Playboy Club v Banca Nazionale del Lavoro

Introduction

When does a bank owe a duty to the end-user of (i.e. person who relies on) a credit reference about one of the bank's customers? It is a question that has regularly been asked of the UK courts for at least a hundred years, and is one that is still troubling courts in the UK and elsewhere today. 

Despite the significance of bank letters of reference having diminished as accounting standards have improved and credit scoring has developed, references remain a feature of the commercial landscape, and are common in certain areas (e.g. international trade in goods; residential landlord & tenant). In a straightforward case, a bank will (subject to any disclaimers that may be effective) owe a duty to take reasonable care under English law as to the accuracy of the reference to the person or persons to whom the reference is addressed. 

But the person to whom the reference is addressed and the end-user relying on the reference to make decisions about whether to provide credit are often not the same. Usually, the end-user asks his/her bank to obtain the reference from a bank with which the subject of the reference has an account.      

In the case of Playboy Club v Banca Nazionale del Lavoro[1], the Supreme Court has recently confirmed that a bank does not owe a duty to the person who relied on the reference to take reasonable care about the accuracy of the reference, if his identity is not disclosed and he uses an agent to make the request without the bank knowing or being able to know that the agent is acting in that capacity. 

The case is not a good advertisement, either for the commercial practice of written credit references or for the law of negligence. Given the number of credit reference cases which the Playboy Club case follows, it seems that general rules of tort liability are probably not adequate tools for managing and fulfilling the legitimate expectations of commercial parties, and that a commercial "fix" to the practice of credit referencing might work better than leaving difficult cases to the Courts to resolve.    

Facts

The essential facts of the case were that a Mr Barakat visited the Playboy Club, a London casino, and applied for credit with which to play. The casino asked Barakat to provide a credit reference. The player provided details of an Italian bank, Banca Nazionale del Lavoro ("Banca Lavoro"). Following its standard practice, the casino made the request through its associated company, Burlington, without disclosing the casino's involvement or the purpose for which the reference was required (presumably because players usually prefer their banks not to know about their gambling). The request for a reference was on Burlington letterhead, and was submitted to Banca Lavoro by the casino's bank.

Banca Lavoro wrote in response that Barakat was trustworthy up to £1.6m in any week. The bank had no reasonable basis for making that statement. The casino extended credit to the player in reliance on the reference.  He failed to repay, and the casino suffered a loss. It sought to recover that loss from Banca Lavoro. It succeeded at trial, but the trial judge's decision was overturned on a first appeal to the Court of Appeal. The casino then appealed to the Supreme Court. 

Decision

The Supreme Court unanimously dismissed the appeal and confirmed that Banca Lavoro did not owe a duty of care to the casino regarding the reference. The basis of the decision was that Banca Lavoro did not know, and had no way of knowing, that the reference was or was likely to be relied on by the casino. A duty was owed to Burlington, to whom the reference was addressed, but as Burlington had suffered no loss it could recover no damages. Lord Sumption JSC (giving the lead judgment of the Court) observed that for the maker of a statement (such as a credit reference) to owe a duty of care in tort to a recipient of a statement, it must not only be likely that the statement will be communicated to and relied on by the recipient; it must also "be part of the statement's known purpose" that it should be communicated to and relied upon by the recipient.

Discussion

Account-providers have been held to owe duties of care for their statements on the credit or creditworthiness of their account-holders in many other cases, including in the courts of New York, South Africa and Australia, as well as England[2].  It may therefore seem odd that the UK Supreme Court has decided that Banca Lavoro did not owe a duty to the casino, particularly in circumstances in which Banca Lavoro had done nothing to try and limit its liability in the reference itself and, as the Court found, was seemingly indifferent to who they were providing the reference. On the other hand, the casino had used Burlington (rather than disclosing its own involvement) to protect its players' (not unreasonable) expectation of privacy – for which it can hardly be criticised. 

The main factual matter which led to the rejection of the claim also seems, intuitively, an unsatisfactory one. Had Burlington's name not been given by the casino's bank (i.e. had the request for the reference been made in the name of the casino's bank alone), the casino's claim would have succeeded. That is because the English case of Hedley Byrne v Heller decided that a reference-providing bank ought to know that a requesting bank is acting on behalf of a customer if no customer is named in the request. (I.e. a bank will owe a duty to an unidentified customer, but not a misidentified customer.)  

The explanation for these odd features of the Playboy Club case is that the rules for imposing duties of care on businesses in the absence of a contract are designed to put some boundaries around liabilities that might otherwise become open-ended (or what the New York Court of Appeals described as "liability in an indeterminate amount for an indeterminate time to an indeterminate class")[3].  Although flexible, the rules have definite limits, and their application sometimes lead to results which appear harsh to one side or the other. Precautions can be taken – e.g. practical steps can be taken to limit the distribution of credit references, disclaimers can be used, and (for requesting parties) the identity of the "end-user" and the purpose for which he intends to rely on the reference can be disclosed – but it should be remembered that the rules are formulated broadly because they are designed to cover all statements, not merely statements about creditworthiness. Banks and end-users of credit references cannot reasonably expect a perfect solution from the tort of negligence.

Practical lessons

Banks and other account-providers, when are reviewing their policies around providing credit references about account-holders, will no doubt look at their commercial position as carefully as the legal position. They provide credit references and other information as a service to their customers, not to the businesses requesting the information. The customer typically needs a credit reference in order to conduct business on credit. The bank providing the reference will expect at least the possibility of a benefit over time, by helping its customer's business and account balances to grow[4].  It is up to banks and other credit reference providers to determine whether that "benefit" is adequate compensation for the risks they run in servicing their customers' requests. In the Playboy Club case, where the credit obtained was used to fund the playing of roulette and the customer Mr Barakat had never had a credit balance with Banca Lavoro, the "benefit" could not reasonably have been thought to be significant. But, operated correctly, the service might be of benefit to the reference provider in the long run, though not in any fixed or predictable way.

We are not aware of any practice in the UK of banks charging for references, other than for administration (presumably to cover operating expenses). Carrying out credit referencing, with the risk of substantial liability, but without any fixed or predictable return, might be thought to be out of step with a commercial world in which credit scoring agencies supply - for profit – a huge market for credit data, and (generally speaking) accept only a limited responsibility in their contractual terms for the accuracy of the data. 

Had the Playboy Club paid for and received the same negligent reference from a credit scoring agency engaged on market-standard terms, the agency might have been contractually liable to compensate the casino for gross negligence or wilful default, but the amount recoverable would have been very limited. Perhaps more importantly, it is almost inconceivable that the matter would have resulted in a complex, protracted and potentially embarrassing piece of litigation. 

Conflicts of interest between the account holder and a paying business requesting the reference may arise, but those conflicts are present anyway under current commercial circumstances. A well-defined contractual framework that includes all stakeholders in the transaction would be capable of managing those conflicts of interest, probably no worse than at present.

[1] [2018] UKSC 43

[2] Including Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; Commercial Banking Co of Sydney Ltd v R H Brown & Co [1972] 2 Lloyd's Rep 360; Standard Chartered Bank of Canada v Nedperm Bank Ltd [1994] ZASCA 146; Banque Indosuez v Barclays 181 A.D.2d 447 (1992); Barkany v Southwest Securities 972 N.Y.S.2d 458 (2013). Another example of a case in which the court held that a duty of care was not owed is DP Mann v Coutts [2004] 1 All ER Comm 1.

[3] Ultramares Corporation v Touche 174 N.E. 441 (1932)

[4] A point made in slightly different terms in Berkline Corp. v Bank of Mississippi, 453 So.2d 699