UK ruling offers lesson for banks on credit referencing

Mike Hawthorne of Pinsent Masons, the law firm behind Out-Law.com, said an Italian bank had been "very lucky to escape liability" for losses suffered by a casino which had relied on a credit reference the bank had provided for one of its customers.

In a case before the Supreme Court, Playboy Club London had argued that Banca Nazionale del Lavoro (BNL) was liable for losses it suffered after extending a credit facility to one of the bank's customers.

Hassan Barakat, a "well-known figure at a casino in Lebanon", applied to Playboy Club for a cheque cashing facility for up to £800,000 to enable him to gamble in the casino. Seeking proof that Barakat had the available funds available to him, Playboy Club sought a credit reference from Barakat's bankers for twice the amount Barakat wished to borrow.

Playboy Club asked for the credit reference via a third party agent, Burlington Street Services. This was to avoid disclosing to the bank the purpose of the credit facility, according to the court ruling.

BNL responded to Burlington's request for the credit reference and confirmed that Barakat had an account with them and was 'trustworthy up to £1,600,000 in any one week'.

Playboy Club relied on the credit reference and granted Barakat the credit facility of £800,000, which it subsequently extended to £1.25 million. Barakat won more than £400,000 from gambling at the casino which Playboy Club paid out to him. However, cheques he drew from BNL to the total value of £1.25m were returned unpaid, leaving Playboy Club with a total net loss of more than £800,000.

According to the ruling (13-page / 186KB PDF), Barakat had only set up a BNL account two days after the BNL credit reference was sent. The account had a nil balance and was closed approximately two months later.

Playboy Club claimed BNL should be held liable for its losses. However, the Supreme Court ruled that while the bank owed a duty of care to Burlington, it did not owe a duty of care to the Playboy Club whom Burlington was acting for.

The distance in the relationship between Playboy Club and BNL as a result of Burlington's involvement as an undisclosed agent of Playboy Club, was a vital factor in the Supreme Court's judgment.

The Supreme Court said: "It is impossible to feel much sympathy for BNL given the circumstances in which they came to give a favourable credit reference for someone with whom they appear to have had no relevant dealings. But they had no reason to suppose that Burlington was acting for someone else, and they knew nothing of the Playboy Club."

"In those circumstances, it is plain that they did not voluntarily assume any responsibility to the Club. It may well be, since they knew nothing of Burlington either, that they were indifferent to whom they were dealing with. But the fact that a representor may have been equally willing to assume a duty to some one else does not mean that he can be treated as if he had done so," it said.

Litigation expert Craig Connal QC of Pinsent Masons said had the reference been, expressly or impliedly, for the benefit of an unnamed party, the claim could have succeeded, because the bank would have undertaken what Lord Mance, in his concurring judgment in the ruling, described as ‘an open exposure’.

Hawthorne of Pinsent Masons said: "Banks generally avoid giving references for customers for the reason that this case highlighted; namely that if the person to whom you give the reference relies on it and suffers a loss that person is then entitled to sue the bank for its loss."

"Because a bank giving a reference will usually have little or no knowledge of the commitments which the recipient of the reference might enter into based on the reference, giving a reference at all is always a risk. Here, the bank went way beyond a normal banker’s reference and said that the customer was good for 'up to £1,600,000 in any one week'. Banks are normally much more cautious in their references and limit themselves to bland statements like 'the customer has conducted his accounts with us properly'," he said.

"If the bank in this case had addressed its reference to the casino then there is no doubt it would have been liable to the casino for the loss. By good fortune for the bank, the casino sought the reference through the agency of a different company and that company did not tell the bank that it was asking for the reference on behalf of the casino. The casino tried to persuade the Supreme Court to look through the intermediate company, but the Supreme Court refused to do so. The lesson for banks is that, if you have to give reference at all, make sure that the reference says that it is for use by the addressee only," Hawthorne said.