The dangers of using third party references – a warning to businesses

High stakes

In October 2010 Hassan Barakat, a gentleman with an appetite for high stakes gambling, opened a £800,000 cheque cashing facility with the Playboy Club casino in London (the “Club”). The Club required a credit reference from the player’s bank for twice the amount of credit facility requested (i.e. for £1.6m). To protect clients’ privacy, it was the Club’s practice to obtain the reference via an intermediary company called Burlington Street Services Ltd (“Burlington”). Upon the written request of Burlington, Mr Barakat’s bankers, Banca Nazionale del Lavor (“BNL”) provided written confirmation that Mr Barakat had an account with them and was trustworthy up to £1.6m in any one week.

Rolling the dice

Relying on that reference the Club granted the cheque cashing facility to Mr Barakat and shortly thereafter increased it from £800,000 to £1.25m. Mr Barakat subsequently drew two cheques on BNL for a total of £1.25m in return for gambling chips of the same amount. Both cheques were then returned unpaid. The Club later discovered that BNL did not in fact hold an account for Mr Barakat and there was no basis for the reference.

Snake eyes

In the recent case of Banca Nazionale del Lavoro SPA v Playboy Club London Ltd and others [2018] All ER (D) 148, the Supreme Court examined whether BNL owed a duty of care to the Club, and found that a bank could not be liable for a credit reference in circumstances where it was not aware that its reference would be communicated to or relied upon by any third party.

This is a well-trodden (albeit complex) area of law, but this case serves as a useful reminder of the limits to professional advisors’ liability to undisclosed principals and the importance of ensuring that the contractual framework is appropriate to the situation and context in which that advice is sought. There are highly fact sensitive considerations, including what the advisor’s knowledge of the transaction was and the purpose for which the advice is being given. Is there a special relationship between the parties which is ‘akin to contract’? In this case there was not, and BNL did not owe the Club a duty of care.

Hedging your bets

There is sometimes a tension between protecting client confidentiality, particularly in the banking context, while at the same time ensuring contractual arrangements afford adequate protection to undisclosed principals. The courts are reluctant to expand a representor’s liability for negligent misstatement where that would result in liability to the world at large or to a wholly indeterminate group. Clients looking to strike a balance between these two competing aims should give consideration to the principles considered in this case.

Gregory Pooler is a managing associate at Grosvenor Law.