Corporate Law Update
This week:
Bank not liable to undisclosed person who relied on credit reference
The Supreme Court has confirmed that, where a bank which negligently provided a credit reference to a person acting as the agent of an unidentified casino, it was not liable to the casino itself.
What happened?
In Banco Nazionale del Lavoro SPA v Playboy Club London Limited and others, an individual wished to open a cheque cashing facility for a substantial sum with a private club and casino in London (the “Casino”).
The Casino required a credit reference for the individual. To maintain the individual’s discretion, the credit reference was requested through a company associated with the Casino, but without disclosing the identity of the Casino itself.
The individual’s bank (the “Bank”) duly provided a credit reference to the associated company and, relying on that reference, the Casino opened the facility for the individual. The individual drew two cheques on the facility, cashed in his winnings, left the Casino and did not return.
Both cheques were subsequently returned unpaid, causing the Casino considerable loss. The Casino claimed against the Bank, claiming it had given the reference without any reasonable basis and claiming damages for negligent misstatement.
The Bank conceded that it had given the reference negligently, but it said that it had not undertaken any duty of care to the Casino, because the Casino had not formally requested the reference and had not been identified in the request. If the Bank had assumed a duty of care to anyone, it was to the associated company that requested the reference, and that company had not suffered any loss.
What is negligent misstatement?
In certain circumstances, a person can bring a claim if they rely on an inaccurate statement made by someone else and suffer loss as a result. Negligent misstatement is a “tortious” claim and essentially forms a sub-branch of the tort of negligence. This means there is no need for there to be a contract between the two persons to bring a claim.
Instead, to bring a claim in negligent misstatement, a person must be able to show three things:
- That the person who made the statement owed a duty of care to the recipient.
- That the person who made the statement breached that duty. Generally, this will happen if the person making the statement did so negligently or without any reasonable basis.
- That the breach of duty caused loss to the recipient.
Generally, the hardest of these three elements to prove is the existence of a duty of care. Various cases have examined this element and, as a result, it can be difficult to pin down. However, the courts normally focus on two cases in particular – Hedley Byrne & Company Limited v Heller, the first case in negligent misstatement, and Caparo Industries plc v Dickman and others, which significantly developed the law.
Together, these two cases set out three conditions that are required to establish a duty of care:
- It must be reasonably foreseeable that making an inaccurate or negligent statement would cause the recipient loss. Both the possibility of the loss, and the identity of the recipient, must be reasonably foreseeable.
- There must be a sufficient degree of proximity between the person making the statement and the recipient (sometimes called a “special relationship”). This includes if the statement is requested for a particular purpose and the person giving knew (or should have known) that.
- It must be fair, just and reasonable to impose a duty of care.
This is sometimes characterised instead as requiring an assumption of responsibility by the person making the statement.
Indeed, Hedley Byrne v Heller also involved a bank that gave a negligent credit reference. In that case, one bank gave a reference to another bank, which was itself acting on behalf of one of its own unidentified clients, who in turn suffered loss.
What did the court say?
The Supreme Court found that the Bank did not owe a duty of care to the Casino (and, in so doing, confirmed the earlier decision of the Court of Appeal) and so was not liable for negligent misstatement.
The court said that the Bank was not aware, and had no reason to suppose, that the associated company had requested the reference for the Casino. Indeed, the Bank “knew nothing of the … Club” and so “[plainly] did not voluntarily assume any responsibility” to it.
Rather, the representation had been requested by the associated company and “directed simply and solely to” the associated company.
This case was very similar to Hedley Byrne, but there was one subtle difference. In both cases, the bank that gave the reference did not know the identity of the person who was ultimately to rely on it.
However, in Hedley Byrne, the bank did know that the reference was being requested for someone else (even though it did not know who that person was). To use the Supreme Court’s words, in Hedley Byrne, the person who suffered loss was “identifiable (although not necessarily identified)”.
In this case, by contrast, the Bank did not know that the associated company was requesting the reference for someone else. It could not have known that anyone other than the associated company would rely on it. In other words, the person who suffered loss was neither identified nor identifiable.
Practical implications
The clear lesson from this case is that, if looking to obtain and rely on advice of any kind (be it professional advice, a credit reference or some other form), it is important to make it clear who will be relying on the advice and for what purpose, and preferably to enter into a contractual arrangement.
In this case, it is clear why the Casino did not wish to disclose its identity and, in doing so, it was looking to preserve the individual’s discretion. There will often be genuine and legitimate circumstances in which the person who is ultimately seeking the advice will wish to remain anonymous.
Businesses can of course follow this kind of model, but the clear risk of doing so is that, if the advice is faulty, it may not be possible to recover any loss at all.
By contrast, the decision is welcome news for professional and financial services businesses. Firms should remain alert when providing advice to persons they know are acting as agents or intermediaries, as they could still incur liability to their underlying client. But where there is no indication that the recipient of the advice is acting as an in-between, they can be confident as to the limits of their duty.
