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Waller-Edwards v One Savings Bank plc [2025] UKSC 22
The Supreme Court ruling in Waller-Edwards v One Savings Bank plc [2025] confirms that the requirement of banks to follow the Etridge procedure extends to non-commercial transactions which, on their face, appear to be of ‘hybrid’ nature, consisting of both an element of lending that appears to be for the benefit of both joint-borrowers, and an element that appears to be for the benefit of one party alone and which is more than de minimis (i.e. trivial).
Development of the law – surety and joint borrowing transactions and the Etridge protocol
It has been established for some time now that in non-commercial lending transactions, banks are put ‘on inquiry’ of the heightened risk of undue influence where one party (often, but not necessarily always, a wife) offers to in effect guarantee the other party’s debt (often the husband) as a ‘surety’, and in doing so incur a legal liability for the husband’s debt for nothing in return. A typical example is a loan taken out by a husband as a mortgage over property jointly owned with his wife. In such circumstances, a bank knows that they must follow the steps outlined under the Etridge protocol, as a failure to do so will result in the severe consequence of the loan being unenforceable by the bank against the wife.
The law has previously distinguished between surety transactions, where on the face of the lending the wife is assuming a liability for her husband’s debts, and joint borrowing transactions, where it appears that both appear to benefit from the lending.
Surety transactions
In circumstances where a wife takes on an obligation as surety for her husband’s debts, case law has established that lenders are put on inquiry whenever a vulnerable party (as above, often the wife) is offering to stand as surety for her husband’s debts in a non-commercial context. This case law has introduced a low threshold for putting a lender on inquiry of the potential for domestic undue influence misrepresentation or fraud committed by the husband on the wife to enter into the transaction. In those circumstances the law has established a series of steps set out in what is known as the ‘Etridge Protocol’ which a bank must follow to ensure that the vulnerable party is fully aware of the risks and implications of providing a surety where they have no financial benefit in return. Under the Etridge protocol the bank must communicate directly with the wife, informing her that for her own protection she should obtain independent legal advice from a solicitor, separately from her husband, fully explaining to her the nature of the transaction and its practical implications for her. By bringing home to the wife the risk in providing a legal guarantee for her partner’s debts for nothing in return, the Etridge protocol reduces the risk of a vulnerable party being induced to enter into such a transaction whilst compliance by the bank can help to protect the ability of the bank to enforce the transaction against the wife.
Joint borrowing transactions
Where, however, the lending appears to be advanced to a husband and wife jointly, the bank is not put on inquiry unless the bank is aware that the loan is being made for the husband’s purposes as distinct from their joint purposes (for example, mortgage lending for a jointly owned home). In this case a lender would not be put on inquiry that undue influence has been exercised because, on the face of it, there is no guarantee being provided by a vulnerable party that is not to their financial benefit.
Hybrid transactions
Whilst the distinction between the above two scenarios is straightforward and binary, in Waller-Edwards v One Savings Bank plc the Supreme Court was required to consider a less straightforward ‘hybrid’ transaction where, on the face of it, the lending was partly for a joint benefit and partly for one party’s sole benefit and, to that extent to the financial disadvantage of the other.
The issue for the Supreme Court to identify was the correct legal test for deciding when a lender is put on inquiry in such a non-commercial hybrid loan transaction.
Facts
The facts in Waller-Edwards v One Savings Bank plc, involved Ms Waller-Edwards who in 2011 had commenced a relationship with her partner, Mr Bishop, at a time when she was emotionally vulnerable, but financially independent, as the sole owner of a mortgage-free home, with substantial savings. Mr Bishop was in the process of building a property, called ‘Spectrum’. Spectrum was already subject to a charge securing a debt that Mr Bishop owed. Mr Bishop persuaded Ms Waller-Edwards to exchange her home and savings for Spectrum (and an adjoining piece of land). In 2012 legal title to Spectrum was put into Ms Waller-Edwards’ and Mr Bishop’s joint names, with a declaration of trust stating that 99% of the beneficial interest was held by Ms Waller-Edwards, and 1% by Mr Bishop.
In 2013, Mr Bishop re-mortgaged Spectrum for £384,000 with One Savings Bank plc (‘the Bank’). The Bank’s understanding was that the loan was to pay off an existing mortgage debt and to purchase another property. The Bank understood that the re-mortgage would be a buy-to-let mortgage, with Spectrum let out at a rent sufficient to repay the re-mortgage payments. The Bank also required Mr Bishop to use part of the loan, £39,500 (about 10%) to pay off some of Mr Bishop’s existing debts. The Bank was unaware of the declaration of trust in relation to Spectrum. From the Bank’s perspective therefore, most of the mortgage was to be used for joint-borrowing purposes (to pay off the existing mortgage and buy a new home for the couple), but with an element of 10% which consisted of a surety transaction provided by Ms Waller-Edwards, because she derived no benefit from that element of the loan being used to pay off the existing debts of Mr Bishop. The transaction was therefore a hybrid transaction.
However, and unknown to the Bank, Mr Bishop used the loan to make a divorce payment to his ex-wife, and to redeem the first charge on Spectrum. Mr Bishop utilised £142,000 of the loan to make a divorce payment to ex-wife, and approximately £233,000 to pay off his obligations under the secured over Spectrum, whilst Spectrum was not let-out and instead remained lived in. The relationship then ended, with Mr Bishop moving out of Spectrum, whilst Ms Waller-Bishop remained living there but was unable to service the re-mortgage payments so that the Bank brought mortgage possession proceedings due to the arrears and the breach of condition to use Spectrum as a buy-to-let and not to live in.
Previous court decisions
The lower courts, in dismissing Ms Waller-Edwards’ appeal against an original possession and sale order made by the trial judge, had determined that the test in establishing whether a lender was put on inquiry of the possibility of undue influence in a hybrid transaction was one of “fact and degree”. The lower courts essentially determined that the identification of partial surety cases that would put a lender on notice was necessarily fact sensitive, and that essentially the 10% element of the lending that the Bank knew was to be used to pay off Mr Bishop’s debts only did not constitute a transaction which placed Ms Waller-Edwards in the position of surety of Mr Bishop’s debts.
The Court of Appeal rejected Ms Waller-Edwards’ argument that a hybrid case should be treated the same way as a full surety case unless the surety element of which the lender is aware is trivial. The Court of Appeal held such a test in a hybrid case would introduce uncertainty about what was non-trivial, observing that it would be onerous to banks and many borrowers to expect a bank to establish whether certain debts are truly for the sole benefit of the person in whose name they stand. The Court of Appeal therefore held that, under a ‘fact and degree’ test, the court is required “to look at a non-commercial hybrid transaction as a whole and to decide, as a matter of fact and degree, whether the loan was being made for the purposes of the borrower with the debts, as distinct from their joint purposes“. In this case, the looking at the loan as a whole and from the point of view of what the bank knew, the lower and appeal courts considered that the loan was a joint borrowing made for joint purposes.
Supreme Court decision
The Supreme Court rejected the fact and degree approach adopted by the appeal courts, by imposing a ‘bright line’ test to hybrid cases. The Supreme Court held that the existence of any exclusive benefit for one party (not being de minimis) should be regarded as a ‘surety’ transaction and therefore engaged the need to apply the Etridge protocol.
In adopting a bright line test, the Supreme Court rejected the Bank’s argument that, in order to determine whether the transaction is one which presents a substantial risk of a vulnerable party’s entry being procured by undue influence or misrepresentation of the other party, transactions must be considered on a spectrum of risk and looked at as a whole from the perspective of the bank. The Supreme Court however held that there was a binary position, either the bank is on notice of the risk of undue influence, or it is not. If it is on notice, then it must follow the Etridge Protocol, if it is not on notice, it need not. There is no spectrum of lesser or greater steps to be taken by a creditor put on inquiry that varies depending on a spectrum of differing levels of risk – the court saw that there is no scope for a nuanced or fact-sensitive approach on such grounds.
The Supreme Court considered that the level of risk presented by a surety transaction is the same whether it is accompanies by joint borrowing or not – the hybrid element does not reduce that risk. The court considered that in hybrid transactions there is a need for the same workable simplicity established under the Etridge protocol to assist banks to put in place a procedure that can be applied in a routine, straightforward manner and which does not require an exercise of judgement by their officials. The bright line approach to non-commercial hybrid cases achieves just that, the discharge of the banks’ duties to minimise domestic undue influence and fraud is not difficult and involves the simple step of recommending that the vulnerable party should seek independent legal advice, which the courts hold is no more than to be reasonably expected of a creditor who is taking a guarantee from an individual.
As Ms Waller-Edwards took on a legal liability for a loan in part to discharge her partner’s debt (which in this case was obviously not de minimis) and for no apparent financial benefit to her, then the Bank was on inquiry of the possibility of undue influence being exerted on her by her partner. The Bank should therefore have followed the protocol and Ms Waller-Edwards’ appeal was allowed.
Conclusion – comment on case
The Supreme Court judgment confirms the low threshold for putting banks on inquiry to prevent domestic undue influence and fraud, and is aligned with the direction of social policy aimed at protecting vulnerable parties from undue influence in a domestic context. Banks should be in no doubt that they will be required to follow the Etridge protocol where any element of a transaction involves a surety element in a non-commercial transaction, that is more than de minimis in amount. The bright line test does not however absolve a bank of the need to exercise their judgment as to any increases risk of undue influence where red flags exist, even in apparently straightforward surety or joint borrowing transactions.
As a practical consequence of the Supreme Court’s decision, it appears that the Supreme Court does not consider that the bright line test in hybrid matters should increase costs for lenders, or in practice borrowers who pay for the additional measures. The Supreme Court noted that there was no evidence to support the Bank’s assertion that banks have been effectively operating the “fact and degree” test since the Etridge Principle was formulated 20 years ago – the Supreme Court was satisfied that its decision would not impact on any settled understanding or practice in relation to non-commercial hybrid transactions. Whether the Supreme Court’s judgment will have a material impact on the volume of enforcement matters involving hybrid elements, however, remains to be seen.