Supreme Court rules hybrid loan transactions still subject to inquiry protocol for undue influence

About this case:

• Citation:
  [2025] UKSC 22
• Judgment:
  External link
• Court:
  UK Supreme Court
• Judge:
  Lady Simler

Appellant Catherine Waller-Edwards, who was left as the sole owner of a property in which One Savings Bank held a secured interest, contended that the “fact and degree” test adopted by the High Court and Court of Appeal was wrong, and what was required was a bright-line approach. The loan under which the Bank sought possession had been found to have been taken out primarily to discharge the debts of the appellant’s ex-partner, Nicholas Bishop.

The appeal was heard by Lord Briggs, Lord Hamblen, Lord Stephens, Lady Rose and Lady Simler. Julian Malins KC and Marc Beaumont appeared for the appellant, and Joanne Wicks KC and Antonia Halker for the respondent. Mr Bishop played no part in the proceedings.

Financially independent

In late 2011, the appellant and Mr Bishop entered a relationship, at a time when she was emotionally vulnerable. At the time she was financially independent, owned a mortgage-free home, and had a modest pension and savings. Mr Bishop was in the process of building a property, referred to as “Spectrum”, for which he persuaded the appellant to exchange her home and savings.

The legal title to Spectrum was in joint names with a declaration of trust stating that the appellant held a 99 per cent interest and Mr Bishop one per cent as tenants in common. In 2013, Mr Bishop sought to re-mortgage Spectrum for £440,000 with the respondent. The Bank understood that the loan was to pay off an existing mortgage debt and to purchase another property, and that the re-mortgage would be a buy-to-let mortgage. In fact, Mr Bishop used most of the money to make a divorce payment to his ex-wife and pay off another secured charge over Spectrum to a Mr Higgins.

Following completion of the re-mortgage, the appellant and Mr Bishop separated. He moved out of Spectrum, which the appellant was unable to meet the mortgage payments for herself. Ultimately, the Bank sought possession on the basis of arrears and breach of the buy-to-let condition. A High Court judge found that the appellant had entered into these financial transactions under the undue influence of Mr Bishop, but rejected her case that the Bank had been put on inquiry of the undue influence. This position was upheld by the Court of Appeal.

The appellant relied on the principle as expressed in RBS v Etridge (No. 2) (2001) to argue that she was a surety for part of the loan made to pay off Mr Bishop’s debts, so that the Bank would be put on inquiry that her agreement may have been obtained by undue influence. Counsel for the respondent submitted that the approach of the Court of Appeal was correct, having regard to the infinitely variable nature of such transactions. The appellant’s proposed test would be onerous for lenders and many borrowers.

Modest, reasonable step

Giving the sole judgment of the court, with which the other judges agreed, Lady Simler said of the general principle confirmed in Etridge: “The bank is not expected to try to find out whether or not undue influence or misrepresentation is taking place, or indeed whether it is being misled as to the purposes of the loan. The bank is simply on notice of a risk of undue influence or similar impropriety. The most the bank is then expected to do is to take reasonable steps to minimise the risk that such a wrong may be committed by satisfying itself that the wife (or vulnerable partner) has had brought home to her, in a meaningful way, the implications of the proposed transaction, so that if she continues with it, she does so with her eyes wide open.”

She continued: “The existence or adoption of the Etridge protocol does not mean that banks can simply close their eyes to evidence indicating that there is a higher level of risk in a particular case. As the House of Lords recognised, even in apparently straightforward surety or joint borrowing transactions, there may be features which should put the bank on alert. The development of bright line rules for the straightforward cases does not absolve the banks of the need to exercise their judgment as to any increased risk of undue influence where red flags exist.”

Considering the test to be applied to hybrid transactions, Lady Simler said: “The existence of any exclusive benefit for one borrower (not being de minimis) moves the case out of the joint loan category and into the surety category, engaging the need for a bank to take the simple steps identified in the Etridge protocol. It satisfies the need for simplicity of operation by the banks who are more likely to wish to play safe by issuing an Etridge protocol letter to remove possible risk, than to litigate about the need for one subsequently. This bright line approach should encourage banks to prevent future litigation by taking the modest, reasonable step of issuing Etridge protocol letters, rather than encouraging controversial or finely balanced judgments to be formed by underwriting staff about whether there is, or is not, an appearance of suretyship.”

She concluded: “I would therefore hold that a creditor is put on inquiry 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 to the financial advantage of the other. The transaction must be viewed from the bank’s perspective. Such a transaction, if viewed in this way, should be regarded as a ‘surety’ transaction and the creditor placed on inquiry of the possibility of undue influence.”

The appeal was therefore allowed, with the case put out for the parties to consider the consequences of the court’s decision.