Finance Litigation: The Latest Cases And Issues – September 2018

Gowling WLG's finance litigation experts bring you the latest on the cases and issues affecting the lending industry.

No duty of care owed for negligent bank reference to undisclosed principal

The Supreme Court has held that a bank which negligently provided a favourable credit reference for one of its customers did not owe a duty of care to an undisclosed principal who acted on that reference.

In Playboy Club London Ltd & Ors v Banca Nazionale Del Lavoro Spa (the Bank), the Bank provided a customer reference through a requesting bank to the effect that its customer, HB, was financially sound and trustworthy and good for up to £1.6 million per week. The requesting bank named its own customer (Burlington) as requesting the reference. Burlington was in fact acting as an agent for an undisclosed principal, the claimant casino. The claimant sought the reference through Burlington so as to avoid disclosing the purpose of the reference, being to set up a credit facility for gambling purposes. On the strength of the reference, the claimant exchanged HB's cheques for gaming chips. HB never had any money in the account with the Bank and the cheques he presented to the claimant were counterfeit. The claimant lost around £800,000 which it sought to recover from the Bank, HB having disappeared.

It was common ground that the reference was negligent. The Court of Appeal overturned the first instance decision and held that the Bank did not owe the claimant a duty of care in relation to the reference as the reference was addressed to its agent, not the claimant. The claimant appealed.

The Supreme Court dismissed the appeal. For purely economic loss for negligent misstatement to be recoverable, a special relationship must exist between the party making the representation (the representor) and the recipient (the representee) (Hedley Byrne & Co v Heller & Partners Ltd [1964]). The representor must have voluntarily assumed responsibility for the representation to an identifiable (although not necessarily identified) person, or group of persons, rather than to the world at large. The representor must have known (and intended) that the statement was going to be communicated to that identifiable person or group and would be relied upon by them.

The Supreme Court held that whether a relationship is sufficiently proximate to give rise to a duty of care is a question of fact. The court rejected the argument that the right of an undisclosed principal to intervene (and step into the shoes of its agent) in contract could also, of itself, give rise to the necessary proximate relationship for tortious purposes. The position in contract and tort should not be conflagrated.

Here, the Bank was unaware Burlington was acting as an agent. It knew nothing of the claimant's involvement (it being an undisclosed principal) and was unaware that the reference would be communicated to and relied on by the claimant. In...