Playboy Club London Ltd v Banca Nazionale del Lavoro SpA
 UKSC 43
By Andreas Giannakopoulos
In Playboy Club London Ltd v Banca Nazionale del Lavoro SpA,the Supreme Court was asked to revisit the principles underlying liability in negligence for pure economic loss. The case raised the question of whether a bank owed a duty of care to an undisclosed principal in supplying a credit reference. The Supreme Court answered that it did not. While this outcome was hardly a surprise to tort lawyers, the case is significant because the Judges’ reasoning shows that clear guidance remains elusive in this area of the law of negligence. As this case note will argue, the decision’s dicta may also prove important regarding what a defendant must know about the nature of the transaction for which his advice is sought before he can come under a duty of care.
In October 2010, Mr Barakat chose to gamble at the London Playboy Club and applied for a credit cashing facility of up to £800,000. This would allow him to give cheques to the club and receive gaming chips in return before the cheques were cashed. Before granting the facility, Playboy Club’s policy was to ask for a credit reference from the customer’s bank for twice the amount requested. Critically, in order to keep their customers’ gambling activities confidential, the club used an associated company called Burlington Street Services Ltd (‘Burlington’) to request the reference. Burlington approached Mr Barakat’s bank, Banca Nazionale del Lavoro (‘BNL’) for the reference, indicating only that it was required in connection with some ‘financial commitment’. At no point did the bank disclose that it was acting on behalf of Playboy Club. BNL’s reply confirmed that Mr Barakat had an account with them and that he was ‘trustworthy up to £1.6 million in any one week.’ In fact, Mr Barakat’s account with BNL was not opened until two days after the reference was sent and he never deposited any money in it. It was therefore common ground that BNL had no reasonable ground for their reference. However, in reliance on the reference, the club granted the credit cashing facility and subsequently increased it to £1.25 million. Mr Barakat purported to draw two cheques worth that amount on his BNL account, but the cheques were later dishonoured. As a result, the club suffered significant economic loss.
- Case History:
The Playboy Club claimed damages against BNL for negligent misstatement. BNL argued that they did not owe a duty of care to the club because they never assumed responsibility to anyone other than Burlington. At first instance, HHJ Mackie QC held that BNL did owe a duty of care to the club because they did not seek to restrict liability to Burlington and there was no evidence that they would have behaved differently had the club sought the reference directly.The Court of Appeal disagreed and ruled that BNL owed no duty of care to the club because they never assumed responsibility to it and it would not be ‘fair, just and reasonable’ to impose a duty when the club had deliberately concealed its interest in the reference.The Playboy Club appealed to the Supreme Court.
- The Supreme Court’s judgment:
The Supreme Court unanimously dismissed the appeal. Lord Sumption delivered the lead judgment and Lord Mance gave a short concurring judgment. Lord Sumption’s reasoning draws upon two seminal cases in the law of negligent misstatement: Hedley Byrne & Co Ltd v Heller & Partners Ltdand Caparo Industries plc v Dickman,each of which establishes a different test to determine the existence of a duty of care.In Hedley Byrne, the House of Lords established that a defendant could be liable for pure economic loss arising from negligent misstatement provided there was a ‘special relationship’between him and the claimant or a relationship ‘equivalent to contract’.Such a relationship would typically exist where the defendant had assumed responsibility to provide advice and the claimant had reasonably and foreseeably relied on that advice.
A later decision of the House of Lords, Caparo, famously established the three-stage test for duty of care in novel situations: foreseeability of damage; proximity between the parties; and considerations of fairness, justice and reasonableness. As Lord Sumption noted, in Caparo, their Lordships were looking for limiting factors to define the class of persons to whom a defendant could properly owe a duty of care in respect of pure economic loss.In particular, he cited two passages in which Lord Bridge and Lord Oliver suggest that for there to be sufficient proximity, the defendant must have known i) that his statement would be communicated to the claimant, either specifically or as a member of a particular class, and ii) that it would be relied on in connection with a particular transaction or a transaction of a particular kind.The difficulty in the present case was that BNL had no reason to suppose that the credit reference would be communicated to or relied on by anyone other than Burlington and they knew nothing about the gambling and credit cashing facility for which the reference was sought. Counsel for the club submitted that there was nonetheless a relationship ‘equivalent to contract’ because in contract an undisclosed principal can reveal itself and assume the benefits of the contract. So likewise, it was argued, in tort an undisclosed principal could reveal itself and assume the benefits of the defendant’s assumption of responsibility. Lord Sumption noted that the contractual rule relied upon was anomalous in the modern law.He then identified three flaws with the submission. First, the argument was based on a false premise. It did not follow from the fact that a relationship ‘equivalent to contract’ is generally sufficient to establish a duty of care that it involves the same legal incidents as a fully-fledged contractual relationship.Second, a relationship between a person and another’s undisclosed principal is by definition not sufficiently proximate to give rise to a duty of care since the parties have had no factual dealings with each other.Third, the submission would import into the law of tort just one aspect of the law on undisclosed principals when in fact this area of the law consists of a series of rights and liabilities between the undisclosed principal and his counterparty, most of which have no place in the law of tort.Lord Sumption concluded that it was plain that BNL had not voluntarily assumed responsibility to the club since they knew nothing about its involvement.
Lord Mance agreed that the claim failed because i) above was not met; the reference was directed solely to Burlington and BNL could not know that it would be communicated to and relied on by Playboy Club.He then added, albeit obiter, that had BNL known about this, the claim should have succeeded even though they knew nothing about the transaction for which the reference was required, save that it was some ‘financial commitment’.There was no reason in principle why a duty of care should not arise in connection with so vague a purpose, if the defendant, like BNL, had made no inquiries and shown no interest in the nature of the transaction or the level of risk involved.
The Supreme Court’s decision is based on well-established principles, but it offers no guidance as to the proper approach to claims for pure economic loss. In the Court of Appeal, Longmore LJ applied the test of assumption of responsibility and the Caparotest in turn as cross-checks on each other,an approach that has become common since the House of Lords decision in Customs and Excise Commissioners v Barclays Bank Plc.Lord Sumption and Lord Mance instead drew upon passages in both Hedley Byrneand Caparoto reach the proposition that the defendant does not owe a duty of care to the claimant unless he voluntary assumed responsibility to the claimant, either individually or as a member of a class. The conflation of the two tests is clearest when Lord Sumption describes both assumption of responsibility and proximity as being ‘the foundation’ of the duty of care in this area of law.Although both concepts are closely connected, in the sense that assumption of responsibility will often suffice to establish proximity,blurring the line between the tests is unhelpful and one may question whether there is any value in retaining different tests if the Supreme Court is driven to conflate them.
This, of course, is not to say that the court reached the wrong result. Following Caparo, it is clear that if BNL did not know that Playboy Club would rely on their credit reference, they cannot be said to have been in a sufficiently proximate relationship with the club. Likewise, they cannot have voluntarily assumed responsibility to the club since they knew nothing about it. Still, there is something unattractive about the outcome of this case. Playboy Club was effectively penalised for taking steps to preserve their customers’ confidentiality, while BNL, despite providing a grossly inaccurate credit reference, were able to get off scot-free. Had Playboy Club not used an intermediary, BNL would clearly have been liable.Moreover, BNL evinced no interest in who would rely on their reference,yet they escaped liability precisely on the ground that they did not know that the club would rely on it. This outcome therefore illustrates how limiting factors, such as the requirement of proximity, can sometimes result in a deserving claimant falling on the wrong side of the line.
At first sight, one might think that Playboy Clubdoes not bring anything new to this area of law. That is a mistake. Lord Mance’s dicta on what a defendant must know about the relevant transaction for a duty of care to arise are potentially very significant. In his view, if B asks A to make a representation in connection with an unspecified business transaction, making it clear that it will be relied on, and A, without making further inquiries as to the nature of the transaction or the level of risk involved, undertakes to make the representation, A must be taken to accept an open-ended liability, whatever transaction B had in mind.In effect, Lord Mance is rejecting the requirement that the defendant must know the kind of transaction for which his advice is sought, an ‘essential ingredient’ of proximity under the Caparotest.Lord Sumption seems to echo this view when he says that the defendant’s knowledge of the transaction is relevant to identifying some specific person or group of persons to whom the defendant can be said to have assumed responsibility and to determining the degree of responsibility assumed, but stops short of treating it as a separate requirement.This matters particularly for banks, accountants and others who provide professional advice as to a person’s creditworthiness. It means that they cannot hide behind the fact that the purpose for which their reference was required was not communicated to them. It is for them to make further inquiries before deciding whether to make a representation. If they fail to do so and proceed to provide negligent advice, they will be liable for the loss caused by their negligence.
It is unusual for the courts to suggest loosening control mechanisms in this way, especially in cases of pure economic loss where the fear of indeterminate liability is always a powerful consideration. Lord Mance’s dicta aim to ensure that banks and other professionals take responsibility for the risks that they take. If they take the risk to advise in connection with an unspecified business transaction, they should accept the consequences. They should not be able to avoid liability simply by relying on their failure to make inquiries. Yet, Lord Mance’s remarks areobiterand they conflict with Lord Bridge and Lord Oliver’s statements in Caparo. But they may well signal a greater judicial willingness to impose a duty of care even where the maker of the statement knows nothing about the transaction for which his advice is sought, provided he knows it is intended to be relied on by the claimant for some business transaction.
InPlayboy Club, the Supreme Court applied established case law to a novel set of facts but, in doing so, missed an opportunity to provide much-needed guidance as to the proper approach to claims for pure economic loss. The outcome, while legally justified, may appear unattractive and serves as a reminder to claimants that a party should always disclose their intention to rely on a representation made by the representor. In the final analysis, one can only agree with Lord Mance that BNL was very lucky to avoid liability.His dicta, however, suggest that other defendants may not always be so lucky.
This article was published
 UKSC 43,  1 WLR 4041.
Playboy Club London Ltd v Banca Nazionale del Lavoro SpA  EWHC 2613 (QB),  LLR 171.
Playboy Club London Ltd v Banca Nazionale del Lavoro SpA  EWCA Civ 457,  1 WLR 3169.
 AC 465.
 2 AC 605.
Customs and Excise Commissioners v Barclays Bank Plc UKHL 28,  1 AC 181 -.
Hedley Byrne(n 4) 511 (Lord Hodson), 528 (Lord Devlin), 539 (Lord Pearce).
ibid 529-530 (Lord Devlin).
Playboy Club(n 1) .
ibid ,  citing Caparo Industries plc v Dickman 2 AC 605, 620-621, 638 (Lord Bridge and Lord Oliver).
Playboy Club(n 3) .
 UKHL 28,  1 AC 181.
Playboy Club(n 1) -.
see e.g. Kent v Griffiths (No 3) QB 36; Mitchell v Glasgow City Council  UKHL 11
 1 AC 874; Michael v Chief Constable of South Wales  UKSC 2,  AC 1732.
Playboy Club(n 1) .
Caparo Industries plc v Dickman 2 AC 605, 621 (Lord Bridge).
Playboy Club(n 1) .