Banks must beware of their duty to protect a borrower, even in situations of joint borrowing and joint ownership, where only the other borrower benefits from some of the funds.
Ms Waller-Edwards entered a relationship with Mr Bishop, a property developer. She contributed her mortgage-free home (worth £600,000) and £150,000 in savings in exchange for a property Bishop was building. That property was subject to an existing charge which secured a debt owed by Bishop to a third party. Waller-Edwards was granted a second charge.
They were joint legal owners on the title of the new property, but a declaration of trust gave her a 99% beneficial interest (an underlying fact of the actual ownership of the equity in the property). In 2013, the couple remortgaged the property for £384,000 with One Savings Bank to pay off an existing mortgage debt and to purchase a new home for both parties. Part of the loan (£39,500) was used to pay off Bishop’s personal debts. The Bank was unaware of the trust arrangement and the full nature of the transaction.
The couple split and fell behind on the mortgage repayments and the bank commenced possession proceedings. Waller-Edwards claimed she was unduly influenced by Bishop and the Bank should have been “put on inquiry” and taken steps to protect her due to the surety element of the remortgage.
All lower courts (County Court, High Court, Court of Appeal) rejected her argument. They held that in such cases there should be a nuanced or fact-sensitive approach. As such, the transaction was joint borrowing, not a surety, and the Bank was not on inquiry for that reason.
Waller-Edwards appealed to the Supreme Court. The appeal was allowed. It was held that:
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The transaction was a "non-commercial hybrid" as it was partly for joint benefit, and partly for Bishop’s sole benefit.
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The £39,500 used to pay Bishop’s debts was not de minimis and created a surety element.
The Bank was put on inquiry and should have followed the Etridge protocol, being to:
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Inform the potentially influenced party.
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Require that party to obtain independent legal advice.
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Obtain written confirmation from a solicitor.
As such:
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The Court reaffirmed a binary test from previous caselaw including Etridge (No.2):
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Either the lender is on inquiry, or it is not. There should be no nuanced or fact-sensitive approach, as held by the lower courts.
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In non-commercial hybrid transactions, any more than a trivial surety element puts the lender on inquiry.
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The purpose of the loan is not the key factor. What matters is whether one party took on liability without consideration.
Ultimately, Waller-Edwards gave a surety for £39,500 from which she did not benefit, and this ought to have put the bank on inquiry.
The clear lesson here is that lenders should treat hybrid transactions with caution. If there is any non-trivial surety element, they must follow the Etridge protocol or pay the price. This decision promotes certainty and simplicity in lending procedures in an effort to further protect vulnerable parties from undue influence.
