New Etridge clarification: undue influence in joint borrowing scenarios

In a decision sure to be well-received by lenders, the Court of Appeal has recently dismissed the notion that partial use of a joint loan provided to two romantically-linked borrowers towards purposes solely benefitting one borrower automatically fixes the lender with constructive notice of undue influence.

The case:

In Waller-Edwards v One Savings Bank Plc [2024] EWCA Civ 302 the court considered the application of previous rules on bank procedure to mitigate undue influence risk, originally outlined in Royal Bank of Scotland Plc v Etridge (No 2) [2001] UKHL 44.

Ms Waller-Edwards had entered a personal relationship with Mr Bishop at a vulnerable stage of her life, culminating in a joint loan application by the couple with security being taken by way of a mortgage over Ms Waller-Edwards’ property in Dorset (although this was ostensibly owned in joint names). Prior to making the loan, the Bank had been led to believe that the majority of the funds were to be applied towards the couple’s joint ventures, save for 10% to be used to pay off credit card and car debts of Mr Bishop.

The couple defaulted on the loan and the bank obtained possession over the property.

The legal issue:

Bank due diligence duties in respect of undue influence in the context of joint non-commercial borrowing are well-established following the cases of Etridge, Barclays Bank v O'Brien [1994] 1 AC 180, CIBC Mortgages plc v Pitt [1994] AC 200. The approach is as follows in the below ‘clear-cut’ scenarios:

• ‘Surety’ cases: where (i) one borrower guarantees the debts of the other or a company, or (ii) security is taken over jointly owned property to finance debts of only one borrower. In this situation, lenders are deemed to have constructive notice that one party may be under undue influence owing to the fact that they will incur a burden (as guarantor/surety) without any direct personal benefit. The risk is heightened bearing in mind the non-commercial nature of the relationship between such borrowers. The protocol from Etridge requires the lender to ensure the surety receives independent legal advice about the risks of entering the transaction and are proceeding on their own account. This enables the lender to avoid being fixed with constructive notice that the surety/guaranteeing party was unduly influenced, which may impact on the validity of the security given.
• ‘Joint borrowing’ cases: where a loan is taken jointly to be applied towards joint non-commercial purposes of the borrowers. As was upheld in the Pitt case, lenders are not normally expected to anticipate undue influence in a scenario where each party is jointly due to benefit from the loan proceeds. As such, lenders here need not show Etridge compliance.

Ms Waller-Edwards’ legal team argued that a third ‘hybrid’ category should exist for scenarios such as hers where some but not all of the loan is applied towards ends solely benefitting one borrower. It was argued that unless the amount being applied for the benefit of just one borrower is ‘trivial’, the transaction should be treated in the same way as a ‘surety’ case (thus extending the application of the Etridge procedure). Given that the protocol was not followed in her case, Ms Waller-Edwards made an application for the mortgage granted to the bank to be struck out.

Decision:

Ms Waller-Edwards’ argument that the application of the Etridge protocol be extended to cover a further ‘hybrid’ category of case was rejected.

Whilst sympathetic to the misfortune she had endured, Sir Geoffrey Vos concluded that such an approach would place too onerous an obligation on lenders when it is common for small proportions of loans to couples to be applied towards repayment of individual debts. The court clarified that the correct approach is for banks to look holistically at each joint borrowing transaction to determine whether it more suitably falls into the ‘surety’ category or ‘joint borrowing’ category, and apply Etridge accordingly.

Concluding thoughts:

The Waller-Edwards decision clarifies to lenders that they are not to be fixed with constructive notice of undue influence in a non-commercial joint borrowing transaction unless it is of a nature where one party can, in practical terms, be viewed as a ‘guarantor’ for the other.

It is therefore important to ensure that the intended purposes of a loan granted to joint borrowers are well established and to what degree these are jointly beneficial to the parties. Whilst the case did not go in Ms Waller-Edwards’ favour, the position remains that, on different facts, where security is taken from one party not directly due to benefit from the loan proceeds and independent legal advice procedures are not covered off, security may potentially be struck out in a default scenario.

If you would like any further information or advice, please contact Katherine Grant from our Banking & Finance team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.