From grey to black-and-white: the Supreme Court's bright line test for undue influence

Briefing

Summary

The Supreme Court recently allowed the appeal of Ms Waller-Edwards in Waller- Edwards v One Savings Bank Plc [2025] UKSC 22. It overturned the earlier decision of the Court of Appeal which dismissed the claim that a lender should automatically be 'on inquiry' where a non-commercial loan was made to joint borrowers, secured on a property held in their joint names, to be applied partially for joint purposes and partially for a purpose to the benefit of one.

The Court of Appeal previously held that determining when a lender is put on inquiry in respect of undue influence in a non-commercial hybrid loan transaction involves looking at the transaction as a whole and determining, as a matter of fact and degree, whether the loan was being made for the purposes of the borrower as distinct from their joint purposes. In contrast, the Supreme Court endorsed a 'bright line' test as the appropriate standard for such hybrid, non-commercial loans in which a creditor is put on inquiry in any such transaction where on the face of the transaction there is more than a de minimis element of borrowing which serves to discharge the debts of one borrower, and is to the disadvantage of the other. Our previous Lending Focus article discussed the now overturned Court of Appeal decision and can be read here.

Facts involved and court decisions

The facts are as discussed in our previous article but in brief summary they involved the appellant, Ms Waller-Edwards, entering into a re-mortgage transaction with One Savings Bank (the Bank), which as far as the Bank knew comprised both a joint borrowing element (discharging an existing mortgage and acquiring a new residence for both parties) and a surety element (settling her partner, Mr Bishop’s personal car loan and credit card liabilities to the sum of £40,000). The Bank did not know that Ms Waller-Edwards owned 99% of the equity in the re-mortgaged property or that £142,000 was intended by Mr Bishop to be going to Mr Bishop's wife in respect of her divorce settlement or that over £230,000 would be used to pay off a personal debt of Mr Bishop's. Ms Waller-Edwards asserted the following in relation to the transaction:

undue influence in relation to her entry into it
that the Bank should have been put on inquiry that her agreement to the transaction may have been obtained by undue influence
that the transaction should be set aside as between her and the Bank.

The case concerned a relationship between a husband and wife, with the wife being the vulnerable party but the Supreme Court clarified that the principles could apply equally to other non-commercial relationships open to abuse.

The first instance judge did agree with Ms Waller-Edwards 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. The County Court, High Court, and Court of Appeal then each held that there was no obligation to inquire into potential undue influence placed on the Bank as this was a joint borrowing and not a surety case. The Supreme Court unanimously allowed the appeal, concluding that the applicable test to determine whether a creditor should investigate a non-commercial hybrid transaction is whether on the face of the transaction there is more than a de minimis element of borrowing which serves to discharge the debts of one of the borrowers, and might not be to the financial advantage of the other. In this situation the Etridge protocol, arising out of the Court of Appeal case of Royal Bank of Scotland v Etridge (no.2) [2002] UKHL 44 should be followed.

Legal context

A 'joint borrowing' transaction involves sums being advanced for mutual non-commercial purposes and both borrowers being jointly liable.
A 'surety' transaction is a non-commercial transaction in which one party offers to guarantee the other party's debt/liabilities (and can include offering jointly-owned assets as security towards exclusive repayment obligations), with nothing offered by the other party in return.
The principle confirmed by Etridge is that banks and other lenders are ‘put on inquiry’ that one party’s agreement to the transaction with the bank may have been obtained by undue influence whenever on the face of a three-way non-commercial transaction, the wife (or other vulnerable partner in the relationship) is offering to stand surety for her husband’s debts (or vice versa). By contrast, where on the face of the transaction the lending is advanced to 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.
According to the Etridge Protocol, where it applies the bank must:
(i) inform the party who would be acting as a surety that, for their protection, it requires written confirmation from a solicitor who has fully explained the transaction and its legal effects, ensuring they are aware of them
(ii) ask the party acting as surety to choose a solicitor to advise him/her independently from his/her partner and provide the required confirmation; this may be the same or a different solicitor than the one representing his/her partner.

Prior to this case, the law was clear on the obligations of a lender in terms of potential undue influence in both surety and joint borrowing cases:

In surety cases, the lender would be considered to have constructive notice of the possibility that one of the borrowers could be the subject of undue influence by the other. This meant, in effect, that the lender was put on inquiry and had to follow the Etridge guidelines.

In joint borrowing cases, a lender was not typically put on inquiry unless it was aware that the loan was being made for one partner's purposes as distinct from their joint purposes. There was generally no presumption of potential undue influence by one of the borrowers because both husband and wife would both be personally liable for the secured debt and would therefore both benefit from the giving of security.

There was, however, a degree of uncertainty as to how to treat non-commercial hybrid arrangements which blended the features of joint borrowing and surety transactions, which the Supreme Court acknowledged "come in different shapes and sizes" and for which the "level of risk is infinitely variable".

Hybrid transactions – question of fact and degree or bright line?

The transaction in this case was a non-commercial 'hybrid' loan, which involved features of both surety and joint borrowing. The Bank argued, and up to Court of Appeal stage it was accepted, that in hybrid cases such as this, the lenders should consider the transaction "as a whole and decide, as a matter of fact and degree, whether the loan was being made for the purposes of the borrower with debts, as distinct from their joint purposes."

This approach was challenged by the proposed application of the 'bright line test' by the appellant and accepted by the Supreme Court. The Supreme Court rejected there being a third test of hybrid cases and adopted the approach of treating a non-commercial hybrid transaction as a surety transaction and not as a joint loan. The Supreme Court held that a creditor is put on inquiry in any non-commercial transaction where, on the face of the transaction, there is more than a de minimis element of borrowing which serves to discharge the debts of one of the borrowers and may not therefore be to the financial advantage of the other. Such a transaction should be viewed as a surety transaction and the creditor therefore placed on inquiry of the possibility of undue influence. The steps set out in Etridge should then be followed.

Following the Supreme Court judgment, lenders are considered to have constructive notice of potential undue influence when a transaction on its face includes more than a de minimis borrowing element that settles one borrower's obligations whilst offering no financial benefit to the co-borrower.

The 'de minimis' threshold had previously been thought by the Court of Appeal to have the potential to create problems in determining what constitutes 'de minimis' for these purposes. The Supreme Court considered the 'de minimis' test to be sufficiently long-standing such that it would be surprising to regard it as a source of unworkable uncertainty. The judgment of Lord Briggs in Brown v Ridley [2025] UKSC 7; [2025] 2 WLR was referred to which includes the following: "Well-known authorities on the principle describe it as excluding matters which are trifling, insubstantial, inconsequential, immaterial, irrelevant or negligible". As the Supreme Court highlighted, the application of the 'de minimis' test would also be likely to engender far less analysis than the fact and degree test.

Analysis

The Supreme Court emphasised several preliminary considerations regarding hybrid transactions. It made clear that each transaction must be assessed from the lender’s perspective: it is what is apparent to and communicated to the bank which carries weight when deciding whether the bank was put on inquiry. Moreover, being 'put on inquiry' does not require banks to actively investigate or question motivations behind entering into such arrangements or scrutinise personal relationships between co-borrowers. Rather than detecting actual undue influence or misrepresentation directly, lenders are expected only to recognise risk factors and take proportionate steps so that individuals understand all implications before proceeding.

With these points in mind, the Supreme Court outlined the test to be applied in hybrid transactions to decide whether a bank is put on notice: it comes down to whether, on the face of it, a non-commercial transaction involves a surety element, creating a heightened risk of undue influence. This risk is the same whether or not joint borrowing is also involved, as the hybrid element does not reduce it. The ratio of joint borrowing to surety in hybrid transactions does not make a difference, as long as the surety is more than a de minimis amount. The risk level varies and is not for the lender to assess case-by-case; there is no spectrum on which to decide as this is a binary question.

Implications for lenders and borrowers:

Lenders can no longer rely on potentially operating within the 'grey zone' that persisted following the earlier Court of Appeal decision – a position which we had previously commented on as being somewhat helpful to lenders in circumstances where they had determined that the lending taken as a whole did not necessitate following the well-established Etridge principles, or where they otherwise did not follow them for any reason prior to advancing the loan (and then sought to defend that approach on an enforcement).
Lenders and borrowers now have a binary and less flexible position from which to operate, except in certain de minimis circumstances. The merit of that now lost flexibility is somewhat arguable from a practical perspective, given that most prudent lenders would have always sought to avoid being drawn into potentially complex fact-and-degree analyses by trial courts as part of an enforcement. However, there will undoubtedly be an impact on some market participants' practices in this respect.
Borrowers should expect their lenders to take an even more robust stance on requiring compliance with the protective steps going forward, including in circumstances where they may have previously successfully persuaded a lender to forego those steps (for example, to avoid the borrower incurring additional (albeit fairly immaterial) costs for independent legal advice and any logistical difficulties with the relevant parties being available to present themselves to an independent English qualified solicitor ahead of the loan being completed).
The Supreme Court's bright line test provides lenders with straightforward guidelines which, it can be argued, introduces 'workable simplicity' for lenders. It provides lenders and borrowers alike with straightforward guidance, which in turn provides certainty and allows lenders to apply a clear test to prevent lending where there is the potential for undue influence. For those managing high volumes of loan applications, especially within retail lending portfolios, the clarity afforded by the bright line test facilitates consistency across cases and reduces administrative complexity overall.