One Savings Bank Plc v Catherine Waller-Edwards – undue influence in a “hybrid” case

The judgment in the recent case of One Savings Bank Plc v Catherine Waller-Edwards offers guidance on how the principles of undue influence are applied to “hybrid” cases, where part of the borrowings is for joint purposes and part for the benefit of only one of the borrowers.

In the case of One Savings Bank Plc v Catherine Waller-Edwards, the Court of Appeal assessed whether a third category of joint borrowing transactions, the “hybrid” case, was needed to clarify when a lender is considered to be put on inquiry with respect to undue influence on one of the borrowers.

The existing case law (O’Brien, Pitt, Etridge) establishes two categories of joint borrowing transactions, and stipulates when a lender should be put on notice:

1. Surety case: Where a loan is taken to pay off the debts of a single borrower or when one borrower guarantees the debts of the other or of a company, the lender will be put on inquiry of the possibility of one borrower being unduly influenced by the other and is required to follow the steps set out in Etridge, which may include requiring the relevant borrower to obtain independent legal advice.
2. Joint borrowing case: Where a loan is taken for the joint non-commercial reasons of both borrowers, the lender will not normally be put on inquiry of the possibility of one borrower being unduly influenced.

However, in One Savings Bank Plc v Catherine Waller-Edwards, Ms Waller-Edwards argued that her situation was a “hybrid” case, as her loan was sought partly for joint non-commercial purposes and partly for the benefit of a single borrower, her then partner Mr Bishop.

Following an assessment of the existing case law, the Court of Appeal held that:

• introducing a third category of joint borrowing transaction would create legal uncertainty and place overly onerous conditions on the lender; and
• when assessing if a bank should be put on inquiry in cases of joint borrowing, the Etridge principles should be applied, under which a transaction should be looked at as a whole to determine if, as a matter of fact and degree, the purpose of the loan was joint borrowing.

Facts of the case

In 2011, Ms Waller-Edwards began a relationship with Mr Bishop, who was a builder then constructing three houses. At the time of meeting Mr Bishop, Ms Waller-Edwards lived in her own mortgage-free property (worth £585,000), and had accumulated savings of around £150,000, together with a small income.

In 2012, Ms Waller-Edwards exchanged her property and £150,000 of her savings to purchase a property being built by Mr Bishop (the New Property). The New Property was held jointly by Ms Waller-Edwards and Mr Bishop, subject to a declaration of trust stating that Ms Waller-Edwards owned 99% of the equity, whilst the remaining 1% was owned by Mr Bishop (the Declaration of Trust). It was anticipated that the New Property would be worth £750,000 when complete.

By completion, two charges had been granted over the New Property: (i) an existing charge to a Mr Higgins for £78,000 which was later increased and replaced; and (ii) a charge in Ms Waller-Edwards’ favour for the £150,000 handed to Mr Bishop.

In 2013, Ms Waller-Edwards and Mr Bishop approached One Savings Bank Plc (the Bank) for a remortgage of £440,000 to be secured against the New Property. However, the Bank only agreed to lend £384,000.

The Bank was informed that the loan would be used as follows:

• to pay off an existing mortgage of £200,000 (the Existing Mortgage);
• to pay off £24,000 of debt relating to Mr Bishop’s car finance (the Car Finance Debt); and
• to pay off £16,000 of debt relating to Mr Bishop’s credit card (the Credit Card Debt); and
• the remaining balance to purchase another property.

When the remortgage was completed, £233,801.76 was used to pay off the Existing Mortgage. However, most of the remaining balance, a sum of £142,000, was used to pay Mr Bishop’s ex-wife as part of a divorce settlement.

In 2014 the relationship between Ms Waller-Edwards and Mr Bishop had terminated. Mr Bishop moved out of the New Property and ceased to pay any mortgage instalments. The mortgage defaulted and in 2021 the Bank commenced proceedings to seek possession of the property and the arrears.

In defending the possession claim, Ms Waller-Edwards alleged that she was acting under undue influence from Mr Bishop when she entered into the remortgage, and therefore asked that the remortgage be set aside. Ms Waller-Edwards argued that her case constituted a new category of joint borrowing, a “hybrid” case, as the purpose of the loan was partly joint borrowings and partly surety for a single borrower’s debts. She proposed a new test for hybrid cases, which required a lender to be put on inquiry of undue influence whenever the sole benefit element of the borrowing was non-trivial.

Trial outcome

In the first instance, Judge Mitchell (the Trial Judge), found in favour of the Bank and granted the possession order. The Trial Judge held that whilst Ms Waller-Edwards was under the undue influence of Mr Bishop when she consented to the legal charge, the Bank was not put on inquiry.

To the Bank’s knowledge only £40,000 of the remortgage was used to repay the Car Finance Debt and Credit Card Debt held by Mr Bishop, whilst £233,000 was used to repay the Existing Mortgage which was a joint debt. The Bank was unaware of the monies to be paid to Mr Bishop’s ex-wife and the Declaration of Trust, and acted on the understanding that the New Property was held equally by Ms Waller-Edwards and Mr Bishop.

Considering the above, the Trial Judge determined that the Bank was not put on inquiry and was entitled to enforce the legal charge.

High Court appeal outcome

Ms Waller-Edwards appealed the decision at the High Court, stating that the Trial Judge was wrong to find that the Bank was not put on inquiry. Mr Justice Edwin Johnson (the High Court Judge) rejected the appeal and upheld the Trial Judge’s decision that the Bank was not put on inquiry and therefore remained entitled to enforce the legal charge.

In reaching his decision, the High Court Judge drew on the existing case law of O’Brien, Pitt and Etridge, which states that for a Bank to be put on notice there must be a non-commercial relationship, and a transaction which is not, on its face, to the financial advantage of one of the borrowers. It was held that this principle was sufficient for assessing whether a bank should be put on inquiry in cases of partial surety.

Applying this to the facts, whilst Ms Waller-Edwards and Mr Bishop were in a non-commercial relationship, to the Bank’s knowledge the majority of the remortgage was used to repay jointly held debts. Therefore, the decision of the Trial Judge was upheld. The Bank was not considered to be put on inquiry and the charge remained enforceable.

Court of Appeal outcome

In the Court of Appeal judgment, the question proposed was, in a hybrid case such as this, is the lender put on inquiry unless the element of the transaction that is for the sole benefit of one of the borrowers is trivial?

In agreement with the Trial Judge and the High Court Judge, the Court of Appeal concluded that the correct legal test was that established in O’Brien, Pitt and Etridge – namely that it is necessary to look at the transaction as a whole and consider, as a matter of fact and degree, whether the overall purpose of the loan was for the benefit of a single borrower or for the joint benefit of both borrowers.

In the eyes of the Bank only 10% of the remortgage was to be used on Mr Bishop’s personal debts, and this was not enough to turn the case into one of surety. Furthermore, the evidence established that it is not uncommon for joint borrowing to include an element of repaying a sole borrower’s debt. As such, the Court of Appeal judge concluded that looking at the remortgage as a whole, Ms Waller-Edwards’ case was one of joint borrowing, and therefore the Bank was not put on inquiry.

Practical implications

In summary, the judgment provides confirmation that the principles previously established in the cases of O’Brien, Pitt and Etridge also extend to hybrid cases.

Whilst the judgment will be welcomed by lenders, it also raises some practical considerations for them going forward:

• as whether a particular case amounts to a surety case or a joint borrowing case is a question of fact and degree, there is no clear cut rule on when some element of sole borrowings can transform a case from a joint borrowing case into a surety case;
• the case serves as a reminder as to the implications of a bank being considered to have been given constructive notice of undue influence. If constructive notice is deemed to be given, this can affect the enforceability of guarantees and security. Therefore, lenders must ensure they undertake appropriate due diligence and accurately record the purpose of the loan.