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Emma Brendling, trainee solicitor in the litigation and arbitration team at CMS, previews the appeal in Playboy Club London Ltd & Ors v Banca Nazionale Del Lavoro SPA, on which judgment is currently awaited from the UK Supreme Court.

On 24 April 2018, the Supreme Court heard the appeal of Playboy Club London Ltd, Caesar’s Entertainment UK Ltd  and Burlington Street Services Ltd against the Court of Appeal’s decision that a bank did not owe a duty of care to an undisclosed principal in respect of a negligent misstatement.

Background 

Playboy Club Ltd operated a casino in London called The Rendezvous. The casino’s owner was Caesar’s Entertainment UK Ltd. In October 2010 Mr Bakarat, a member of the club, requested a cheque cashing facility of £800,000. This allows customers to present a cheque to Playboy and, before the cheque is cashed, obtain gaming chips of an equivalent amount. Before granting the facility, it was Playboy’s policy to request a positive banker’s reference for twice the amount of the cheque cashing facility (£1,600,000). The request was sent to Banca Nazionale del Lavoro SPA (the Bank) via an intermediary, Burlington Street Services Ltd care of NatWest. Burlington and Playboy were members of the same group company. It was Playboy’s standard practice to request references via Burlington in order to preserve the confidentiality of its customers who preferred to keep their gaming activities private. This reference sought to confirm Mr Bakarat’s financial position and ability to meet his commitment to Playboy. An employee of the Bank, Ms Giudetti, returned the reference to Burlington, confirming that Mr Bakarat was able to support such a financial commitment. The reference was “given in strict confidential”.

Caesar’s reviewed the reference and Playboy subsequently granted Mr Bakarat the cheque cashing facility of £800,000 in exchange for cheques drawn on his account at the Bank. The facility was later increased to £1,250,000. When Playboy tried to cash the cheques Mr Bakarat had deposited, it discovered these were counterfeit. It was later discovered that Mr Bakarat’s account with the Bank had always maintained a zero balance.

Earlier Decisions

High Court

In the High Court in 2014, Playboy sought to recover its loss of circa £800,000 from the Bank. It argued that the Bank had provided a negligent misstatement upon which it had relied in granting the cheque cashing facility. Playboy had to show that the Bank owed Playboy a duty of care, the Bank breached that duty and that Playboy had suffered loss resulting from the breach.

At first instance, HHJ Mackie QC held that the Bank was responsible for the reference by virtue of its vicarious liability for the actions of Ms Giudetti or by virtue of Ms Giudetti’s apparent authority to give the reference. The reference was issued via conventional channels that would not have put a third party, such as Burlington, on enquiry. It was held that the statement was undoubtedly negligent, as the account had always remained empty. The Bank owed Burlington a duty of care.

He found that the Bank also owed Playboy a duty of care, although the reference had been requested by and provided to Burlington. In his judgment, HHJ Mackie QC considered there was no attempt to restrict liability to the enquirer (Burlington), and there was no suggestion in the evidence that the reference would not have been given or would have taken a different form if requested directly by Playboy. He further reasoned that there was no basis for treating an offer of finance for gambling differently to an offer of finance for ordinary trade, so whether the Bank knew the true purpose of the reference was irrelevant. Finally, HHJ Mackie QC found the Bank had breached the duty of care and this breach caused loss to Playboy. Playboy were deemed contributorily negligent to the extent of 15% for failing to recognise that the cheques were photocopies and therefore counterfeit.

Court of Appeal

The High Court decision was appealed in the Court of Appeal in 2016. The Bank submitted that its duty of care extended only to Burlington, not Playboy, and only to the giving of the reference not to the presentation of cheques by its customer. It further submitted that Playboy broke the chain of causation in failing to recognise counterfeit cheques and, in any event, their contributory negligence was greater than 15%.

The key issue of interest was the scope of the Bank’s duty of care. In submissions, counsel for Playboy and Ors argued that Burlington was Playboy’s agent and Playboy was Burlington’s undisclosed principal. Therefore a sufficiently ‘special relationship’ arose between Playboy and the Bank for a duty of care to be owed under the seminal cases of Hedley Byrne & Co v Heller & Partners Limited [1964] AC 465 and Caparo v Dickman [1990] 2 AC 605. Hedley Byrne v Heller, by way of summary, established that a duty of care in negligent misstatement can arise where (1) a special relationship existed between the parties and (2) there was an assumed responsibility towards the claimant. Caparo v Dickman later refined the first limb of that test and set down four guidelines for finding a special relationship where advice was given: (1) the advice was required for a purpose and the adviser knew, or should have known, that purpose (2) the claimant is a person or a member of an ascertained class whom the adviser knew, or should have known, might use the advice for that purpose (3) the adviser knew, or should have known, that the claimant was likely to act on that advice for that purpose without independent enquiry (4) the claimant acted on that advice to its detriment.

Hedley Byrne v Heller provided clear parallels to the present case for Playboy and Ors, being a case of negligent misstatement in a banker’s reference. Longmore LJ distinguished both cases, but in particular Hedley Byrne v Heller, on the basis that:

  1. the customer in Hedley Byrne v Heller was unnamed, but in the present case was expressly identified as Burlington;
  2. the reference in Hedley Byrne v Heller was described as being for an advertising contract, whereas in the present case the true purpose was concealed; and
  3. there was no reason for the Bank to believe the reference would be relied upon by a third party. The natural meaning of the words “given in strict confidential” indicated the reference was not to be shown to, and even less relied on by, third parties.

He concluded there could be no duty of care owed to Playboy.

Issues to be decided by the Supreme Court

Longmore LJ held that a duty of care in negligent misstatement could not be owed to an undisclosed principal and that Playboy, as Burlington’s undisclosed principal, was not owed a duty of care. Playboy and Ors appealed the Court of Appeal’s decision on this basis. Whether a duty of care in negligent misstatement can be owed to an undisclosed principal is the key issue for the Supreme Court to decide.

The undisclosed principal is a feature of contract law, extending privity of contract to the undisclosed principal not party to a contract between agent and third party. There can be a duty of care in negligent misstatement to an unidentified or unnamed principal under Hedley Byrne v Heller. This situation was “equivalent to contract” (in that, but for the absence of consideration, there would be a contract (Nocton v Lord Ashburton [1914] AC 932)) and therefore a duty of care would be owed (although it was not found on the facts of Hedley Byrne v Heller because of a disclaimer). Counsel for Playboy and Ors submit to the Supreme Court that the present factual scenario is also “equivalent to contract” and therefore a duty of care should be owed by the Bank to Playboy.