Tue 07 Aug 2018

Agency: Undisclosed Principals & Tort

In 1964 the House of Lords issued its decision in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. The decision developed the law of tort/delict by allowing the recovery of purely economic loss in negligence where the existence of a special relationship between the pursuer and the defender made it appropriate.

In that case, Hedley Byrne had asked its bank to get a credit reference for a company which wanted to place advertising contracts through it. The company's bank, Heller & Partners supplied the reference. The court held that the Heller & Partners must have known that the bank was not acting on its own account but wanted the reference for a client intending to do business with Heller & Partner's customer, despite not knowing the identity of that person. Essentially, Hedley Byrne's reliance on the reference and Heller & Partner's knowledge of the fact that they would rely on it, gave rise to a duty of care between them.

On 26 July this year the Supreme Court issued its decision in Banca Nazionale del Lavoro v Playboy Club London & Others [2018] UKSC 43. The facts of this case are remarkably similar to those in Hedley Byrne. The difference, however, is an important one. In this case, the reference was not relied upon by the party to whom it was addressed but by that party's undisclosed principal. Accordingly, the question for the Supreme Court was whether, in these circumstances, the bank is liable to the undisclosed principal.

The principal in question was the London Playboy Club. It asked an associated company, Burlington Street Services Ltd to obtain a credit reference for an individual but without disclosing the purpose of the inquiry or the fact that the reference was required for their benefit. BNL provided a credit reference for the individual despite having had no relevant dealings with him. Having done so, the individual drew two cheques on BNL for a total of £1.25m in return for gaming chips at the club. Both cheques were, however, returned as unpaid and he was never seen again. The club suffered a loss of £802,940 and it and Burlington raised proceedings against BNL on the basis of a breach of duty of care. The trial judge held that BNL owed the club a duty of care. The court of appeal disagreed and held that the only duty was owed to Burlington.

In Hedley Byrne, Heller & Partners had fully understood that the reference provided would be relied on by an unidentified, but identifiable client of the bank. However, in this case, Senior Counsel for the club accepted that there was no evidence that BNL knew that its reference would be communicated to or relied on by anyone other than Burlington. Senior Counsel instead relied on the ratio of the court's decision in Hedley Byrne in support of its argument and, in particular, Lord Devlin's reasoning. He held that "wherever there is a relationship equivalent to contract, there is a duty of care". He submitted that the relationship between BNL and the club was equivalent to contract because in contract the club would have been entitled to declare itself and assume the benefit of the contract if it had wished to do so. The Supreme Court disagreed.

In a judgement given by Lord Sumption the court explained the problems. First, while a relationship equivalent to contract is generally proximate enough to found a duty of care, it does not follow that an equally proximate non-contractual relationship involves all of the same legal incidents. Secondly, the relationship between a person dealing with another and the latter's undisclosed principal is not analogous to the kind of relationship which will give rise to a duty of care. Indeed, as Lord Sumption explains while "The whole point about the law relating to undisclosed principals is that a person may be brought into contractual relations with some one with whom he has no factual relationship at all…Such a relationship is, by definition, not proximate. Nor is it in any relevant sense voluntary or consensual so as to give rise to an assumption of responsibility". Finally, the club was attempting to import one aspect of the law relating to undisclosed principals into the law of tort/delict. But most of the rights and liabilities relating to undisclosed agency were "entirely inapposite to the law of tort".

Accordingly, while the court had very little sympathy for BNL (having given a credit reference for someone it hadn't dealt with before) it held that BNL had no reason to believe that Burlington was acting for someone else and it knew nothing of the club. It was, therefore, clear that it did not voluntarily assume responsibility to the club. While BNL may have been indifferent to whom they were dealing with and may have been willing to assume a duty to the club, that indifference could not lead to the conclusion that they had actually done so.

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