Threatening banks with accessory liability claims

DF Dugdale, New Zealand Business Law Quarterly Volume 10

This article considers the much discussed Court of Appeal decision in US International Marketing Limited v The National Bank of New Zealand Limited1 and discusses when a bank should be liable to a third party for aiding a breach of trust by the bank's customer.

The company was a customer of the bank and wished to make payments out of its account. The bank subsequently received a letter claiming that another company in liquidation was entitled to $15,000 that was held in that company's account. The bank sought legal advice and then froze the customer's account.

The bank was sued by the company for damages for breach of contract (being a breach of the promise to pay out the money deposited at the bank on the agreed terms). The Court of Appeal overturned the High Court's decision and held that the bank was liable to pay damages to the company for freezing its account. The test adopted by the Court was whether the bank had acted dishonestly in the circumstances. If so, they would be liable for breach of trust.

In his judgment, Justice Tipping noted that the banks are facing a dilemma. If a bank freezes funds, then it may be liable to compensate the customer for loss if there are insufficient grounds to freeze the account. On the other hand, if a bank knows that a third party has a beneficial interest in the funds and declines to freeze the funds, then it may be subject to a claim for dishonest assistance.

Mr Dugdale argues in this article that the judge overstated the dilemma that banks are facing. He considers that only in very rare circumstances will a bank face a claim for dishonest assistance if it complies with its customer's directions instead of complying with the requests of a third party. The author argues his point on the basis that "it is both socially desirable and commercially essential that a bank should fulfil its obligations to provide to its customers the service that it has promised to provide".

Mr Dugdale goes on to state that, if a third party considers that they have such a claim, they should apply to the Court for an injunction rather than contacting the bank to freeze the funds. He concludes that "it is difficult to see how a banker can ever be held to be dishonest simply because he has loyally done what he promised his customer to do rather than breaching that obligation relying on assertions by a stranger to the contract".

1(Court of Appeal, Auckland, CA 144/02, 28 December 2003, Tipping, Anderson & Glazebrook JJ)

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