Banca Nazionale del Lavoro SPA v Playboy Club London Ltd & Ors [2018] UKSC 43

The Playboy Club obtained a credit reference for a gambler via an associated company, Burlington, without disclosing the Club's interest. BNL negligently confirmed creditworthiness. The Supreme Court held BNL owed no duty of care to the Club as undisclosed principal.

Facts

In October 2010, Hassan Barakat applied for an £800,000 cheque-cashing facility at the Playboy Club London. The Club’s policy required a banker’s reference for twice that amount (£1.6m). To avoid disclosing that the reference was sought for gambling purposes, the Club arranged for an associated company, Burlington Street Services Ltd, to request the reference from Mr Barakat’s bank, Banca Nazionale del Lavoro (BNL) in Italy. The request, made on Burlington’s letterhead, did not disclose that Burlington was acting for another party.

BNL responded confirming Mr Barakat was trustworthy up to £1,600,000 in any one week. In reliance on the reference, the Club extended the facility (later increased to £1.25m). Mr Barakat drew cheques totalling £1.25m in exchange for gaming chips, both cheques were dishonoured, and the Club suffered a net loss of £802,940. BNL had no reasonable basis for the reference: Mr Barakat had no account with them at the time, and the account subsequently opened had a nil balance.

The trial judge held BNL owed a duty of care to the Club. The Court of Appeal reversed, holding the duty was owed only to Burlington, the addressee of the reference.

Issues

The central issue was whether BNL owed a duty of care in negligence to the Playboy Club, as the undisclosed principal of Burlington, in respect of the credit reference negligently supplied to Burlington. More specifically, whether the doctrine permitting an undisclosed principal to sue on a contract could be transposed into the tort of negligent misstatement so as to create a duty of care to a person of whose existence the representor was unaware.

Arguments

Appellants (Playboy Club)

Mr Salzedo QC accepted there was no evidence that BNL knew the reference would be communicated to or relied upon by anyone other than Burlington. However, he submitted that the relationship between BNL and the Club was, in Lord Devlin’s phrase, “equivalent to contract” because had there been a contract, the Club as undisclosed principal would have been entitled to declare itself and assume its benefit. The same proximity should apply in tort.

Respondent (BNL)

BNL argued that no duty of care arose because (a) the Club was not a person to whom BNL had assumed responsibility and (b) the purpose of the reference (gambling) had not been disclosed.

Judgment

The Supreme Court unanimously dismissed the appeal.

Lord Sumption (with whom Lady Hale, Lord Reed and Lord Briggs agreed)

Lord Sumption traced the principle in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, emphasising that the foundation of liability for negligent misstatement is the defendant’s voluntary assumption of responsibility to an identifiable person or group of persons, and not to the world at large. He cited Lord Devlin’s analysis that liability arises where the relationship is “equivalent to contract”.

He reviewed Caparo Industries plc v Dickman [1990] 2 AC 605, in which Lord Bridge and Lord Oliver identified that proximity required the defendant to know that the statement would be communicated to the claimant, individually or as a member of an identifiable class, in connection with a particular transaction or transactions of a particular kind.

Lord Sumption rejected the appellant’s submission for three reasons. First, the expression “equivalent to contract” is an allegory of proximity; it does not import all the legal incidents of contract into tort. Secondly, the relationship between a contracting party and an undisclosed principal is a legal construct, not a factual relationship of proximity, and “runs counter to fundamental principles of privity of contract” (per Lord Lloyd in Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199). It is not voluntary or consensual and lacks the features required by Caparo. Thirdly, the doctrine of undisclosed principals is a complex bundle of mutual rights and liabilities (election, set-off, defences) which cannot be selectively imported into tort.

BNL had no reason to suppose Burlington was acting for someone else and knew nothing of the Club; accordingly, BNL did not voluntarily assume any responsibility to the Club.

Lord Mance (concurring)

Lord Mance agreed but added observations on the question of purpose. He considered that the Club’s claim should not fail for want of communication of the purpose: BNL had been prepared to give an unconditional representation of trustworthiness to £1.6m per week without enquiry into the nature of the financial commitment, and gambling was not so unusual as to fall outside the scope of representation. The claim failed solely because the representation was, objectively, requested by and confined to Burlington alone, reinforced by the notation that the information was given “in strict confidential”. Had the reference been made for an unnamed (rather than wholly undisclosed) principal of Burlington, the case would have paralleled Hedley Byrne and succeeded.

Implications

The decision confirms and reinforces that liability for negligent misstatement under Hedley Byrne rests on a voluntary assumption of responsibility to an identifiable person or class. A representor cannot be held to have assumed responsibility to a person of whose existence he is wholly unaware.

The judgment makes clear that the contractual doctrine permitting undisclosed principals to sue on contracts cannot be transposed into the law of tort. The phrase “equivalent to contract” used in the negligent misstatement case law is descriptive of proximity, not a doctrinal bridge importing contractual incidents into tortious relationships.

For practitioners, the case is significant for those advising banks, auditors, valuers, and other professionals giving references or statements: their duty of care extends only to those they know will rely on the statement for a known purpose, not to undisclosed principals behind the named recipient. Conversely, those obtaining references through agents or nominees should be aware that doing so anonymously may preclude any tortious remedy against the representor if the reference proves negligent.

Lord Mance’s concurring judgment leaves open that, where a reference is sought for an unnamed (but disclosed-as-existing) principal, a duty of care may extend to that principal — a useful clarification of the boundary between Hedley Byrne and the present case. The decision also illustrates the continuing influence of Caparo‘s control mechanisms in limiting indeterminate liability for economic loss.

Verdict: Appeal dismissed. BNL owed no duty of care to the Playboy Club as undisclosed principal of Burlington; the duty was owed only to Burlington, to whom the reference was addressed.

Source: Banca Nazionale del Lavoro SPA v Playboy Club London Ltd & Ors [2018] UKSC 43