law
and also the
uncertainties
left at this
stage.
The
second
question
was
whether the Bank
of
England
was
capable
of
being
liable
in
damages
to the claimants
for
violation of
Community
law as laid down
in
the First
Banking
Directive.5 The House of
Lords held that the claimants did not have a
damages
remedy
under
Community
law.
The second
hearing
before
the House of
Lords dealt with the
question
whether it was
right
to
strike
out the
claimants' action on the
basis that
there
was no reasonable
prospect
of
the claim
succeeding
at
trial.6
The
strike
out
application
made
by
the Bank
of
England
was
rejected
by
a
majority
of the
House
of
Lords.7
A
crucial factor
in
their decision
was the
reliance,
of
the
judge
at first instance
and
the
majority
in
the Court of
Appeal,
on the
findings
of the
Bingham Report
into the
supervision
of
BCCI.8
Lord
Hope
said
that
Bingham
LJ
was not
in
a
position
to conduct
a fair
trial
of
the issues
relating
to the tort
of misfeasance
in
public
office.9
He
agreed
with the
dissenting opin-
ion of
Auld
LJ
in
the Court of
Appeal
that it
would not be
right
to
treat the
2
Three Rivers District Council
[2000]
2
WLR
1220;
Three
Rivers District Council
[2001]
UKHL
16.
3
At first
instance,
after
initial
proceedings
concerning
various
preliminary
issues of
law,
Clarke J acceded to the Bank
of
England's application
to strike
out the action
(Judgment
of
30
July
1997
(unreported)).
The Court of
Appeal
upheld
Clarke J's decision in a
joint majority
judg-
ment of
Hirst and Robert
Walker
LJJ;
Auld
LJ
dissented:
Three Rivers DC
v
Bank
of
England
[1999]
EuLR 211.
4
Three
Rivers District
Council
[2000]
2 WLR
1220.
5
First Council
Banking
Co-ordination
Directive of 12 Dec
1977
(77/780/EEC).
6
Under the transition
arrangements
guiding
the introduction of
the Civil Procedure
Rules
(CPR)
in
1999,
the
question
whether
the misfeasance claim
should
be
struck
out was
determined
according
to the
CPR:
Three
Rivers District Council
[2001]
UKHL
16,
paras
12-13.
7
The Bank of
England
asked the
House
of
Lords
to
give summary
judgment against
the
claimants under Rule 24.2
CPR. Lords
Steyn, Hope,
and Hutton allowed the
appeal against
the
striking
out of
the claim. Lords
Hobhouse and
Millett
dissented.
8
Inquiry
into the
Supervision of
the Bank
of
Credit
and
Commerce International
HC
Paper
(1992-3),
no 198.
9
Three Rivers
District Council
[2001]
UKHL
16,
para
33
and 80.
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Misfeasance
in
Public
Office
759
Bingham Report
as
effectively
conclusive on the
questions
that arose in
the
litigation.10
Lord
Hutton also
agreed.
He held it
impermissible
for the
judge
and
the
majority
of the
Court
of
Appeal,
in
deciding
at this
interlocutory
stage
whether there was no real
prospect
of the
action
succeeding,
to be
influenced
by
the
findings
and conclusions
of
Bingham
LJ.1
Disregarding
for this
reason
the conclusions in the
Bingham
Report,
the
majority
held that it
could not
be
said the claim had no
real
prospect
of
succeeding.
The claim
had
to
proceed
to
trial. There are
important
statements,
in
particular
in
Lord
Hope's
speech,
about
the
elements of misfeasance which both
aid the
process
of
clarification
and the
development
of the tort.
The
main features of the
UK
model
of
banking supervision
are
briefly
set
out below. It is followed
by
an outline of the law on tort
liability
applying
to
the Bank of
England
as
banking
supervisor.
The scene is
then set for the
discussion of the
Three
Rivers
case.
A.
The Reluctant and
Immune
Supervisor
The UK model
of
banking supervision
remained
a minimalist
one
under the
responsibility
of the Bank of
England.
Until
the
adoption
of the
Banking
Act
1979
supervision
was
implemented
on an
informal basis12 with
no
compre-
hensive
legislative
backing.13
The
Banking
Act
1979
created a
statutory
system
for authorisation of all
deposit-taking
institutions.
This was
modernised
by
the
Banking
Act
1987
which increased
the Bank of
England's
power
to
regulate,
vet
controlling
shareholders,
and
require
information.14
In
1988
the
Bank
published
a
Statement
of
Principles.15
The
Statement
lays
down
in
some
detail the
grounds
for
using
the
powers
to revoke and restrict
an
authorisation
under the 1987
Act.
The
protection
of
depositors
was set
out,
in
the
long
title of the
1979
and
1987
Acts,
as the
prime objective
of
banking supervision.
In
contradiction
to
this,
the focus
of a
new
ideology
of
banking
supervision, prudential supervi-
sion,
became
the
solidity
of financial
institutions
and
payments systems.
Supervision
should
prevent
contagion
and
systemic
risk that could threaten the
10
Ibid,
para
33
and 86.
"
Ibid,
para
132.
12
Banking supervision
was not
without
bureaucracy:
there were
many
administrative
permits
and
dispensations
which had
to be
obtained
if a full
range
of
banking
activities
were to
be
attained.
This
served
more as a barrier
to
entry
than
a basis for
real
supervision.
'The
underlying
idea was
to
await the
development
of a new
financial
institution and then
make a
judgement',
W
M6schel,
'Public
Law of
Banking'
(1991)
Int
Enc
Comp
Law,
vol
IX,
ch
III,
at
para
20.
13
The Bank
never
formally
invoked
the
power
of
recommendation
and direction contained
in
s
4(3)
of the
Bank
of
England
Act 1946.
The Bank's
approach
to
supervision
was that of a
gentle-
man's
code
of ethics
and
self-regulation.
See
G
Penn,
Banking
Supervision
(London:
Butterworths,
1989),
10-11.
14
Ibid,
15.
15
The current
Statement
of
Principles
from
1998
was issued
by
the Financial
Services
Authority
and is
complemented
by
the
very
extensive Guide
to
Banking Supervisory
Policy.
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760 International
and
Comparative
Law
Quarterly
stability
of the
banking
system.16
The
Bank
of
England
developed
this
over
the
years, partly
in
response
to criticism
over
its
handling
of the
different
banking
crises,17
and
partly
in
interaction with international
standard
setting.
In this
new
perspective,
individual bank
insolvency
could
be
acceptable.
Indeed,
under certain
circumstances,
it
might
even
promote
the soundness
of
the financial
system.18
This redefinition
created
a
clear
tension
in
relation
to
the Bank
of
England's
statutory
duties,
both under domestic
and
EU
law.
The
change
to
modern
methods of
banking supervision19
and
the
develop-
ment
of
formal
powers
was a
long
and
gradual process.
This added
another
tension: the
continued reliance on
informal
supervision
after
the
establishment
of a formal framework
with
legal
duties and
sanctions
for
breach of
those
duties. In the
Bank's
practice,
omissions to make
use
of
formal
sanctions
could for
instance
be
justified
with market
reactions.20 The
Bank
could omit
to
use
sanctions where
its 'moral
suasion'
failed,
even
though
this
contrasted
with the
philosophy
of
the
legislation
and the
Bank's own
Statement
of
Principles.21
The
Bank of
England
Act
1998
followed
yet
another
banking
crisis,
this
time
ushering
in
radical
reform. The
1998 Act transferred
banking supervision
from the
Bank
of
England
to
the
Financial
Services
Authority,
an
independent
financial
services
regulator.
The
Bank of
England
retained certain
functions
in
relation
to the
supervision
of banks'
liquidity.
In
terms of
potential
liability,
a
statutory
immunity
from
damages
liability
was
introduced under the
Banking
Act
1987.22
Under the terms
of the
statute,
liability
may only
arise
if
the
impugned
act or
omission
'was in
bad
faith'.23
16
See the
discussion of
systemic
risk in R
Cranston,
Principles of
Banking
Law
(Oxford:
Oxford
University
Press,
1997),
71-2.
17
See,
for
instance,
the
submissions
by
the
Governor of the
Bank of
England
and
its other
representatives
to
parliamentary
committees and the
annual
reports
by
the
Bank on
banking
super-
vision.
18
The
advantages
for a
banking supervisor
are
obvious.
Compare
systemic
risk,
which has not
yet
ever
materialised in a
systemic
collapse,
as the
only
standard of
accountability
with loss for
depositors,
which
occurs with
most
individual bank
failures.
19
See the
discussion
of
these
issues
in
Cranston,
op
cit,
91-2.
20
For
instance,
it
could be
claimed that
that the
market
would withdraw
from a
bank whose
activity
was
restricted. This
could
bring
about the
collapse
of
the
bank with
possible
consequences
for the
stability
of
the
banking
market.
21
This
is
well
documented in the
Rt
Hon
Lord
Justice
Bingham's
Inquiry
into
the
Supervision
of
the
Bank
of
Credit
and
Commerce
International
(HC
Paper
(1992-3),
No
198)
and in
Report
of
the
Board
of
Banking Supervision
Inquiry
into
Circumstances
of
the
Collapse
of
Barings
(1995).
At
260 of the
latter
Report
it was
noted that
no
in situ
inspection
('visit')
to
Barings
Bank
was
ever
undertaken
before its
collapse
in
1995.
22
Banking
Act
1987,
s
1(4).
See
now
Sch
1,
s
19(1)
of the
Financial
Services and
Markets Act
2000. For an
in-depth
analysis
of
UK
law,
see C
Hadjiemmanuil,
Banking Regulation
and
the Bank
of England
(London: LLP,
1996)
and
the
more
general
discussion in
Cranston,
op
cit,
91
et
seq.
23
This
immunity
reaches
further
than
restricting
mechanisms
in
other
European
jurisdictions.
It is for
instance
undisputed
that German
regulators
will
be liable
in
negligence
to the
banks
they
supervise.
The
possible
restrictions in
German tort
liability
are
in relation
to
depositors,
other
creditors
and
shareholders.
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Misfeasance
in Public
Office
761
Regardless
of
the
statutory provisions,
regulators
have
traditionally
been well
protected
by
the
common law. The cases
concerning
liability
in
negligence
have
been restrictive and
not
imposed
any duty
of care
upon regulators
in
respect
of economic loss.24
The
cases
concerning
the
supervision
of financial
institutions
confirm
this
restrictive
approach.25
Thus,
the
statutory
immunity
may
well have been
superfluous
in
1987.
But as the common
law
develops,
and
tort
liability expands,
the
immunity may
become more
important.
The
statutory
immunity
is
not
applicable
to acts taken
in bad faith. This
exception
allowed for
claims based
on
the tort of misfeasance
in
public
office.
Misfeasance
in
public
office is the
only specifically 'public
law' tort in
English
law.26 In
the
BCCI case the claims
against
the Bank
of
England
were
based
on the tort
of misfeasance in
public
office,
and the remedies
under
Community
law.
B.
Misfeasance
in Public
Office:
The
Mental
Requirements
The essence
of
misfeasance
is
the exercise
of
power by
a
public
officer in bad
faith
that
causes
loss to
the
claimant.27
The crucial element of
this tort is
the
mental
requirement,
which
may
be
divided
into
two alternatives.
First,
the
most
stringent
form of this tort
is
known
as
targeted
malice.
It
requires proof
that
a
public
officer has acted
with
the
intention of
injuring
the
claimant.28 The
second
form,
untargeted
malice,
is made
out when
a
public
officer acts
in the
knowledge
that he exceeds
his
powers,
and that this
act would
probably
injure
the claimant.29
The focus
of
the
litigation
before the House
of
Lords
in the Three Rivers
case
was
upon
the second
less
stringent
form,
untargeted
malice.
In
the
House
of
Lords,
the debate over
the mental element
in
misfeasance
concerned two
sepa-
rate
questions.
The first
question
is the
public
officer's
knowledge
of
the
unlaw-
fulness
of his or her act.
Must it be shown
that the defendant
knew
or
suspected
that the
act was unlawful? Or
is
it sufficient
to show that he
ought
to have known
that
such
was the case?
Which of these
differing
standards
is
applicable?
24
See,
eg,
Lam v Brennan
[1997]
PIQR
P488
(planning
control);
Reeman
v
Department
of
Transport
[1997]
2
Lloyd's Rep
648
(health
and
safety
regulation).
See discussion
in H
McLean,
'Negligent
Regulatory
Authorities
and
the
Duty
of Care'
[1988]
OJLS
442;
PP
Craig
and D
Fairgrieve,
'Barrett,
Negligence
and
Discretionary
Powers'
[1999]
Public
Law
626
and 646.
25
Yuen
Kun
Yeu
v
Attorney
General
of Hong
Kong
[1988]
AC
175;
Davis
v
Radcliffe
[1990]
2 All ER 536.
26
See
Bourgoin
SA
v
MAFF
[1986] QB
716,
776. See
also
Dunlop
v
Woollahra
Municipal
Council
[1982]
AC
158, 172;
Jones
v
Swansea
CC
[1990]
3 All
ER
737.
27
Generally,
see
Craig,
Administrative
Law,
4th edn
(London:
Sweet
&
Maxwell,
1999),
875-80;
S Arrowsmith,
Civil
Liability
and Public
Authorities
(Winteringham: Earlsgate,
1992),
226
ff;
W
Wade,
Administrative
Law,
8th edn
(Oxford:
Oxford
University
Press,
2000),
765
ff;
McBride,
'Damages
as a
Remedy
for
Unlawful
Administrative
Action'
[1979]
CLJ
323.
28
Bourgoin
SA
v MAFF
[1986] QB
716,
776. See
also
Dunlop
v
Woollahra
Municipal
Council
[1982]
AC
158,
172.
29
Three
Rivers
District Council
[2000]
2
WLR 1220 and
[2001]
UKHL
16.
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