Undue influence: is there a third category of “hybrid” joint borrowing cases?

In its recent decision of Waller-Edwards v One Savings Bank Plc, the Court of Appeal provided guidance on how the principles of undue influence will apply in joint borrowing transactions where security is given partly for joint non-commercial purposes and partly for the benefit of a single borrower. 

The principles of undue influence enable a court to intervene to prevent abuse where a party is forced into a transaction against their will. In the leading case of Etridge, the House of Lords (now Supreme Court) reviewed the law on undue influence where wives provide surety for their husbands’ debts and gave guidance on when a lender will be put on notice of the risk of undue influence (and therefore of the risk of a charge being voidable). 

Post-Etridge, two categories of joint borrowing have been established:  

1. Surety cases: where, in non-commercial circumstance, one borrower guarantees the debts of the other or of a company. In these cases, the lender will be put on notice and required to follow the so-called ‘Etridge protocols’, which includes informing the party acting as surety that they must obtain independent legal advice. A lender’s failure to follow the Etridge protocols in these scenarios means the transaction is liable to be set aside for undue influence.  

2. Joint borrowing case: where a loan is taken for the joint non-commercial reasons of both borrowers. In these cases, the lender will not usually be put on notice of the possibility of one borrower being unduly influenced. 

However, in the case of Waller-Edwards v One Savings Bank Plc, Catherine Waller-Edwards argued that her case fell into a third category of “hybrid” cases. Part of the money she had borrowed with her ex-partner, Nicholas Bishop, was used partially for the sole benefit of Nicholas and partially for joint purposes. Catherine sought to argue that in these hybrid situations, lenders are put on notice of potential undue influence and, should undue influence occur where the lender has failed to follow the Etridge protocols, such transactions should be set aside. The Court had not previously considered such “hybrid” cases.  

Facts

In 2011, Catherine Waller-Edwards was financially independent and the sole owner of a mortgage-free property (worth around £585,000), with savings of £150,000 and a small income. However, she was also at a vulnerable period of her life. It was at this time that she began a relationship with Nicholas Bishop, a local builder and developer.  

In May 2012, Catherine was persuaded by Nicholas to exchange her mortgage-free property and £150,000 of savings to purchase a property constructed by Nicholas and known as Spectrum (the Property). The Property was to be held in their joint names, subject to a declaration of trust which provided that 1% was held by Nicholas and 99% held for Catherine.  

In mid-2013, One Savings Bank (the Lender) advanced a loan of £384,000 to be secured against the Property. The Lender had understood that the purpose of the remortgage was as follows: 

1. £200,000 to pay off an existing charge; 

2. £24,000 to pay off a debt on Nicholas’ car finance; 

3. £16,000 to pay off a debt on Nicholas’ credit card; and   

4. the remainder (being £142,000) to purchase another property.  

However, in reality, £233,801.76 was used to pay off the existing charge and £142,000 was used to pay Nicholas’ ex-wife in respect of a divorce settlement.  

When Catherine and Nicholas’ relationship later broke down, Nicholas moved out of the Property and Catherine was left in a heavily mortgaged home, with no savings and limited income. The mortgage subsequently fell into arrears and the Lender sought and obtained a possession order over the Property.  

County Court and High Court decisions 

At first instance, it was determined that Catherine’s consent to the remortgage had been procured through undue influence. It was also conceded that the Lender had not taken steps to ensure compliance with the Etridge protocols. However, the Trial Judge was not persuaded that the Lender had been put on notice of the risk of undue influence. The High Court agreed with the Trial Judge’s decision

Court of Appeal decision 

The sole issue to be considered by the Court of Appeal was whether a lender should be treated as having been put on notice of undue influence where a loan is made to joint borrowers, partially for joint purposes and partially for the sole benefit of one borrower, unless the sole benefit element of the transaction is trivial.  

The Court of Appeal answered in the negative. Instead, the loan had to be considered as a whole, through the lens of the Lender. The fact that, to the Lender’s knowledge, 10% of the borrowing was to be used to repay Nicholas’ credit debts did not, as a matter of fact and degree, make this a surety case and therefore the Lender was not on notice of undue influence. It was also said that to introduce a third category for hybrid cases such as this would introduce “some uncertainty”.  

The Birketts view 

The case provides much needed clarity for lenders in respect of the “hybrid” borrowing that occurred in this case. It is, however, unfortunate that the Claimant was left without legal recourse, given the unpleasant situation (a heavily mortgaged home, no savings and limited income) in which she found herself.  

If you require further assistance or advice regarding the topics covered in this article, please contact Stephanie Butler or Lauren Peach.