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The limits of negligent misstatement

22 June 2016

The house always wins - except, it seems, at the Court of Appeal. The appellant bank did not owe a duty of care to Playboy Club's casino for a negligent misstatement as to a gambler's creditworthiness made to a sister company. In reversing the first instance decision in Playboy Club London Ltd & ors v Banca Nazionale Del Lavoro Spa [2016] EWCA Civ 457, the Court of Appeal sets out the boundaries of negligent misstatement and highlights the need for caution when relying on a statement made to a group company or intermediary.

Playboy Club Limited (Playboy), operated a casino in London. Playboy granted a customer (Mr Barakat) a GBP 1.25 million cheque cashing facility in October 2010. This facility operated as a line of credit whereby Mr Barakat was able to draw down against cheques he supplied to Playboy before those cheques had cleared. Before granting this facility, Playboy sought a financial reference for Mr Barakat from Banca Nazionale Del Lavoro Spa (the Bank).

Playboy made the reference request through an intermediate services company: Burlington Street Services Limited (Burlington), which was owned by the same ultimate parent company as Playboy. Playboy stated it was standard practice to make such requests through Burlington to ensure a level of discretion for customers. A Bank employee supplied the reference to Burlington, confirming Mr Barakat had the means to support a financial commitment of up to GBP 1.6 million in any given week. Burlington in turn provided the reference to Playboy.

After two very unsuccessful nights on the casino tables, Mr Barakat disappeared. The cheques he had used to secure the facility were counterfeit.

The elements of negligent misstatement

Playboy sought recovery of Mr Barakat's debts from the Bank. It argued that the reference provided to Burlington was a negligent misstatement on which it had relied. This required Playboy to show: (i) the Bank owed Playboy a duty of care; (ii) the Bank breached that duty; and (iii) the loss resulting from that breach.

Elements (ii) and (iii) were established at first instance and the Court of Appeal did not seek to revisit the points. There was some discussion as to whether the Bank employee giving the reference had authority to bind the Bank. However, once HHJ Mackie QC held that Playboy could at least rely on the employee's apparent authority, there was little doubt that the reference provided to Burlington was negligent: Mr Barakat's account was, as it had been since opening, empty. The Bank had accordingly breached its duty of care to Burlington by stating Mr Barakat could meet a weekly financial obligation of GBP1.6 million. The employee who gave the reference was subsequently dismissed for unrelated but similar conduct.

The scope of the duty of care

Where the Court of Appeal and trial judge differed was on the scope of the Bank's duty of care.

The Bank clearly owed Burlington a duty of care as it was the addressee of the reference. However, the Bank argued that it did not owe Playboy a similar duty as it was not aware of Playboy's existence when making the reference. Indeed, Playboy had deliberately used an intermediate company to conceal its existence.

Playboy, on the other hand, argued that knowledge of the ultimate recipient of the reference was not a requirement to establish liability for negligent misstatement. Playboy cited Hedley Byrne v Heller [1964] AC 465 as an example of a bank making a financial reference without knowledge of who the ultimate recipient of the statement would be.

HHJ Mackie QC at first instance held that the Bank did owe Playboy a duty of care. The reference was simply marked "given in strict confidence" and otherwise did not purport to disclaim the Bank's liability to other parties. He noted "there is nothing out of the way in a principal having this request or any other administrative task carried out by another member of the same group of companies". 

Longmore LJ, giving the leading judgement for the Court of Appeal, disagreed. Noting the classic test for establishing a duty of care in Caparo v Dickman [1990] 2 AC 605, Longmore LJ distinguished the present case from Hedley Byrne:

  • First, in Hedley Byrne, the bank knew that its reference related to a client's creditworthiness for an advertising contract. In this case, the true purpose of the reference (for a gambling company) had not been revealed and accordingly, it could not be said the Bank had assumed responsibility for the reference in circumstances where it did not know the purpose for which the reference would be used nor the party who would use it. Moreover, the natural meaning of the words "given in strict confidence" was that the reference should not be passed on to a third party.
  • Secondly, there was a distinction between a disclosed, albeit unnamed principal (as in Hedley Byrne) and a completely undisclosed principal (as in the present case).
  • Finally, in circumstances where Playboy concealed its interest in the Bank's reference to preserve customer's confidentiality, it was not fair, just or reasonable for Playboy to assert it was also owed a duty of care.

Comment

For companies who are frequently asked to give statements which may be relied on by third parties, the case is a welcome expression of the limits of a branch of negligence which has always been of potentially vast scope. The fact that noting a reference was "strictly confidential" was held sufficient to limit the duty of care to the addressee alone is of comfort in situations where detailed disclaimer wording has not been used.  

For those who often request such references, the Court of Appeal's decision shows the dangers of wider reliance. While it will be a rare case where a company is actively seeking to hide its identity, the facts, following on from Argos Ltd v Leather Trade House Ltd [2012] EWHC 1348, make clear that simply being part of the same group of companies (as Burlington and Playboy were) is not sufficient for a duty of care to arise. As a practice point, the case suggests it would be desirable when making a request to specify that the statement may be relied on by the addressee and/or related companies

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710