Supreme Court provides clear guidance on liability to third parties for bankers' references: clarifying the circumstances where banks will be liable for incorrect information

The recent decision of the Supreme Court in NB Banca Nazionale del Lavoro SPA v Playboy Club [2018] UKSC 43 upheld the decision of the Court of Appeal, confirming that where a bank reference is requested on behalf of an undisclosed principal, then no duty of care is owed by the bank providing the reference to the undisclosed principal receiving it.

The decision provides authoritative and clear guidance to banks who give references for their customers as to the potential duties they will owe to third parties for inaccuracies in the information they provide, where the purpose and the identity of the recipient of the information is unknown.

This case also provides guidance on how parties should structure requests for bank references to ensure that any third party on whose behalf the request is ultimately made will have recourse against the referee bank in the event that the reference is provided negligently.

Background

The full background to the case is set out in our earlier e-bulletin on the Court of Appeal decision.

To briefly recap; Burlington Street Services Ltd ("Burlington") requested a bank reference for Mr Barakat on behalf of its client, Playboy Club London Ltd (the "Club") from Banca Nazionale Del Lavoro (the "Bank") in October 2010.

Burlington did not disclose to the Bank that they sought the reference on behalf of the Club or indeed any other party, or that the reference would be used to assess Mr Barakat's eligibility for a credit facility to fund his gambling activities at the Club.

The reference provided by the Bank to Burlington as to Mr Barakat's financial position and credit worthiness was inaccurate and, when cheques provided by Mr Barakat to the Club turned out to be counterfeit, the Club was unable to recover the amounts owing from Mr Barakat.

The Club commenced a negligence claim against the Bank.

High Court Decision

At first instance, the Court held that in giving the reference, the Bank owed a duty of care not just to Burlington, but also to the Club, and that it had breached that duty. The Bank appealed the duty of care finding.

Court of Appeal Decision

Overturning the decision of the High Court, the Court of Appeal held that the Bank did not owe a duty of care to the Club and that its obligations were limited to Burlington on the basis that there could be no assumption of responsibility or “special relationship” between the Bank and the Club, given that the Bank did not know of the existence of the Club.

Distinguishing the facts of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] A.C. 465, the Court of Appeal noted that the Bank’s reference expressly named Burlington as the party to whom the reference was being provided (so that the Club was entirely undisclosed) whereas in Hedley Byrne, the true recipient was merely unnamed. Further, the Bank knew nothing of the purpose for which the reference was sought.

The Court of Appeal therefore held that it was not just and reasonable for the Club to assert a duty of care when it deliberately concealed its existence to preserve the confidentiality of its customers (for our earlier analysis of this decision, see our previous banking litigation e-bulletin).

Supreme Court Decision

The Supreme Court dismissed the Club's appeal and upheld the Court of Appeal decision that a duty of care was not owed by the Bank to the Club.

(1) Hedley Byrne distinguished

The Supreme Court upheld the Court of Appeal's view that the facts of this case could be distinguished from that of Hedley Byrne on the basis that, in that case, the bank was found to have appreciated that the statement would be relied upon by an unidentified, yet easily identifiable, client of the recipient on whose behalf the reference was being sought.

(2) Knowledge of the third party recipient

The Supreme Court's decision authoritatively confirms that a party providing a credit reference to one recipient will only assume a duty of care to a third party recipient of that reference where:

• the representor knew the reference would be communicated to, and relied upon by, that third party; and
• it was part of the statement's known purpose that it should be communicated to and relied upon by that third party.

The Supreme Court held that, in circumstances where the Bank had no reason to suppose that Burlington was acting for someone else and knew nothing of the Club, the Bank did not assume any responsibility to the Club.

The Supreme Court confirmed that - even though the Bank knew nothing of Burlington, and appeared indifferent to whom they were dealing with - it could not be assumed that they would have been willing to assume responsibility to the Club instead of Burlington, if the real recipient of the reference had been made known to them.

(3) Purpose of the credit reference

In his concurring judgment, Lord Mance noted that two sentences of the Court of Appeal's judgment potentially indicated that the court saw the claim as failing because of both lack of knowledge of the third party recipient and lack of clarity in the purpose for which the reference would be used. Lord Mance considered that the lack of clarity in the purpose was not fatal to the Club's appeal because the Bank was prepared to provide a reference relating to an unspecified "financial commitment" or "business" up to the amount stated. Accordingly, should banks wish to reduce the risk of a duty of care being owed, they should be careful to ensure greater precision in the terms in which they provide such references.

(4) Principal and agent relationship

The Club argued that the relationship between the Club and Burlington was "equivalent to contract" so that the Club (as an undisclosed principal) could nevertheless take the benefit of the contract that Burlington as agent entered into with the Bank (on the Club's behalf). The Supreme Court rejected this argument on the basis that a non-contractual relationship which is "equivalent to contract" (and therefore gives rise to a duty of care) does not import into that relationship all of the principles of a contractual relationship.

Comment

This decision provides authoritative and clear guidance for banks when giving credit references and confirms that knowledge on the part of the bank of both the existence (but not the identity) of the third party and, at least in a broad sense, the purpose for which the information will be used, is necessary.

At a practical level, a request for a credit reference should specify that it is being provided only to the recipient if the bank wishes to restrict any duty of care it owes only to the recipient.