ONE SAVINGS BANK PLC V WALLER-EDWARDS [2024] EWCA CIV 302: UNDUE INFLUENCE IN ‘HYBRID’ CASES
On 28 March 2024, judgment was handed down in One Savings Bank Plc v Waller-Edwards [2024] EWCA Civ 302 (“Waller-Edwards”) concerning the correct test in ‘hybrid’ cases of undue influence.
Undue Influence
Royal Bank of Scotland v. Etridge (No 2) [2002] 2 AC 773 (“Etridge”) determined that when a non-commercial mortgage is taken out in joint names, a lender has constructive notice of the possibility of undue influence when the borrowing is for the benefit of one of the borrowers. In such instance, the lender should (follow the ‘Etridge protocol’ – see Etridge at [79], and) undertake enquires, otherwise the mortgage is liable to be set aside for undue influence.
Conversely, when the mortgage is in joint names for joint purposes, a lender is not put on inquiry.
Hybrid cases
Waller-Edwards concerned a ‘hybrid’ case; part of the borrowing was for joint purposes and part to discharge the debts of one borrower.
Facts
Ms Waller-Edwards developed a relationship with Mr Bishop, a builder. The two co-habited from 2012 in a property built by Mr Bishop but owned in joint names subject to a declaration of trust providing that 1% was held for Mr Bishop and 99% for Ms Waller-Edwards.
In mid-2013, One Savings Bank (the “Bank”) was approached for a buy-to-let mortgage over the property and agreed to lend £384,000. The Bank understood the advance was being used (a) to pay off the previous mortgage of some £200,000, (b) to pay off a £24,000 debt on Mr Bishop’s car and £16,000 on his credit card, and (c) £142,000 was to purchase another property. The Bank was unaware that Ms Waller-Edwards owned 99% of the equity or that the £142,000 was intended for Mr Bishop’s wife in respect of divorce settlement.
Ultimately, at completion £233,801.76 was used to pay off the existing charge and most of the balance was used to pay Mr Bishop’s wife.
Subsequently, the relationship ended, Mr Bishop moved out at the end of 2014 and stopped paying the mortgage.
The Bank brought proceedings for possession in November 2021. At trial, the judge decided that the mortgage had been entered into as a result of Mr Bishop’s undue influence, but that the bank did not have notice of it, it was not put on inquiry.
The Appeal
The question which arose was: In a hybrid case, is a lender put on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial?
Decision
Such question is not the right test. Therefore, the judges below were right to find that the fact that some ~10% of the advance was to be used to pay debts in Mr Bishop’s sole name did not, as a matter of fact and degree, turn the transaction from a joint borrowing case (where the bank was not put on inquiry) to a surety case (where it would have been put on inquiry).
The Court considered the judgments in Etridge, notably the judgment of Lord Nicholls at [48]:
“As to the type of transactions where a bank is put on inquiry, the case where a wife becomes surety for her husband’s debts is, in this context, a straightforward case. The bank is put on inquiry. On the other side of the line is the case where money is being advanced, or has been advanced, to husband and wife jointly. In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband's purposes, as distinct from their joint purposes.”
The Court determined (at [34]) that a bank is not put on inquiry, unless the bank is aware the loan is being made for purposes of the borrower with the debts, as distinct from their joint purposes and nothing in Etridge implies a third test for hybrid cases.
The test (at [36]) is: looking at the transaction as a whole, on the facts, is the loan really made for the purposes of the borrower with the debts, as distinct from their joint purposes?
Comment
Redemption of personal loans is a routine element of non-commercial remortgages.
Lenders should not be put on inquiry when it is not apparent that the loan is made for the purposes of the borrower with the debts.
Such a question needs to be considered by the Court on the facts, but in the event of doubt after any ‘red flags’, lenders would be well advised to follow the Etridge Protocol.
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This case summary/comment was composed by Martin Horne.