Casino wins claim against bank for negligent reference
The central London Playboy Club is a casino for high rollers and big players. Like many businesses taking on new customers, it is usual practice for the casino to obtain references from the customer’s bank before allowing them any credit. In this case the new customer’s bank assured the casino that he was “trustworthy” for up to £1.6million in any one week. The casino accepted numerous cheques which allowed the customer to play which then turned out to be fraudulent and bounced after the customer had disappeared without a trace. The casino claimed losses of over £1.25million.
The purpose of trade references
Many businesses require new customers to provide ‘trade references’ from their banks and other suppliers before offering a line of credit or supplying any goods or services. The references are intended to give the business confidence that the new customer is trustworthy and has the means to pay its debts as they fall due. But to what extent are the referees liable if those references prove to be wrong?
Professional negligence claim
In order to sue any professional for an allegedly negligent act or omission, all four of the following steps must be met 1) duty of care – this will usually exist between a professional individual or business and their client, 2) breach of that duty – the negligent act, 3) a link between the negligent act and foreseeable losses and 4) damage or loss actually occurring.
In the Playboy Club case, the Italian bank in question argued that:-
1. the reference had been given to a company associated with the Playboy Club but not to the casino directly and therefore owed no duty of care;
2. the casino had broken the link between the negligent act and the casino’s losses by accepting the customer’s forged cheques; and
3. that the reference had been given to the casino by a junior employee who did not have sufficient experience or authority to give such references and therefore it was void and should not have been relied on.
Outcome of claim against bank
The High Court held that the casino was entitled to sue the bank for providing a negligent reference. There was no reason for the casino not to believe that the reference was valid or that the person giving it did not have sufficient authority. The casino had reasonably relied on the reference which resulted in a loss being suffered and, when the customer disappeared off into the sunset, the casino was allowed to recover its loss from the bank.
The bank was also criticised by the court for not making detailed enquiries of the customer’s financial standing. At the time the reference was given the customer’s bank account was empty and the bank had therefore failed to prepare the reference with due care and skill.
Lastly, the court agreed with the casino that there was no break in the link between the bank’s negligent statement and the casino’s loss suffered as a result, but did reduce the casino’s damages by 15% for not better inspecting the customer’s forged cheques before accepting them.
Learning points
In ordinary business terms, while it is good business practice to carry out your own investigations as to the means and trustworthiness of a new customer, the bank’s reference can be relied upon and, if it transpires that the reference is entirely misleading, the bank could be liable for the losses your business suffers as a result.
If you think your business may have suffered a loss as a result of a negligent reference being provided by a bank then contact us today for professional impartial advice.