Court guidance on bank liability to third parties for credit references

Court guidance on bank liability to third parties for credit references

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The UK Supreme Court has recently confirmed that a bank that provides a credit reference bears no duty of care for the accuracy of that reference to an undisclosed principal who relies upon it. Wherever possible, banks providing credit references should ensure that they relate to a specified transaction only and they can only be relied upon by the recipient addressee alone.

What happened?

In October 2010 Mr Hassan Barakat wished to gamble at the London Playboy Club (the “Club”). To fulfil his ambitions, he visited the casino and applied for a cheque cashing facility for up to £800,000. As a matter of house policy, the Club required a credit reference from Mr Barakat’s bankers for twice the sum of the requested facility (i.e. £1.6m). However in order to protect the confidentiality of its customers, it was the Club’s practice not to approach a prospective customer’s bank for the reference directly. Instead, the Club arranged for an associated company, Burlington Street Services Ltd (“Burlington”), to approach Mr Barakat’s bankers for a reference, and to do so without disclosing the purpose of the inquiry or that the reference was in fact required for the benefit of the Club.

Mr Barakat’s bank, Banca Nazionale del Lavoro (the “Bank”), duly assisted with Burlington’s request for a credit reference. On 13 October 2010, the Bank sent a letter by fax to Burlington, confirming that Mr Barakat had an account with them and that he was trustworthy up to £1,600,000 in any one week.

Acting in reliance on the Bank’s reference, the Club granted the cheque cashing facility to Mr Barakat and soon increased it to £1.25m. In a subsequent four-day spell during October 2010, Mr Barakat played at the casino. He drew two cheques from the Bank for a total of £1.25m in return for gaming chips of the same amount. The Club paid him his net winnings of some £427,400 before Mr Barakat returned to his home country (Lebanon) never to return to the casino again. Both cheques were returned unpaid and the Club suffered a total loss of £802,940 including gaming duty.

It was common ground that the Bank had no reasonable basis for the reference it provided. Mr Barakat did not hold an account with the Bank until two days after the reference was sent, when an account was opened in his name with a nil balance until it was closed in December 2010.

Supreme Court decision

The Supreme Court found that no duty of care was owed by the Bank to the Club (Playboy Club London Ltd v Banca Nazionale del Lavoro SPA [2018] UKSC 43). In reaching its decision, it confirmed that a person providing a credit reference to one person will only assume a duty of care to a third party where it has some knowledge of the third party recipient. In particular, the reference provider should know that the reference will be communicated to, and relied upon by, the relevant third party.

In this case, the Bank had no reason to expect that Burlington was acting on behalf of the Club. The Bank also had no knowledge of the Club’s involvement in the reference request, and no knowledge of the transaction in contemplation or the purpose for which the reference would be used. Accordingly, the Supreme Court concluded that the Bank did not owe any responsibility to the Club. Moreover, it did not matter that the Bank knew nothing about Burlington and had appeared to be rather indifferent as to whom they were dealing with.

Practical implications

We expect banks will welcome this Supreme Court decision. It provides useful clarity that knowledge of both the existence (but not necessarily the identity) of a third party and, at least in broad terms, the purpose for which a reference will be used, is necessary in order to establish any kind of duty to a third party when providing a credit reference.

In practice, banks should be careful to extend reliance upon their credit references to named addressees only. We also recommend that banks seek to reduce their potential exposure under any credit reference they provide by carefully specifying the purpose for which it is given.

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