Banks regularly provide financial references for their clients to confirm they believe they are able to pay their debts. This case considers whether a bank was negligent for providing a reference for its customer who was not able to do so. It demonstrates the limit on this duty, and will be of interest to banks providing such references as part of their business practice, and to insurers providing professional indemnity cover to banks.

A financial reference was provided by Banca Nazionale Del Lavoro SpA (the bank) for Mr Hassan Barakat (the customer) to Burlington Street Services Ltd. (the agent), which was acting on behalf the Playboy Club London Ltd. (the club). The club operated a casino at which the customer requested a cheque cashing facility. Before authorising the facility, the club appointed the agent to seek a financial reference in strict confidence, without naming the club. It was understood that the reference would confirm the customer’s means and standing and trustworthiness to meet a financial commitment of £1.6 million. A reference was provided but cheques presented by the customer later proved to be counterfeit and unpaid debts were left totalling £802,940.Upon investigation, it transpired that the customer’s bank account with the bank had always maintained a nil balance. The club successfully claimed against the bank for providing a negligent misstatement, and this report covers the bank’s appeal.

The main question to answer in the appeal was whether the bank owed a duty of care to anyone other than the agent, and if so, whether that included the (undisclosed) club? Lord Justice Longmore considered that since Hedley Byrne & Co. Ltd. v Heller & Partners Ltd.2 there must be a “special relationship” between the advisor and advisee for the advisor to be liable for a negligent misstatement. To establish this, since Caparo Industries Plc. v Dickman3, it has been customary to enquire: (1) if the defendant assumed responsibility to the claimant (the “assumption of responsibility test”); (2) whether the loss was a foreseeable consequence of the defendant’s actions or inactions, (b) the relationship of the parties was sufficiently proximate, and it is fair, just and reasonable to impose a duty of care on the defendant towards the claimant (the threefold test); and (3) whether the addition to existing categories of duty is incremental and by analogy with existing categories. Longmore LJ noted these guidelines were applied in Customs and Excise Commissioner v Barclays Bank Plc4, and that case included the following key paragraph in its judgment: “In these cases in which the loss has been caused by the claimant’s reliance on information provided by the defendant, it is critical to decide whether the defendant (rather than someone else) assumed responsibility for the accuracy of the information to the claimant (rather than to someone else) or for its use by the claimant for the one purpose (rather than another).”5 It was this passage that Longmore LJ referred to in his judgment, to help him decide whether the factual differences with Hedley Byrne afford a meaningful distinction. On the facts, this case was distinguished from Hedley Byrne, since, unlike that case, the bank was not aware that: a) the reference would be used by another (i.e. the club) as the bank only knew the agent (and was unaware they were acting for the club), and b) the purpose of the reference was for gambling. Therefore, there was no assumption of responsibility, and it was difficult if not impossible to describe the bank and club as having a “special relationship”. That was not the end of the enquiry, since although the assumption of responsibility is sufficient on its own to establish a duty, it is not a necessary condition for liability, and further consideration would be required. The threefold test in Caparo was considered, and it was held that there was no “sufficient proximity”between the bank and club, nor was it considered fair, just and reasonable to impose a duty of care, when the club deliberately concealed its existence (albeit standard practice). It was held no duty of care existed.

The bank in this case did not appear to exclude liability for making such a statement. Many banks do have exclusion clauses, and although the decision did not go against the bank, nevertheless it remains prudent to do so, and to ensure policies and procedures are in place to ensure all references contain a liability exclusion. If it is not possible to fully exclude liability, our view is that banks should restrict in the references who may rely on it, and the purpose of the reference. In different circumstances this claim could have prevailed, and such claims may be covered under a bank’s Professional Liability cover in its Financial Institutions insurance.

Link: http://www.bailii.org/ew/cases/EWCA/Civ/2016/457.html