The case of Waller-Edwards v One Savings Bank plc [2025] UKSC 22 (the Case) establishes a clear test (the 'bright line' test) for when a lender is put on inquiry of undue influence in a non-commercial hybrid transaction.
This test provides welcome clarity for lenders regarding when they are put on inquiry of undue influence and must therefore follow the safeguards and procedures set out in the Etridge Protocol.
What is a non-commercial hybrid transaction?
A non-commercial hybrid transaction is a financial arrangement (such as a secured loan or mortgage) in which (1) the borrowers are acting in a non-commercial capacity, and (2) the loan serves both joint and personal purposes, in that some of the loan benefits both borrowers whilst the rest of the loan benefits only one borrower.
What is the Etridge Protocol?
The Etridge Protocol sets out the steps a lender must take when put on inquiry of potential undue influence. In summary, a lender must:
- Require the vulnerable party obtains independent legal advice
- Directly confirm to the vulnerable party the need for independent legal advice and that the Bank will not proceed with the transaction without it
- Receive a solicitor's certificate confirming that independent legal advice was given and that the vulnerable party appeared to understand this and there did not appear to be undue influence.
Facts of the Case
In 2013, Ms Waller-Edwards and Mr Bishop entered into a non-commercial hybrid transaction with One Savings Bank plc (the Bank). The couple had jointly borrowed £440,000 from the Bank, secured on a property known as "Spectrum". The loan was to be used by the couple to purchase another property and to pay off an existing mortgage. The Bank also required that part of the loan (£39,500) was to be used by Mr Bishop to pay off personal debts. Instead, Mr Bishop used part of the loan to make a divorce payment to his ex-wife and part of the loan to pay off a separate charge over Spectrum.
Subsequently, Ms Waller-Edwards and Mr Bishop's relationship ended and Ms Waller-Edwards remained living in the heavily-mortgaged Spectrum property. She was unable to make the mortgage payments and the Bank commenced proceedings to repossess Spectrum.
Ms Waller-Edwards contested these proceedings and sought to set aside the mortgage on the grounds of undue influence by Mr Bishop, and the Bank being put on inquiry of this.
The lower courts had accepted that there was undue influence, so the question remained as to whether the Bank was put on inquiry and therefore should have complied with the Etridge Protocol.
The lower courts held that the Bank was not put on inquiry. The lower courts applied a "fact and degree" test whereby the courts looked at the non-commercial hybrid transaction as a whole and made a decision, as a matter of fact and degree, on whether the loan was being made for the purposes of Mr Bishop's debts, or for purposes of both parties. The courts had decided that, on the whole, the loan was made for joint purposes and so the Bank was not put on inquiry for undue influence.
Ms Waller-Edwards appealed to the Supreme Court.
What was decided?
The Supreme Court held that a lender is put on notice of potential undue influence in a non-commercial hybrid transaction where it appears that there is a more than 'non-trivial' element of the loan which is to be used to discharge one of the borrower's debts and which might not be to the financial advantage of the other borrower (the 'bright line' test). Satisfaction of the 'bright line' test would then trigger the requirement for lenders to follow the Etridge Protocol. In this Case, the Supreme Court found that the £39,500 surety element of the loan was more than trivial. They had decided that the Bank had therefore been put on inquiry, but had subsequently failed to follow the Etridge Protocol, resulting in the mortgage being set aside.
What does this mean for lenders?
This Case provides a clearer test for lenders to adopt when determining whether they have been put on inquiry. As noted by Lady Simler in her judgment, it is likely to be easier and more practicable for lenders to follow than the "fact and degree" test, which requires lenders to review the transaction as a whole to determine the overarching purpose.
Lady Simler also acknowledged that it is likely that lenders have been operating the 'bright line' test in non-commercial hybrid transactions for many years. Whilst this may be the case, it would be advisable for lenders to review their current procedures and consider whether the Etridge Protocol is followed in such transactions to minimise the risk of a transaction being set aside.
By extending the Etridge principle and introducing a clearer test for lender responsibility, the Supreme Court has reinforced protections for vulnerable borrowers whilst placing a greater duty on lenders to act with care. Although the de minimis threshold remains undefined, which in itself may lead to some confusion for lenders, in reality funders will be minded to adopt a belt and braces approach and insist that any joint borrower who appears not to be benefiting entirely from a loan obtains separate independent legal advice, no matter how small the ‘surety’ element.
