Undue influence: back before the courts

Briefing

Summary

In a decision that will be welcomed by lenders, the Court of Appeal has recently dismissed a claim that a lender should automatically be "on inquiry" where a loan is made to joint borrowers to be applied partially for joint purposes and partially for a purpose that is to the benefit of a sole borrower unless the sole benefit element of the transaction is trivial.

The 28 March 2024 judgment in One Savings Bank Plc v Catherine Waller-Edwards [2024] EWCA Civ 302 (Waller-Edwards) contains a detailed and helpful analysis of three well known House of Lords' cases on undue influence: Barclays Bank v O'Brien [1994] 1 AC 180, CIBC Mortgages v Pitt [1994] 1 AC 200 and RBS v Etridge (No 2) [2002] 2 AC 773 (Etridge) (together the Authorities).

Surety case v joint borrowing case

The existing case law distinguishes between two different categories of borrowing by two people in a relationship:

Surety cases: a borrower guarantees the debts of a co-borrower or secures borrowings on jointly owned property to pay off the debts of only one borrower
Joint borrowing cases: a loan is taken for the joint non-commercial purposes of two borrowers in a relationship.

In surety cases, lenders would typically have constructive notice of the possibility of one borrower being subject to undue influence and will be put on inquiry. The practical effect being that a lender should follow the protocol set out in Etridge to help mitigate the potential risk of the charge being vulnerable to challenge.

In joint borrowing cases, lenders will not typically be put on inquiry.

The 'hybrid case'

The appellant in Waller-Edwards argued that its case was a 'hybrid case' because, as summarised below, the loan proceeds were used partially for joint purposes and partially for the sole benefit of the appellant's former spouse. It was argued that such circumstances amounted to a third category distinct from the surety and joint borrowing cases considered in the Authorities and in which a lender should be deemed to be on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial.

The facts

In 2011, Ms Waller-Edwards entered into a relationship with Mr Bishop and subsequently swapped her mortgage-free home and £150,000 cash for a new property being built by Mr Bishop. The property was held in joint names subject to a declaration of trust providing that 1% was held for Mr Bishop and 99% for Ms Waller-Edwards.
In October 2013 a bank was approached and provided a £384,000 buy-to-let mortgage secured against the property. As far as the bank was aware, £40,000 of the loan was to be used to discharge car finance and credit card debt in Mr Bishop's name only with the remaining 90% to be used for joint purposes to acquire a new property.
It was submitted that it was not uncommon for a joint application to be made to consolidate debts and for debts to be in one party's name, or greater debt to be attributable to one party than the other. Mr Bishop was the primary earner, so it was not unusual that debts were in his name.
The bank was not aware that Mr Bishop intended to use £142,000 of the proceeds to satisfy his divorce settlement and neither was it aware that the equity in the property was subject to the declaration of trust.
Ms Waller Edwards and Mr Bishop's relationship subsequently terminated, Mr Bishop moved out of the property and ultimately ceased paying the mortgage instalments. The bank initiated possession proceedings and a claim for arrears.

It was held in the County Court that Ms Waller-Edwards entered into the arrangements under the undue influence of Mr Bishop but that the bank did not have notice of it. The court considered, looking at the transaction as a whole, the fact that 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). Judgment was awarded for c£451,000 plus costs.

In the first appeal before the High Court, it was confirmed that lenders must inquire into non-commercial transactions which are not beneficial financially to one borrower (the partial surety principle). However, it concurred with the first instance decision that just over 10% of borrowing going towards Mr Bishop's debts did not demand bank inquiry and the original judgment was upheld.

Grounds for further appeal

Limited permission to appeal to the Court of Appeal was granted to consider whether the correct legal test had been applied or whether a 'hybrid case' which was neither a pure surety case nor a pure joint borrowing case was distinct from the Authorities such that a lender should automatically be on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial.

The bank advanced arguments including the following:

That the third 'hybrid' category should not exist and that lenders should consider a transaction holistically.
That the issue of whether there was essentially a surety transaction or a joint borrowing transaction was a question of fact and degree. This determination would then inform whether the lender was put on inquiry.

Appeal decision

The appeal was dismissed. The Court of Appeal found that Etridge requires the court 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 who owed the debts, as distinct from their joint purposes. Nothing in Etridge supported a third test for 'hybrid cases' that would mean a lender is put on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial.

The Authorities require the courts to consider whether a case is a surety case or a joint borrowing case and it was noted by the Master of the Rolls in the lead judgment that, contrary to the arguments of Ms Waller-Edwards, there were overarching reasons why a third test would not be helpful – it would not offer clarity and certainty given it would still be subjective as to what percentage of borrowings would be considered 'non-trivial'.

It was accepted that whether the bank is put on inquiry in surety, joint borrowing or hybrid cases is a matter ascertained through the lens of the lender. It was also noted that there are in some cases one or more red flags which ought to alert a lender to circumstances which require further inquiry. Waller-Edwards was not such a case and 10 of the 11 indicators raised by Ms Waller-Edwards were rejected by the trial judge.

Whilst the Court of Appeal was not tasked with re-considering factual findings, the judgment does agree that the trial court had been entitled to find that the proposed redemption of personal loans of the principal earner was a relatively routine incident of a remortgage and that this element of the transaction did not put the bank on notice of the possibility of undue influence.

Conclusion

This is a helpful decision for lenders as it is now clear that where a loan is advanced to borrowers partly for joint purposes and partly for the sole benefit of one borrower, whether or not the lender is put on inquiry will be an analysis of fact and degree.

Whilst it was acknowledged that in some cases there will be red flags that should alert the lender and require further inquiry, no such flags were present in Waller-Edwards. It is also important to consider the context i.e. that the trial courts were considering a loan that the bank thought was to be applied 90% jointly and 10% towards consolidating debts of the primary wage earner. It is not hard to see how a similar case with a slightly different fact pattern could land on the other side of such analysis with the consequence being that the Etridge protocol should be followed.

Lenders should therefore conduct a careful assessment of the purposes and whether those protective steps should be taken to further mitigate risk – although it will undoubtedly be of relief, particularly given the frequency with such circumstances arise, that a new 'hybrid test' which would have put lenders on inquiry in all but the most trivial of circumstances was dismissed.