When is a lender put on inquiry that a loan has been procured by undue influence? The Supreme Court has provided clarification on this issue in Waller-Edwards v One Savings Bank plc [2025] UKSC 22; [2025] EGCS 94.
Key points
- Where in a non-commercial relationship one party stands surety for another’s debts, lenders are on notice of undue influence
- This applies equally where there is hybrid borrowing – partly joint, partly for one party’s benefit – if more than a trivial element discharges one party’s debts
The law
In a non-commercial transaction, banks and other lenders are put on inquiry that one party’s agreement to a transaction may have been obtained by undue influence whenever, on the face of a three-way transaction, the vulnerable partner in a relationship is offering to stand surety for the other partner’s debts.
In such circumstances, unless the lender takes steps to ensure that the vulnerable party is aware of the nature of the transaction and has received legal advice on it, the lender will have constructive notice of their rights and the loan may be set aside (Barclays Bank plc v O’Brien [1994] 1 AC 180).
The House of Lords set out the requirements – the Etridge protocol – in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; [2001] PLSCS 216. The lender must communicate directly with the surety, informing them that it requires written confirmation from a solicitor acting for them that the nature of the transaction and its practical implications for them have been fully explained to ensure that, once the documents are signed, they will be unable to dispute that they are bound by the transaction. The surety must be asked to nominate a solicitor to act for them in this respect and the transaction should not proceed unless the necessary confirmation is received.
By contrast, where, on the face of it, the lending is to both partners jointly, the lender is not put on inquiry unless it is aware that the loan is being made for one partner’s purpose as distinct from their joint purposes (CIBC Mortgages plc v Pitt [1994] 1 AC 200; [1993] EGCS 66).
Background
The appellant commenced a relationship with Nicholas Bishop in 2011 at a time when she was emotionally vulnerable but financially independent. She was sole owner of her mortgage-free home, valued around £600,000, as well as a pension of £7,000 per annum and £150,000 in savings.
Bishop, a builder and developer, persuaded her to exchange her home and savings for Spectrum, a property he was building, which was expected to be valued at around £750,000 on completion. It was subject to an existing charge.
The appellant was given a second charge over Spectrum and in December 2012 the property was put into joint names as tenants in common with a declaration of trust that the appellant held 99%, Bishop 1%.
In 2013, Bishop remortgaged Spectrum for £384,000 with the respondent bank. The bank understood from Bishop that the loan was to pay off the first charge of £233,000 and £100,000 to purchase a buy-to-let property, the rent from which would repay the mortgage instalments.
The bank also required Bishop to pay off £39,500 of loan and credit card debt. So, being partly joint borrowing and partly to discharge Bishop’s debts, the transaction was a non-commercial hybrid loan. Bishop discharged the mortgage debt and, unknown to the bank, he also made a divorce payment of £142,000 to his ex-wife.
Following completion of the remortgage in October 2013, the couple’s relationship ended. The appellant remained living at Spectrum but her pension income was insufficient to service the remortgage payments. Arrears accrued and the bank brought possession proceedings in November 2021.
The arguments
The appellant established at trial that she had acted under Bishop’s undue influence when entering the transaction, which finding was unchallenged. She argued that, since she was a surety for part of the loan to pay off Bishop’s debts, the bank was put on inquiry that her agreement may have been obtained by undue influence. The bank had failed to follow the Etridge protocol and so the remortgage transaction should be set aside between her and the bank.
Her claim and subsequent appeals failed. The County Court, High Court and Court of Appeal all decided that, looked at as a whole and from the perspective of what the bank knew, the loan was joint borrowing for the parties’ joint purposes. The bank was not put on inquiry of the possibility of undue influence.
The appeal
The Supreme Court unanimously allowed the appeal. None of the appeals in O’Brien, Pitt or Etridge No 2 concerned partial surety transactions: all had involved straightforward surety or joint borrowing transactions. Those decisions provide that the approach is binary: either the lender is on notice of the risk of undue influence and must follow the Etridge protocol or it is not.
The Supreme Court decided that whether or not a lender was on notice was equally a binary question. Either there was a surety element giving rise to a heightened risk of undue influence or there was not and the level of risk was the same whether or not it was accompanied by joint borrowing.
Consequently, a creditor is put on enquiry as to the possibility of undue influence in any non-commercial hybrid transaction where, on the face of it, more than a de minimis element of borrowing serves to discharge the debts of one of the borrowers and so might not be to the financial advantage of the other. Such a transaction is to be regarded as a surety transaction and the Etridge protocol followed. No one could regard £39,500 as de minimis.
Louise Clark is a property law consultant
