The House doesn't always win!
29 August 2018
The Supreme Court rarely sullies itself with matters relating to gambling, casinos and the like, however this was the backdrop to the case of Banca Nazionale del Lavoro SPA –v- Playboy Club London Ltd in which judgment was recently handed down.The facts were rather similar to those in the seminal case of Hedley Byrne and Co Ltd –v- Heller and Partners Ltd (1964) which for the first time permitted recovery of ‘pure economic loss’.The Plaintiff in that case had sustained loss having relied on a negligently supplied credit reference.
Mr Barakat, a Lebanese resident and prolific gambler in his native land, requested a cheque cashing facility for up to £800,000.00 from the London Playboy Club.The club’s policy was to require a credit reference from the patron’s bankers for twice the amount of the facility.Priding themselves on their discretion, they did not in practice request the reference direct.Instead, the club arranged for an associated company (Burlington Street Services Ltd) to make the request without disclosing the reason for it or the fact that the reference was required for the benefit of another company.
The club’s bankers forwarded the request to Banca Nazionale del Lavoro (“BNL”) under cover of a letter beginning:
“We enclose a request on behalf of Berlington Street Services Ltd, who would be glad of your opinion on the character and standing of Hassan Barakat.”
The reply was addressed to Burlington and confirmed that Mr Barakat was trustworthy up to £1.6 million in any one week.
The club was satisfied with the position and duly granted the facility.Mr Barakat attended the club over a period of four days during which period he drew two cheques on BNL for a total of £1.25 million in return for gaming chips to that value.Mr Barakat appears to have enjoyed a lucky streak and the club paid him £427,400.00 in winnings which he took with him to Lebanon, never to be seen again.Both cheques bounced.The club’s total net loss was over £800,000.00.
It transpired that BNL had no basis upon which to vouch for the credit worthiness of Mr Barakat.Indeed, he did not even hold an account with them until two days after the reference was issued.
The club sued BNL in an attempt to recover their losses.In doing so they faced the significant hurdle of establishing that the Bank owed them (and not merely Burlington) a duty of care.
The case law which over the years has applied and developed the principle set down in Hedley Byrne has established that, in order for a duty of care to exist, the party making the relevant statement must be aware of the nature of the transaction in contemplation and of the fact that reliance is likely to be placed on the statement by an identifiable (albeit not necessarily identified) person or group of people.
Those representing the club accepted that they were in difficulty in this regard.It was not in dispute that BNL had no knowledge of the nature of the transaction under contemplation nor were they aware of the existence of the club as undisclosed principal of Burlington.Nevertheless, they sought to argue that a duty of care could be inferred on the basis that the relationship between BNL and the club was “akin to contract”.
Lord Devlin made the point in the Hedley Byrne case that, where a relationship was so close as to be akin to contract, a duty of care would normally exist.An undisclosed principal can, as a matter of contract law, declare itself and assume the benefit of the contract between his agent and the counter party.The club’s lawyer sought to rely on this quirk to argue that the relationship was akin to contract and therefore that a duty of care must arise.
The club’s case was rejected by the Supreme Court.Lord Sumption explained that the phrase “akin to contract” had simply been used by Lord Devlin as a symbol for proximity.What was important was the closeness of the relationship as a matter of fact.The relationship between a contracting party and their counterparty’s undisclosed principal is, by its nature, not proximate.The claim therefore failed.
What does it mean for professionals?
It was no doubt tempting for the Supreme Court to penalise the bank in this case.BNL appear to have taken absolutely no care whatsoever, let alone reasonable care, to ensure that the reference provided was accurate.Nevertheless, the Court was careful to continue to control the limits of liability in this area.The decision will be welcomed by professionals in the business of providing written advice or financial information.If the decision had gone the other way then no doubt such professionals (or more likely their lawyers) would be frantically redrafting their exclusion clauses!