The Supreme Court held that a bank was not liable to the Playboy Club for a negligent credit reference on which the Club had secretly relied. The reference was addressed to an associated company, and the bank neither knew of the Club nor had reason to think that anyone else would act on it. Describing the Club as an undisclosed principal did not create the relationship required for a duty of care.
How the reference was obtained
In October 2010 Hassan Barakat, a Lebanese resident known at a casino in Lebanon but new to the London Playboy Club, asked for a cheque cashing facility of up to £800,000. For a gambler in his position, the Club required a banker’s reference for twice that sum, £1.6 million. It did not want the purpose disclosed, so it did not ask his bank itself. An associated company, Burlington Street Services Ltd, made the request without revealing the purpose or the fact that the reference was required for another company.
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Mr Barakat named Banca Nazionale del Lavoro in Reggio Emilia and consented to a reference being given to Burlington. The request, forwarded by National Westminster Bank, asked about his means, standing and trustworthiness to meet a commitment of £1,600,000 at any one time. On 13 October 2010 the bank replied to Burlington, care of National Westminster Bank. It said that he had an account and was trustworthy up to £1,600,000 in any one week, adding: “This information is given in strict confidential”.
The Club granted the facility and shortly afterwards increased it to £1.25 million. From 15 to 18 October Mr Barakat drew two cheques for £1.25 million, received chips of the same amount, and was paid net winnings of £427,400. Both cheques were returned unpaid. Including gaming duty, the Club’s net loss was £802,940. It was common ground that the bank had no reasonable basis for the reference. It opened an account for him only two days later. The account had a nil balance and was closed on 14 December 2010.
Who was owed a duty?
The Club, Burlington and another associated company sued the bank. Only the Club had suffered a loss. His Honour Judge Mackie QC decided that the bank owed the Club a duty of care in relation to the reference. The Court of Appeal held that the only duty was owed to Burlington, the company to which the reference was addressed. The Supreme Court had to decide whether the bank was liable to the Club, which had relied on the reference as Burlington’s undisclosed principal.
Lord Sumption, with whom Lady Hale, Lord Reed and Lord Briggs agreed, compared the facts with Hedley Byrne & Co Ltd v Heller & Partners Ltd. There, a bank gave a reference to the inquirer’s own bank. The House of Lords inferred that it appreciated the inquiry was for a client who would rely on it, even though the client was not named. Reasonable reliance, together with that appreciation, created a duty of care and allowed recovery of a purely economic loss.
The duty still depends on a voluntary assumption of responsibility, as confirmed in NRAM Ltd v Steel. Responsibility is assumed to an identifiable person or group, not necessarily one already named, and not to the world at large. In Caparo Industries plc v Dickman, foreseeable reliance was not enough. The maker must know that the statement will be communicated to the claimant, or an identifiable class, in connection with a particular transaction or kind of transaction, and that the claimant is very likely to rely on it for that purpose.
Counsel for the Club accepted that there was no evidence the bank knew the reference would be communicated to or relied on by anyone other than Burlington. Lord Sumption went further: communication to and reliance by that other person must also be part of the statement’s known purpose. In Hedley Byrne the client was unnamed but readily identifiable. The Club was entirely undisclosed.
Why an undisclosed principal could not sue
The Club argued that the relationship was “equivalent to contract”, Lord Devlin’s description in Hedley Byrne of a relationship close enough to found a duty of care. In contract, an undisclosed principal may sue on a contract made by an agent acting within the agent’s actual authority. The Club said it could likewise take the benefit of the responsibility assumed towards Burlington.
Lord Sumption rejected that argument. First, “equivalent to contract” expresses proximity and explains why economic loss may be recovered where a service is performed in a relationship that would be contractual if consideration had passed. It does not import every legal incident of a contract. Secondly, liability to an undisclosed principal is a legal construct, not a conclusion from any factual relationship. The bank and the Club had no dealings with one another. That connection was not proximate, voluntary or consensual, and it lacked the features required by Caparo. Thirdly, the contract rules form a package: the principal may sue and be sued, the other party must elect whether to sue the agent or the principal, and defences against the agent are available against the principal. Importing only the right to sue would create no corresponding mutuality in tort.
The bank had supplied the reference without sufficient care, but that fact did not identify the Club as someone to whom it had assumed responsibility. Nothing told the bank that Burlington sought the reference on the Club’s behalf.
Lord Mance: the purpose was broad, the audience was not
Lord Mance agreed that the claim failed, but not because the bank had not been told the purpose. Had Burlington itself operated the club and suffered the loss, he considered that Burlington should have succeeded. Without further inquiry, the bank accepted exposure of up to £1.6 million in any one week, whatever the financial commitment. A duty can arise for an unspecific purpose if the reference is requested and given in terms showing that it will be relied on. Caparo did not require more: it turned on the statutory purpose of an audit, which is to enable shareholders to exercise their class rights in general meeting, not to enable individual shareholders to buy more shares. He would not have treated gambling as excluded either. The bank had shown no interest in the nature or level of the risk.
For Lord Mance, the claim failed only because the representation was requested by and confined to Burlington. The confidentiality notation strengthened that limit. Had the reference been made, expressly or by implication, for an unnamed rather than an entirely undisclosed principal or client, he thought the case would have paralleled Hedley Byrne and the claim should have succeeded. The same would have applied had it been made for any principal or client to whom Burlington might pass it. The contractual right of an undisclosed principal to intervene did not supply the proximity required for a duty of care. He agreed that the appeal should be dismissed, although he thought the bank very lucky to avoid liability.
Verdict: The Court unanimously dismissed the Club’s appeal. The bank had not assumed responsibility towards the undisclosed Club for the accuracy of the reference and owed it no duty of care.
Source: Banca Nazionale del Lavoro SPA v Playboy Club London Limited and others [2018] UKSC 43
