Negligent misstatement and undisclosed principals – a gamble not worth taking
The Supreme Court recently ruled that a bank providing a reference relating to its customer owed a tortious duty of care only to the addressee. The decision reflects the wider judicial trend of restricting the circumstances in which duties of care for negligent misstatement are found to exist on the basis of an assumption of responsibility by the party making the statement.
The Supreme Court has ruled in Banca Nazionale del Lavoro SPA v Playboy Club London Limited that a bank providing a reference relating to its customer owed a tortious duty of care only to the addressee.(1)
Events started at the London Playboy Club. Hassan Barakat required more funds to gamble at the club. Playboy asked an associated company, Burlington, to seek a reference from Barakat's bank, Banca Nazionale del Lavoro SPA. Burlington made the request (making no mention of Playboy) and the bank responded by confirming that Barakat had an account with the bank and was trustworthy for up to £1.6 million "in any one week".
In reliance on the bank's reference, Playboy granted Barakat a cheque cashing facility of £1.25 million. After accumulating net winnings of £427,400 Barakat returned to his home in Lebanon. Barakat's cheques were returned unpaid; it transpired that the bank had opened an account for Barakat two days after it had provided the reference to Burlington. The account was closed shortly afterwards, having never held any of Barakat's funds.
A tortious duty of care can arise where the party making a negligent misstatement has "assumed responsibility" to the recipient of that statement and where the party making the statement:
- knows that the statement is likely to be communicated to and relied on by a specific or identifiable individual
- knows the purpose for which the statement would be used and the transaction which the individual relying on the statement had in contemplation.(2)
For example, an accountant was held to be not liable to investors who had relied on a company's auditor's report because the report had been prepared for the benefit of the company's shareholders, without knowledge of the transactions which potential investors wished to undertake.(3)
Argument based on undisclosed principals
Playboy had no contractual relationship with the bank. It therefore argued that the bank had owed it a tortious duty of care on the basis that:
- it was Burlington's "undisclosed principal"
- the relationship between the bank and Burlington was "equivalent to contract"
- had there been a contract between them, Playboy could have stepped in and assumed the benefit of the contract. (An undisclosed principal may assume the benefit (and liability) of a contract entered into on its behalf by its agent.)(4)
The Supreme Court agreed with the Court of Appeal that the bank had owed a duty of care only to Burlington, to whom the reference was addressed. The court made the following observations:
- The phrase "equivalent to contract" had been used in previous cases only to indicate that a relationship was sufficiently proximate for a duty of care to arise, or to explain why an award of purely economic loss was appropriate in a negligence claim.
- Even if the relationship between the bank and Burlington was "equivalent to contract", it did not mean that contractual principles should be imported into the relationship. The exercise of establishing whether a duty of care exists is factual; by contrast, the obligations which a third party owes to an undisclosed principal in contract arise as a matter of law regardless of the factual proximity between the parties. The relationship between the party making the statement and the undisclosed principal cannot be compared to relationships which give rise to a duty of care.
- The rules in relation to the liability of undisclosed principals in contract are complex and cannot be transposed into tort. For example, a third party can use any defences that it would have had against an agent in defending a contractual claim brought by a principal; such principles cannot be easily transposed into a tortious context.
The decision in Banca Nazionale reflects the wider judicial trend of restricting the circumstances in which duties of care for negligent misstatement are found to exist on the basis of an assumption of responsibility by the party making the statement. If a party wishes to rely on information provided to it by a third party it should (if possible) enter into a direct contractual relationship with the third party or, at the very least and in order to try and establish a duty of care, ensure that the third party knows that they are relying on the information and the purpose for which the information will be used.
(1) Banca Nazionale del Lavoro SPA v Playboy Club London Limited  UKSC 43.
(2) Hedley Byrne & Co Ltd v Heller Partners Ltd  AC 465.
(3) Caparo Industries v Dickman  2 AC 605.
(4) Siu Yin Kwan v Eastern Insurance Co Ltd  2 AC 199.