In a recent case, the Supreme Court in London (which is the highest court in the UK) was asked to decide on a matter in which a reference, given by a bank to its customer, was entirely incorrect. It is common for a party to ask a bank to give their opinion on the financial standing of another party, as part of a commercial transaction. Playboy Club, who asked the bank for an opinion on one of its casino gamblers via a third party, claimed that the bank had been negligent and sought compensation.
In Banca Nazionale del Lavoro SPA v Playboy Club London Limited , a bank gave a reference with respect to the financial standing of its customer (H) from Lebanon as requested by a company known as Playboy Club London.
Playboy Club considered an application for a cheque cashing facility for up to £800,000 made by H. Playboy Club’s policy for gamblers was to require a credit reference from his bankers for twice the amount of the facility, i.e. £1.6m. The enquiry made by Playboy Club was arranged by a third party services provider Burlington Street Services (Burlington), doing so without disclosing the purpose of the inquiry or the fact that a favourable reference was required for the benefit of Playboy Club. Playboy Club had their hand close to their chest. A “Status Enquiry Request” was completed. It was written on Burlington’s printed letterhead and addressed to the bank. Burlington had hole cards which were hidden from view of the bank.
H drew two cheques on the bank for a total of £1.25m in return for gaming chips of the same amount. H’s net winnings were £427,400, which the Club paid out to him. H then returned to Lebanon and was not seen again at the Club. Both cheques were returned unpaid. Including gaming duty, the Club suffered a total net loss of £802,940. H’s payoff was bigger than envisaged. There was no home advantage for H, but Playboy Club was unable to utilise its house edge either. It turned out that the reference given by the bank was incorrect and Playboy Club suffered losses.
The Courts’ decisions
This was a hard fought case. It had gone through High Courts, Court of Appeal and eventually the Supreme Court. This meant that 9 judges, all eminent members of the legal profession, had considered the case. The reason for the difficulties is that a principle was established in a previous landmark case that if a bank gave an incorrect reference, the bank would be liable for its negligent act, i.e. giving misstatement, and, hence, liable for financial losses suffered by the enquirer, Hedley Byrne & Co Ltd v Heller & Partners Ltd , Hedley Byrne was a House of Lords’ (now called the Supreme Court) decision.
Applying the principle, the High Court judge decided that the bank owed Playboy a duty of care and the bank had to compensate Playboy accordingly. The bank appealed. Both Court of Appeal and the Supreme Court, distinguished Hedley Byre based on the facts. They decided that the bank had no reason to suppose that Burlington was acting for someone else, and they knew nothing of the Playboy Club. In those circumstances, it was plain that they did not voluntarily assume any responsibility to the Playboy club. Given that Playboy did not raise the enquiry themselves nor did the third party enquirer make it clear that they acted for Playboy, there was no “special relationship” between the bank and Playboy. The bank owed no duty to Playboy and got away “scot-free”.
However, businesses cannot rely on the Supreme Courts to be their guardian in a situation like Playboy. They should be aware that they may assume a duty of care towards an enquirer, and therefore ought to be extra careful in providing true and accurate references. Likewise, companies asking for references with respect to their customers ought to take extra precautions and due diligence on the customer. Particularly, if they are done so without disclosing the purpose of the inquiry or the fact that it was required for the benefit of the company.
Dr Alan Ma, Resident Partner,
Gordon Dadds LLP, Hong Kong