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Quarantining negligence

Feature Articles

Cite as: (2003) 77(4) LIJ, p.42

The Court of Appeal decision of National Australia Bank Ltd v Nemur Varity Pty Ltd reflects a judicial policy of quarantining certain areas of the law from the reach of negligence, adding the contractual relationship of banker and customer – and potentially all contractual relationships – to the list of “protected” areas.

By Dr Paul Vout

Banks cannot be found negligent in their dealings with customers. A cause of action in negligence is excluded whenever parties enter into a contract other than for professional services. So says the Court of Appeal in the recent decision of National Australia Bank Ltd v Nemur Varity Pty Ltd (NAB v Nemur).[1]

Consumer groups may see this case, and the policy it reflects, as further proof of the privileged position enjoyed by banks at the expense of their customers. Bankers and insurers would argue that the case imposes a small degree of restraint on an increasingly litigious society.

The important legal issue is, however, the exclusion of claims founded in negligence between parties to a contract.

Closing the gate to negligence

As Batt JA emphasises in the leading judgment in NAB v Nemur, “ the last fifteen years or so there has been a deliberate trend in courts of final arrest on the grounds of policy the expansion of the law of negligence into areas governed by contract, equity or statute”.[2]

Why is this trend occurring and what are its implications? Batt JA quotes Lord Scarman,[3] Gleeson CJ, McHugh, Gummow and Hayne JJ[4] but does not provide his own reasons for such a development. Plaintiffs everyday have a choice of causes of action. A claimant under the Goods Act 1958 may also plead in negligence. Partnership disputes may involve a statement of claim drawn in contract and equity. And certainly there is no historical repugnancy between the areas of contract and tort – in fact parties injured by a breach of contract causing physical damage, or arising from the breach of a warranty by a seller of goods, once relied utterly on a tortious claim in trespass (assumpsit and deceit respectively), rather than suing on the “covenant”, in order to be heard in the King’s courts where an agreement was not under seal.[5]

One of the best judicial examinations of the overlap between contract and tort was conducted by Lord Goff of Chieveley in Henderson v Merrett Syndicates Ltd[6] (Henderson), a decision of the House of Lords followed by the High Court in Astley v Austrust Ltd[7] (Astley). His Lordship noted that common lawyers did not segregate the law of obligations into contract and tort until after it became necessary to reclassify the law in substantive terms following the abolition of the forms of action by the Common Law Procedure Act 1853 (15 and 16 Vict cl 76). Even then His Lordship found it “...a remarkable fact that there was little consideration of the problem of concurrent remedies in our academic literature until the second half of the 20th century.”[8] But the issue is not only of academic interest. His Lordship adds:

“If concurrent liability in tort is not recognised, a claimant may find his claim barred at a time when he is unaware of its existence... Other practical problems arise, for example, from the absence of a right to contribution between negligent contract-breakers; from the rules as to the remoteness of damage, which are less restricted in tort than they are in contract; and from the availability of the opportunity to serve proceedings out of jurisdiction... [P]ractical considerations of this kind cannot be ignored.”[9]

His Lordship’s conclusion on the issue on behalf of the Law Lords came in the adoption of Justice Oliver’s view in Midland Bank Trust Co v Hett, Stubbs & Kemp.[10] Quoting Oliver J, Lord Goff wrote:

“A concurrent or alternative liability in tort will not be admitted if its effect would be to permit the plaintiff to circumvent or escape a contractual exclusion or limitation of liability for the act or omission that would constitute the tort. Subject to this qualification, where concurrent liability in tort and contract exist the plaintiff has the right to assert the cause of action that appears to be the most advantageous to him in respect of any legal consequences.”[11] (emphasis added)

That is, a claim in tort will only be limited by contract to the extent that the parties to that contract have expressly or impliedly limited the tortious liability of one or more parties.

In Astley, the High Court stated that “[h]istory and legal principle combine to indicate that the conclusion of the House of Lords in Henderson is the correct view.”[12] In reference to the implied term of reasonable care in a contract for professional services (in this case, the services of a solicitor), Gleeson CJ, McHugh, Gummow and Hayne JJ point out that unlike the duty of care arising under the law of tort, the promisee in contract always gives consideration for the implied term – a term that the parties can and often do bargain away. Their Honours continued:

“Rather than ask why the law should imply [a term of reasonable care] in a contract for professional services, it might be more appropriate to ask why should the law of negligence have any say at all in regulating the relationship of the parties to the contract. The contract defines the relationship of the parties.”[13]

The Court of Appeal has taken these words, spoken with reference to contracts for professional services where a contractual term imposing a duty to exercise reasonable care and skill is implied by law, and extended them to all contractual relationships – including those where no such term is traditionally implied.

Nab V Nemur – The Facts

From 1984 Nemur Varity Pty Ltd (Nemur), an insurance broker, conducted business with Australian National Intermediaries Pty Ltd (ANI) and its predecessor, which operated an underwriting agency business. In 1989 Nemur and ANI agreed to form a company, International Insurance Exchange Pty Ltd (IIE), which would be owned jointly by the two and which would market widely truck insurance. Nemur’s truck insurance business would be placed, via IIE, with Reinsurance Co of America (RCA). Two accounts for IIE were opened at the National Australia Bank Ltd (the Bank) Shepparton Branch, with the proprietor of Nemur, Mr Jarman, and his mother as signatories. Nemur began drawing cheques in favour of IIE for premiums for insurances to be placed with RCA and deposited them in one of the IIE accounts as agreed.

In July 1989 officers of ANI opened accounts in the name of IIE at the Bank’s North Balwyn branch and closed the Shepparton branch accounts. An amount standing to the credit of IIE was transferred to an account at North Balwyn without Mr Jarman’s knowledge. It was intended that the IIE money would be used by ANI to pay claims on RCA and thereby conceal the fact that no insurance policies were being placed with RCA. Nemur continued to place business with ANI as underwriting agent for RCA. Between July and September 1989 five cheques were drawn by Nemur. Four were in favour of RCA and sent to ANI. They were deposited by people acting for ANI in the IIE account at the Bank’s North Balwyn branch and collected by that branch for that account. The fifth Nemur cheque was used to effect a telegraphic transfer to RCA. It was taken to the Bank’s Shepparton branch with an application for a telegraphic transfer. The application named RCA as the beneficiary of the transfer but the account number of the beneficiary, which had been provided to Mr Jarman by ANI, was IIE’s account in North Balwyn. The value of the cheque was transferred by the Shepparton branch to the credit of IIE’s account in North Balwyn.

Mr Jarman subsequently discovered that no insurance had been placed by ANI with RCA and that ANI had no authority to place business with RCA. Nemur sued the Bank and the trial judge found that the Bank had converted the four cheques payable to RCA but collected by the Bank for IIE, had transferred the value of the fifth cheque to IIE instead of RCA, contrary to Nemur’s instructions, and had breached a duty of care owed to Nemur in relation to its omissions regarding the four cheques made out to RCA and in making the telegraphic transfer to IIE. Damages were awarded for conversion and negligence on the part of the Bank in an amount which included the value of the cheques and the transfer, as well as net loss of past and future business income (consequential loss).

The issue of negligence

On appeal to the Court of Appeal (Batt, Phillips and Callaway JJA) and in the course of submissions there, the appeal focused on the issues of causation and remoteness in relation to the award of damages for loss of business, as well as for negligence and conversion. In particular, the issue of whether or not the duties of a bank to its customers lie in contract or tort was raised and decided.

The decision

On the issue of the nature of the Bank’s duty to Nemur, Batt JA noted that there existed between the Bank and Nemur a continuing or standing banker/customer contract.[14] His Honour opined that the Bank’s duty of reasonable care and skill, breach of which the trial judge had found to have occurred in relation to the cheques and the telegraphic transfer, “was purely contractual and did not arise at common law” – that is, in tort. Batt JA quoted[15] with approval the opinion of Lord Scarman for the Privy Council in Tai Hing Cotton Mill Ltd v Liu Hing Bank Ltd:[16]

“Their Lordships do not believe that there is anything to the advantage of the law’s development in searching for a liability in tort where the parties are in a contractual relationship. This is particularly so in a commercial relationship.”[17]

Noting the “...deliberate trend in courts of final appeal...”[18] mentioned above, and after referring to a line of cases where negligence had been so quarantined, Batt JA turned to the High Court’s decision in Astley, quoting the passage in the judgment of Gleeson CJ, McHugh, Gummow and Hayne JJ set out above. His Honour concluded that:

“It is true that that case shows that professional persons are under concurrent liabilities in tort and contract, but the tenor of... the passage which I have quoted is against extending the law of negligence to relationships based in contract other than those for professional services, and in this area of discourse a banker is not a professional person.”[19]

On that basis his Honour excluded liability on the part of the Bank in negligence. Further, in that short leap, the Court of Appeal excluded liability (and thus any cause of action) in negligence wherever a contractual relationship exists other than that for the provision of professional services.

The contractual relationship between the Bank and Nemur did not, however, negate the Bank’s liability for the tort of conversion. The Court of Appeal found that the Bank’s liability in conversion was strict and that the test for remoteness of damage was not that applied in negligence, namely reasonable foreseeability of damage, but rather a stricter test requiring express notice or knowledge that in the ordinary course loss beyond the face value of the goods converted (the four cheques) would be occasioned.[20] This ruling, along with the application of the rule in Hadley v Baxendale[21] (which limits damages for breach of contract to loss that may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract), led the Court to find that the consequential loss suffered by Nemur was too remote to be recoverable against the Bank.


In adopting and applying to a contract for non-professional services the sentiments contained in the rhetorical question posed by the High Court in Astley,[22] the Court of Appeal has substantially enlarged the territory shielded from the reach of negligence. Where contracts for professional services were held by the House of Lords and the High Court to exclude liability in negligence as a result of the terms, express or implied, of such contracts, the Court of Appeal in NAB v Nemur purports to exclude the law of negligence from all contractual relationships by reason of that relationship alone and not as a result of the express or implied agreement of the parties under the contract. Where the House of Lords and the High Court were applying the ordinary rules of contract construction to contracts for professional services, the Court of Appeal has taken a different path.

In NAB v Nemur, Phillips, Callaway and Batt JJA appear to be applying something else – judicial activism. The decision to excise from the realm of contract all liability in negligence on the strength of the High Court’s obiter dictum (as the majority decision was in Astley insofar as might be taken to extend beyond contracts for professional services) on grounds of policy rather than the rules of construction is certainly brave. For it is a monumental shift in the judicial approach to concurrent liability in tort and contract and one, it is respectfully submitted, which the Court of Appeal was not justified in taking on the basis of Henderson or Astley. The elimination of negligence as a cause of action whenever two or more parties enter into a contractual relationship is a development which ought to have been left to the High Court or, better still, to Parliament. Removing from potential plaintiffs that which Lord Goff of Chieveley called the “right to assert the cause of action that appears to be the most advantageous” may, on a practical level, have its greatest effect on the amount of damages available to a plaintiff. But this is no small reduction (for example, as in NAB v Nemur, there is considerably less scope for damages for consequential loss), and as the High Court noted in Astley, negligence and contract also have different limitation periods and different apportionment rules[23] – factors which may work to the significant detriment of a plaintiff restricted to an action in contract for a butcher, banker or candlestick maker who before NAB v Nemur might have been found negligent.

DR PAUL VOUT is a barrister practising in equity, commercial, banking and finance law. He was a senior associate with Blake Dawson Waldron and was that firm’s first chief representative in China. He may be contacted through the Barristers’ Clerking Services Pty Ltd (List A).

[1] [2002] VSCA 18.

[2] Note 1 above, at para 47.

[3] In Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80; note 1 above, at para 46.

[4] Astley v Austrust Ltd (1999) 197 CLR 1; note 1 above, at para 47.

[5] See Baker, JH, An Introduction to Legal History (3rd edn), 1990, Butterworths, pp374-378.

[6] [1995] 2 AC 145, at 184-194.

[7] Note 4 above.

[8] Note 6 above, at 185.

[9] Note 6 above, at 185-186.

[10] [1979] Ch 384.

[11] Note 6 above, at 191, quoting Oliver J in note 10 above.

[12] Note 4 above, Gleeson CJ, McHugh, Gummow, and Hayne JJ at 22.

[13] Note 1 above, at para 47, quoting from Astley (note 4 above), Gleeson CJ, McHugh, Gummow and Hayne JJ at 22.

[14] Note 1 above, at para 45.

[15] Note 1 above, at para 46.

[16] Tai Hing, note 3 above.

[17] Tai Hing, note 3 above, at 107.

[18] Note 1 above, at para 47.

[19] Note 1 above, at para 47.

[20] Note 1 above, at para 57-58, applying obiter dictum in France v Gaudet (1871) LR 6 QB 199.

[21] (1854) 9 Exch 341; 156 ER 145.

[22] Note 4 above, Gleeson CJ, McHugh, Gummow and Hayne JJ at 22.

[23] Note 4 above, Gleeson CJ, McHugh, Gummow and Hayne JJ at 23.


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