The Supreme Court’s recent judgment in Banca Nazionale del Lavoro SPA v. Playboy Club London Limited¹ revisited the landmark judgment in Hedley Byrne v. Heller² . The Court’s judgment related to a party’s voluntary assumption of responsibility when making a statement or providing information that is later relied upon and ultimately results in economic loss. Hedley Byrne allows the recovery of such loss where a special relationship exists between the parties. Such a relationship arises where A makes a statement or provides information, which is reasonably relied upon by B, and A has an appreciation that the statement/information would be reasonably relied upon by B. The question before the Court was whether the person or category of persons to whom the Hedley Byrne duty is owed should be widened to include an undisclosed and unknown principal.

Lord Sumption, who gave the leading judgment, resisted the invitation to extend Hedley Byrne. His Lordship pointed out that it is fundamental to the analysis of a Hedley Byrne duty that the responsibility being assumed by a defendant is to “an identifiable (although not necessarily identified) person or group of persons, and not to the world at large or to a wholly indeterminable group”.

Background

The London Playboy Club required a credit reference from a customer’s bank in order for the customer to cash cheques to gamble in its casino. Given the purpose of the reference, the Club did not contact customers' banks in its own name, but did so via an associated company (Burlington).

In October 2010, a Mr Barakat gave details of Banca Nazionale del Lavoro (BNL). Burlington made a status request to BNL in relation to Mr Barakat’s creditworthiness. BNL replied confirming that Mr Barakat held an account with them and that he was trustworthy up to £1.6m in any one week, adding: “This information is given in strict confidential [sic].”

Relying on the reference, the Club granted Mr Barakat a cheque-cashing facility and over four days he drew two cheques totalling £1.25m and the Club paid him net winnings of £427,400. Mr Barakat left with these, not to be seen again at the Club. Both cheques were returned unpaid, and it emerged that BNL did not hold an account for Mr Barakat when the reference was sent. When an account for Mr Barakat was opened with BNL, two days later, it had a nil balance, and did so until it was closed two months later.

It was held at first instance³ that BNL owed a duty of care to the Club when giving the reference. The Court of Appeal⁴ held that the only person to whom BNL owed a duty was Burlington (to whom the reference was addressed). The Club’s appeal invited the Supreme Court to expand the Hedley Byrne duty of care, so as to establish a special relationship between a representor (BNL) and an undisclosed principal (the Club) of the representee (Burlington).

A relationship “equivalent to contract”

The Club accepted that there was no evidence that BNL knew that the reference it gave would be communicated to, or relied upon by, anyone other than Burlington. The Club also accepted that a representor owes no duty to a third party who relied on his statement unless the representor knew that the statement was likely to be communicated to the third party. BNL’s lack of awareness of the Club and its interest in the reference was the central reason for the Court’s dismissal of the claim.

In what their Lordships recognised as “an ingenious argument”, the Club sought to bypass BNL’s ignorance of Burlington, by relying on a phrase from Lord Devlin’s judgment in Hedley Byrne that “wherever there is a relationship equivalent to contract, there is a duty of care”. On the basis of this, the Club was able to take the Court to a centuries-old rule of English contract law that an undisclosed principal may declare himself and benefit from a contract made by his agent⁵.

Whilst applauded for its ingenuity, Lord Sumption’s opinion was that the Club’s argument was “fallacious”. Just because a relationship is said to be “equivalent to contract”, it does not follow that the legal consequences of a contractual relationship are imported into it. His Lordship also pointed out that liability to an undisclosed principal is “a purely legal construct”, which “runs counter to the fundamental principles of privity of contract”. Such a relationship is, therefore, not sufficiently proximate, voluntary or consensual to give rise to a duty of care in tort.

Lord Sumption commented that whilst the Hedley Byrne principle has undergone considerable development over the last half century, the courts have resisted expanding the scope of liability concerning the person or category of persons to whom a duty of care is owed. A defendant’s voluntary assumption of responsibility according to his Lordship “remains the foundation of this area of law” and in view of the fact that BNL did not know of the Club, or that Burlington was acting for the Club, “it is plain that they did not assume responsibility to the Club”.

Lord Mance (who agreed with Lord Sumption) also took the view that the confidentiality wording in the reference provided to Burlington further strengthened the position that BNL’s responsibility was confined to Burlington alone.

Insight

This case is a variant on the classic problem where a right of action and the loss sit with different entities. In this case, it was not the right and the loss sitting with different entities, but the benefit of the reference and the loss. The judgments are striking in that both Lords Sumption and Mance expressed sympathy that the Club was left with no remedy when BNL's conduct was clearly remiss.

The judgment also highlights and reiterates the importance of defining the person or category of persons to whom information is being provided and who may rely on that information. Lord Mance noted that the decision would have been different had BNL provided the reference expressly or impliedly for the benefit of an unnamed (as opposed to entirely undisclosed) principal of Burlington. This is what happened in Hedley Byrne itself, when the House of Lords inferred, as a matter of fact, that the bank giving the reference understood the recipient did not want the reference for its own ends. In other words, on the facts of Hedley Byrne itself, the reference was given to an unnamed but (implicitly) disclosed principal.