A judgment handed down on 13 June 2006 shows that investment banks may incur liability for negligent misstatement in respect of parties with whom they have no contractual relationship, even though they have a direct contractual relationship with another party. This case is a reminder to investment banks acting in an advisory capacity to carefully consider who is relying upon their advice.
Bank 1 (Ahli United Bank (UK) Plc) had entered into a (technical services) agreement with Bank 2 (Riyad Bank) to provide advice with respect to Bank 2’s establishment of a Sharia-compliant investment fund ("Fund").
In particular, Bank 1 advised Bank 2 on the appropriate value of equipment leases to be purchased by the Fund. It subsequently emerged that the leases had been overvalued, which led to the premature termination of the Fund, and substantial loss for Bank 2.
Bank 2 claimed against Bank 1 for breach of contract, and the Fund also claimed against Bank 1 in tort for negligent misstatement.
Bank 1 unsuccessfully argued at first instance and on appeal that it did not owe the Fund a duty of care because its contractual relationship with Bank 2 had been structured in such a way as to distance Bank 1 from the Fund.
The Court of Appeal held that Bank 1 had assumed responsibility with respect to the Fund, notwithstanding the absence of a direct contractual relationship, and the fact that there was an express provision in the technical services agreement for the Fund’s directors to be responsible for investment decisions. The Court considered that the involvement of Bank 1 in the establishment of the Fund, the expectation of the parties and the contractual structure adopted were sufficient to give rise to a duty of care by Bank 1 to the Fund.
Investment banks should therefore take care wherever possible to identify all the parties receiving the benefit of their advice, and not just contractual counter-parties.
Law: Riyad Bank & Ors v Ahli United Bank (UK) Plc (formerly United Bank of Kuwait Plc) [2006] EWCA Civ 780
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
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The original publication date for this article was 15/06/2006.
