Lender avoids ambitious secondary liability claims

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Banking Litigation specialist explains a recent case in which the High Court resisted a claimant’s ambitious attempts to establish secondary liability on the part of its bank.

An unfortunate but familiar scenario

The claimant in Deane v Coutts & Co had borrowed money to invest in a property scheme. The loan monies were repaid in full, but the claimant suffered loss when the relevant market collapsed. The claimant had successfully sued the party to who introduced them to the scheme (the original defendant) on the basis of wrongdoing including undue influence, breach of fiduciary duty and fraudulent misrepresentation. However the claimant was, unfortunately, unable to enforce. In an attempt to otherwise recoup its losses, the claimant sought to fix its lender with secondary liability. In yet another instance of a customer seeking to extend the boundaries of duties and liabilities imposed on lenders when investments do not pan out as planned, this claimant came up with some ambitious arguments.

Ambitious arguments

The doctrine of undue influence enables a court to intervene to prevent abuse where a relationship exists between two parties with “trust and confidence, reliance, dependence or vulnerability on the one hand, and ascendancy, domination or control on the other” [1]. The  1994 case of Barclays Bank v O’ Brien established that a presumption of undue influence can arise solely from the proof of such trust and confidence without proof of actual undue influence, albeit that was in the context of wives relying and acting on the advice of their husbands in financial matters. In Etridge the House of Lords reviewed the law on undue influence (again in relation to wives giving security for their husbands’ debts) and provided guidance for banks who are ‘put on inquiry’ of the risk of undue influence.

In the current case, the claimant argued that O’Brien and Etridge together meant that there was a presumption of undue influence and wrongdoing by the original defendant and that the lender was fixed with notice of that. It argued that that constructive notice should have led the lender to acquire actual knowledge of the wrongdoing, which it failed to do. The claimant therefore alleged that the lender was liable to it for equitable damages.

Alternatively, in reliance on Investors Compensation Scheme v West Bromwich Building Society (No 2) [2] (in which the court referred to secondary liability on the part of the lender arising from a “joint enterprise”), the claimant argued that a joint enterprise existed between the lender and the original defendant, such that the lender was now affixed with secondary liability to pay damages to the claimant.

The claimant’s arguments failed.

The High Court held that the claimant was seeking too wide-an extension of the lender’s actual/constructive notice principles in O’Brien and Etridge, not least because this case arose in a commercial context.

The court also held that there is no “joint enterprise” cause of action. The liability referred to in the West Bromwich case actually arose from a duty or care and/or an agency relationship.  “Joint enterprise” was merely a convenient shorthand turn of phrase used in that case to refer to those established causes of action – it was not a form of secondary liability in itself.  Neither a duty of care nor an agency relationship existed in Deane, and so the claimant had no case.


Economic uncertainty and declining markets give rise to failed investments and negative equity. Failed investments and negative equity give rise to varied and ever-more ingenious attempts on the part of claimants to look to third parties – often lenders or professionals – to recoup their losses. In view of uncertainty and potential turbulence in the markets in the months and perhaps years to come, it will be reassuring for lenders and other potential target defendants to know that the courts are likely to maintain the distinction between commercial and non-commercial cases, and they are unlikely to entertain claims which push the scope of legal duties and liabilities beyond the boundaries of established authority.

A the same time, this most recent attempt to rely on O’Brien and Etridge does provide a timely reminder to lenders and to professionals of the risk of being affixed with notice of, and liability for, undue influence in non-commercial cases.

The House of Lords in Etridge held that a lender should insist that the wife/surety/other person in the position of dependence or vulnerability in a proposed transaction should attend a private meeting with the lender in which they are informed about their liability, warned of the risks and advised to take separate legal advice. Alternatively the lender should ensure that that person has taken legal advice and then it should gain written and signed confirmation from the solicitor that the nature of the documents was fully explained. A well-advised lender should therefore comply with Etridge guidelines in their entirety and should document the steps that have been taken – certainly in non-commercial cases and, perhaps, where feasible and appropriate to do so, in commercial cases too.

Solicitors should note that Etridge also sets out the requirements which must be fulfilled by them. This includes considering any conflict of duty, explaining to the vulnerable/dependent person the reason for the legal advice and meeting with that person face-to-face. During the meeting, the nature and seriousness of the documents should be explained, risks and alternatives should be outlined and it should be made clear that the decision should only be taken independently by that person.


[1] Royal Bank of Scotland v Etridge (No.2) [2001] UKHL 44
[2] [1999] Lloyd’s Rep PN 496