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Banco Nazionale v Playboy: Raising the Stakes on Negligent Misstatements

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About The Author

Jamil Mustafa (Private Law Editor)

Jamil is currently undertaking pupillage at a commercial chancery chambers, after obtaining an Outstanding on the BPTC at BPP University and a Distinction on the BCL at Oxford. His main legal interests are contract, tort and equity. Before the law, Jamil graduated with an MPhil in American History with Distinction from Clare College, Cambridge, and with First Class Honours in Government and History from the LSE. Outside academia, Jamil enjoys cricket, rugby and rowing and is a staunch supporter of Manchester United FC.

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There is good sense behind our present law that, in general, an innocent but negligent misrepresentation gives no cause of action. There must be something more than the mere misstatement.

Lord Reid

Since these words from the seminal case of Hedley Byrne v Heller & Partners [1963], the law of negligent misstatement has largely remained in step with Lord Reid’s pronouncement. Courts have been hesitant to impose liability on parties for statements they have made where a contractual or fiduciary duty is absent; they are sensitive to the spectre that imposing liability for statements could lead to a representor incurring liability toward an indeterminate number of persons.

Nonetheless, as the House of Lords noted in Hedley Byrne [1963]there are cases where notwithstanding the absence of a contractual or fiduciary relationship between two parties – the law ought to intervene when a representor's statement was reasonably relied upon by a representee, who thereby suffered pure economic loss. However, defining the limits of such intervention has been the subject of much judicial consternation over the years, as varying factual matrixes have generated novel issues for courts to resolve.

The latest example, at the heart of the recent Supreme Court judgment in Banca Nazionale del Lavoro SPA v Playboy Club London Ltd [2018], was whether a representor owed a duty of care to the undisclosed principal of an agent, to whom they had made a representation, which the undisclosed principal subsequently relied upon to their detriment. As this article examines, while the Supreme Court’s answer was an emphatic no, it left the door slightly ajar on a perennial debate.

An Equivocal Legacy

The difficulties that courts have encountered in defining the limits of liability for negligent misstatements are largely a consequence of the way in which subsequent courts have interpreted the judicial pronouncements in the case that established it as a cause of action: Hedley Byrne [1963].

Each member of the House of Lords in Hedley Byrne [1963] delivered their own judgment. And while the majority concluded that, in principle, a negligent misrepresentation may give rise to liability notwithstanding the absence of a contractual or fiduciary relationship – and that a claimant could therefore recover damages for purely economic loss – differences in the judges' reasoning by which they arrived at that conclusion led to murkiness in the law.

The Reasoning of Lord Reid: Distinguishing Acts and Words

Lord Reid in Hedley Byrne [1963] opined that the approach of the courts to negligent acts and words should differ. Thus, despite accepting that Donoghue v Stevenson [1932] was a ‘very important decision’, he noted that it concerned a negligent act. As such, Lord Reid felt it should have no bearing on the result of Hedley Byrne [1963], which concerned a negligent statement.

Lord Reid justified this by arguing that a negligent act  such as the production of a bottle of snail-tainted ginger beer  could only cause one accident, and also noted that there existed clear proximity between an injured person and a negligent manufacturer. By contrast, a person’s words may be broadcast without their consent to a larger audience: thus, there is theoretically no limit to the class of people to whom the representor may be liable. Accordingly, he concluded that something more was required to incur liability for statements.

Lord Reid held that the additional requirement was that ‘the speaker or writer has undertaken some responsibility’ for the veracity of their statement. He conceptualised this "assumption of responsibility" as distinct to proximity, the concept that applies to negligent acts which can arise for a number of reasons.

The Reasoning of Lord Devlin: Treating Both the Same

In contrast, in his judgment in Hedley Byrne [1963], Lord Devlin averred that the principle of proximity ought to apply equally to words and deeds, and that wherever there is a relationship equivalent to contract – which is characterised by a voluntary assumption of responsibility – there is a duty of care in respect of any statement made. He felt that such a relationship could be general – an example of which being the relationship existing between a solicitor and their client  or particular to a specific transaction.  

Thus, Lord Devlin did not see a relevant distinction to be made between negligent words and deeds; the requirement of a relationship equivalent to contract was merely ‘an application of the general conception of proximity’. However, given the generality of the concept of proximity, Lord Devlin thought that greater specificity of the degree of proximity necessary was needed, hence he formulated the notion of ‘nearness to contract’.

Accordingly, on his view, in principle, liability for negligent misstatement was not limited to where there was a voluntary assumption of responsibility, which was only one means by which sufficient proximity could be established to give rise to a duty of care. The key consideration was whether there was a closeness between the parties that could be equated to a contractual relationship.

A Quest for Certainty

It was this disagreement between Lord Reid and Lord Devlin in Hedley Byrne [1963] – namely whether the requirement that there is an assumption of responsibility is merely an application of the principle of proximity or distinct to it – that led to confusion and inconsistency in subsequent case law.

Take the case of Smith v Eric S Bush (a firm) [1990]. This concerned a negligent valuation of a domestic property prepared for a mortgage company, which the valuers expressly stated it was solely for the mortgage company’s reliance. However, it was a valuation upon which the purchasers subsequently relied.

The majority of the House of Lords in Smith [1990] held that the valuers owed a duty to the purchasers in tort in respect of the report; but – as in Hedley Byrne [1963] – although the judges' conclusion was the same, their methods differed.

Lord Griffiths’ Approach: A Proximity Test

Lord Griffiths in Smith [1990] argued that it was artificial to discuss the case in terms of assumption of responsibility when the valuers had expressly sought to disclaim such responsibility. Instead, he held that what mattered was whether:

[I]t is foreseeable that if the advice is negligent the recipient is likely to suffer damage, that there is a sufficiently proximate relationship between the parties and that it is just and reasonable to impose the liability.

The three elements that Lord Griffiths identified – namely foreseeability of damage, proximity and that the imposition of liability is fair, just and reasonable  later became the oft-cited "test" from Caparo Industries Ltd v Dickman plc [1990]. Notably, Lord Griffiths, in line with Lord Devlin in Hedley Byrne [1963], conceptualised the relationship between the valuers and the purchasers using general terms of proximity. The valuers knew at all times that their valuation would be relied upon by a purchaser, loss from it being negligently prepared was clearly foreseeable, and it was fair, just and reasonable to impose a duty given the professional context. 

Equally, in Caparo v Dickman [1990] itself, the House of Lords placed less weight on the notion of assumption of responsibility and focused on facts of the case, which indicated that there was insufficient proximity between the defendant auditors and the claimant company. Here during his discussion of the Hedley Byrne [1963] line of cases, Lord Bridge stated that the:

[S]alient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the [claimant] had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the [claimant] would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation.

On this view, proximity is the key ingredient and a control mechanism to prevent endless liability for negligent misstatements. It follows that assumption of responsibility was simply an extension of that general principle, and was sufficient – but not necessary  to give rise to liability for negligent misstatement.

Ulimately, whether the misstatement was negligent was adjudged by applying the same tripartite test that the court would in the case of negligent acts. The one caveat was that, in considering whether the requirement of proximity was satisfied, courts have special regard to the salient feature(s) identified by Lord Bridge in Caparo v Dickman [1990]:

  1. Whether the representor knew in respect of what the statement was requested;
  2. To whom the statement was or was to be communicated, and;
  3. That it was likely they would place reliance upon it.

Lord Templeman’s Approach: An Assumption of Responsibility

Conversely, though Lord Templeman in Smith [1990] came to the same conclusion as Lord Griffiths, he did so for different reasons. He held that the valuer had assumed responsibility to both the mortgagee and the purchaser, as the valuers knew that the valuation fee was paid by the purchaser and that the purchaser would likely rely on the valuation.

Subsequently, in the leading judgment in Henderson v Merrett [1995], Lord Goff placed greater emphasis on the concept of assumption of responsibility, which he viewed as the sole test for liability for negligent misstatement:

[O]nce the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further enquiry whether it is “fair, just and reasonable” to impose liability for economic loss.

Lord Goff followed the reasoning of Lord Reid and Lord Templeman: he was of the view that there was a distinct test to be applied to negligent words as opposed to acts. In fact, he took things further in the controversial case of White v Jones [1995], which dealt with the issue of whether the intended beneficiaries under a will were owed a duty of care by solicitors who had negligently prepared the will, by failing to make the testator’s requested changes before his death.

Here Lord Goff – fearing that intended beneficiaries in the position of the claimants would be left without a remedy  held that the House of Lords should:

[I]n cases such as these extend to the intended beneficiary a remedy under the Hedley Byrne principle by holding that the assumption of responsibility by the solicitor toward his client should be held in law to extend to the intended beneficiary.

The Result: A Bit of a Mess

As a result, by the time the House of Lords came to consider the case of Customs and Excise Commissioners v Barclays Bank [2006], judicial handling of the notion of assumption of responsibility was inconsistent. Lord Hoffmann particularly, and to a lesser extent Lord Walker, treated assumption of responsibility as a species of proximity, and so seemed to be of the view that negligent words, like acts, were subject to the tripartite Caparo v Dickman [1990] test.

However, other members of the House of Lords – most notably Lord Bingham – viewed the test of assumption of responsibility as free-standing, with the application of the Caparo v Dickman [1990] test functioning as an alternative ground of a duty of care in respect of a statement in the assumption of responsibility avenue failed.

Thus, when the Supreme Court were given the chance to review the law in Banca Nazionale v Playboy [2018] – which turned on the issue of assumption of responsibility/proximity  the question was whether a foundational ambiguity in the law of negligent misstatement that has caused uncertainty since Hedley Byrne [1963] was decided over 50 years ago was finally going to be resolved.

Banca Nazionale v Playboy

The Facts

Banca Nazionale v Playboy [2018] concerned a negligently prepared credit reference given by Banca Nazionale de Lavoro (the Bank) in respect of Mr Hassan Barakat (B), who wanted to gamble in the Playboy Club (the Club). The reference was for a cheque cashing facility in the amount of £800,000. B wanted to drawdown on this amount to gamble in the Club.

In accordance with the Club’s policy, B had to obtain a credit reference from his bank to the tune of double that sum  £1,600,000  in order to do so. Furthermore, it was the Club’s practice  due to concern for the privacy of its members  that the reference was to be obtained by an associate company, Burlington Street Services Ltd (Burlington), on behalf of the Club. 

The Bank supplied Burlington with the reference in the terms requested, and the Club granted the cheque cashing facility in reliance on that reference. After receiving the reference, the Club increased B’s cheque cashing facility from £800,000 to £1.25m; B then drew down £1.25m worth of gambling chips. Having won £427,000, he left the country.

Subsequently though, the two cheques he had given to the club for the chips bounced. When gaming duty was added, the Club suffered a total net loss of £802,940. It subsequently turned out that B did not have the standing to meet a financial commitment to the extent of £1,600,000 at any time.

It was common ground between the parties that the reference was negligently prepared. The issue was whether the Bank owed the Club the undisclosed principal of Burlington, and the existence of whom the Bank was unaware a duty of care for the negligently prepared reference.

The Judgment

The Principal is Ready To See You Now

Lord Sumption gave the leading judgment in Banca Nazionale v Playboy [2018] and conceptualised the assumption of responsibility principle as an extension of the concept of proximity. He drew support from the judgments of Lord Devlin in Hedley Byrne [1963], and Lord Bridge in Caparo v Dickman [1990].

Although he explained that the voluntary assumption of responsibility by one party to the other is fundamental in this area of law – in the sense that it was necessary to delimit the person or the class of persons to whom defendant is assuming responsibility – Lord Sumption held that ‘the foundation of the duty is proximity’. Furthermore, in determining the limits of such a class of persons, Lord Sumption adopted the limiting factors articulated by Lord Bridge in Caparo v Dickman [1990], namely: 

[T]he defendants’ knowledge of (i) the person known to be likely to rely on the statement, and (ii) the transaction in respect of which he was known to be likely to rely on.

In Lord Sumption’s view, (ii) was potentially relevant to proximity in three ways:

  1. To identify some specific person or group of persons to whom he can be said to assume responsibility;
  2. To demonstrate that the claimant’s reliance on the statement will be financially significant; and
  3. To limit the degree of responsibility which the defendant is taken to assume if no financial limit is expressly mentioned.

Applying these principles to the facts of Banca Nazionale v Playboy [2018], Lord Sumption held that the Bank owed no duty to the undisclosed principal, the Club. Counsel for the Club had argued that the relationship between the Club and the Bank was equivalent to contract in that, as the principal, the Club would have been entitled to declare itself and assume the benefit of the contract with Burlington. Lord Sumption rejected this argument; the phrase equivalent to contract served as an ‘allegory of proximity and:

[I]t does not follow from the fact that a non-contractual relationship between two parties is as proximate as a contractual relationship, that it is legally the same as a contractual relationship or involves all of the same legal incidents.

In rejecting this argument, Lord Sumption made clear his view that the key consideration was proximity, not assumption of responsibility or nearness to contract; these phrases merely served to articulate the proximity sufficient to ground a duty of care for negligent misstatement. Indeed, he went on to say:

[W]hether a relationship is sufficiently proximate to give rise to a duty of care is essentially a question of fact from which the law draws certain conclusions.

Lord Sumption also held that, by definition, the relationship between the undisclosed principal Club and the Bank was not proximate; the alleged liability of a contracting party to the undisclosed principal of its counterparty was a legal construct, as opposed to a factual relationship from which legal consequences flowed. Thus, the Bank owed no duty to the Club, and the appeal was dismissed.

What Is The Purpose of That?

Lord Sumption in Banca Nazionale v Playboy [2018] held it was necessary that the representor must know both the person or class of persons to whom the representation is likely to be communicated and relied upon, and that it was part of the purpose of the representation to be so communicated, in order for there to be sufficient proximity to give rise to a duty of care. Counsel for the Club tried to circumvent this difficulty by relying on the principal-agent relationship, an argument that Lord Sumption dismissed.

Lord Mance was less sure of this. Though he agreed with Lord Sumption that the Club’s appeal should be dismissed, he held that the appeal ought not to have failed for a failure to communicate the purpose of the reference. in fact, Lord Mance averred that had Burlington itself operated the gambling club, the claim should have succeeded.

Lord Mance therefore disagreed that the second of the limiting factors that Lord Sumption had taken from Caparo v Dickman [1990]  knowledge of the transaction – was necessary to establish sufficient proximity and give rise to a duty. He dismissed the argument that special considerations arose because gambling was such a risky ‘financial commitment’ that it fell outside what was reasonably and objectively covered by the reference, pointing to other activities that were equally risky, such as trading in derivatives, in respect of which the Bank was prepared to take risk.

Lord Mance then based his dismissal of the appeal solely on the fact that the reference was not given to the Club in circumstances where the Bank may be said to have undertaken responsibility for it. 

Conclusion

Lord Sumption's leading judgment in Banca Nazionale v Playboy [2018] injected some long-needed clarity into the law of negligent misstatement by making it clear that the notions of assumption of responsibility and nearness to contract are facets of proximity, and the approach of the courts in respect of negligent words and deeds is framed by the three-part Caparo v Dickman [1990] test in respect of both.

However, before academics can write off this debate as settled, it is worth noting that Lord Mance’s judgment in Banca Nazionale v Playboy [2018] makes it clear that the law in this area has not reached a state of convivial stasis. 

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Tagged: Banking & Finance, Commercial Law, Supreme Court, Tort Law

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