Etridge revisited – undue influence in lending transactions

Lenders and those involved in lending transactions will be very familiar with the 2001 case of Royal Bank of Scotland plc v Etridge (No 2). This now infamous case established the steps that a lender must take to ensure that a potentially vulnerable party understands the transaction they are entering into. If a lender is put on notice that one party’s agreement to a transaction may have been obtained by undue influence, they must ensure that party receives independent legal advice – this has become known as the “Etridge Protocol”. 

A recent Supreme Court case has extended the ambit of Etridge which means that lenders and their professional advisers will now need to think more carefully about the circumstances in which the Etridge Protocol may need to be followed. 

A reminder of the Etridge Protocol

It has long been established following the case of Etridge, and before that Barclays Bank Plc v O’Brien, that when a spouse (husband, wife or civil partner) stands as surety, or guarantor, for their partner’s debts (i.e. they receive no benefit from the transaction) a lender is automatically put on inquiry that there is a risk of undue influence, and must therefore follow the Etridge Protocol. On the other hand, where a loan is made to joint spouses, a lender is not automatically put on inquiry that there is undue influence (and does not therefore have to follow the Etridge Protocol) unless the lender has actual notice that the loan is only being provided for one party’s benefit. 

The recent Supreme Court case of Waller-Edwards v One Savings Bank Plc considered the application of the Etridge line of cases to a so-called ‘hybrid transaction’. A ‘hybrid transaction’ is one where a loan is provided to a joint spouse which is, on the face of it, partly for their joint benefit and partly for only one of the spouse’s benefit, and therefore to that extent apparently to the financial disadvantage of the other. 

Waller-Edwards v One Savings Bank Plc

In 2011, Catherine Waller-Edwards (Waller-Edwards) was the sole owner of a mortgage-free home with substantial savings. Despite being financially independent, Waller-Edwards was regarded as emotionally vulnerable at the time. She entered a relationship with Mr Bishop and agreed to sell her own home, investing the proceeds of sale and her savings in a property he was building, called ‘Spectrum’. Waller-Edwards took a charge over Spectrum to secure her investment.

In 2013, Mr Bishop and Waller-Edwards took a joint £384,000 loan from One Savings Bank Plc (the Bank) to remortgage Spectrum. The Bank were informed that the loan proceeds were to be applied towards:

• the joint purchase by Waller-Edwards and Mr Bishop of a buy-to-let property; and 
• the repayment of an existing mortgage over Spectrum which had been taken out by Mr Bishop. 

As a condition of the Bank’s loan, the Bank also required Mr Bishop to use part of the loan proceeds to settle his existing personal debts, including car repayments of £25,000 and credit card repayments of £14,500. The Bank therefore understood that part of the joint loan was going to be used to settle Mr Bishop’s personal debts and therefore a hybrid transaction between non-commercial parties – part of the loan benefitting both parties and part benefitting Mr Bishop only. 

The Bank were not, however, aware that Mr Bishop would in fact be using the loan proceeds to make a divorce repayment (£144,000) to his ex-wife, as well as repaying the existing mortgage over Spectrum. 

Waller-Edwards did not, nor was she required by the Bank to, obtain her own separate independent legal advice.

Shortly after completion of the loan from the Bank, the relationship between Waller-Edwards and Mr Bishop broke down. Spectrum was heavily mortgaged and the couple fell into arrears in their mortgage repayments. The Bank commenced possession proceedings in November 2021. In response, Waller-Edwards sought to have the mortgage set aside on the basis that the Bank should have been aware that Waller-Edwards’ agreement to the transaction was obtained by undue influence.

The first instance decision

It was determined by the trial judge that Waller-Edwards had entered into the transaction with the Bank under the undue influence of Mr Bishop. This finding was not contested. Waller-Edwards argued that the Bank’s knowledge that £39,500 of the loan was supposedly to be used to repay Mr Bishop’s personal debts should have put the Bank on notice of undue influence in this case. This argument was rejected. It was suggested that the transaction must be viewed as a whole to understand whether, as a matter of fact and degree, the overall purpose of the loan was to fund one party’s debts, as distinct from the joint purpose. In the circumstances, the judge found that on the whole, the loan was for the joint purposes of Waller-Edwards and Mr Bishop. Therefore, the Bank was not put on inquiry of undue influence by the element of the transaction that would stand to benefit Mr Bishop alone, and therefore the Bank was not required to follow the Etridge Protocol. This view was upheld in both the High Court and the Court of Appeal. 

The Supreme Court decision

The Supreme Court took a different view from the lower courts, and allowed Waller-Edwards’ appeal. They noted that a lender is put on notice of undue influence in any non-commercial hybrid transaction where, ‘on the face of the transaction, there is a more than de minimis element of borrowing which serves to discharge the debts of one of the borrowers and so might not be the financial advantage of the other’. The Supreme Court did not view the £39,500, out of a total loan of £384,000, which was advanced solely to repay Mr Bishop’s debts as a de minimis amount. As such, it was determined that the Bank should have followed the Etridge Protocol in requiring Waller-Edwards to obtain independent legal advice.

Impact on lenders

In delivering its judgment, the Supreme Court was keen to emphasise that lenders are generally over cautious in determining whether or not a surety/guarantor is required to obtain independent legal advice. Even though the Etridge line of cases requires the Etridge Protocol to be followed only on non-commercial cases, it was noted that the Etridge Protocol is generally followed where there is an individual surety/guarantor on commercial cases. The Supreme Court was keen to reduce the burden on lenders to have to exercise judgment in hybrid transactions, and determined that it was far simpler and clearer to have a rule whereby the Etridge Protocol must be followed on all (save for de minimis) non-commercial partial surety/hybrid cases.

What is less clear is what constitutes ‘de minimis’ for the purposes of making this determination and this, in itself, may lead to confusion for lenders. Whilst we know that £39,500 of a £344,000 loan was considered not to be de-minimis or trivial, it could remain difficult for a lender to determine exactly when the threshold for following the Etridge Protocol would be triggered. Certainly, it is likely that lenders will adopt a belt and braces approach, and demand that any joint borrower who appears not to be benefiting entirely from the loan in question obtains separate independent legal advice, no matter how small the ‘surety’ element.