The Supreme Court has allowed an appeal on whether a lender should have been on inquiry in a case of secured lending to joint borrowers.
In the case of Waller-Edwards v One Savings Bank Plc, Ms Waller-Edwards was persuaded by her partner, Mr Bishop, to exchange her home and savings for a property he was building. At the time, the appellant was emotionally vulnerable but financially independent, as her home was free of mortgage and she had significant savings. Mr Bishop’s property was already subject to a charge. He then remortgaged 2 years later with the respondent bank, which believed the funds would buy another property that the couple would use as a buy-to-let and would pay off an existing mortgage debt. It also required Mr Bishop to use the loan to pay off other existing debts, which included nearly £40,000 to pay off a car loan and a credit card. Mr Bishop actually used it to make a divorce payment and pay off the first charge on the property. The bank did not know this.
The relationship ended, and eventually the payments on the heavily mortgaged house in which Ms Waller-Edwards was then living fell behind and the bank started possession proceedings.
The appellant said that since she was a surety for part of the loan that would be used to pay off Mr Bishop’s debts, the bank should have been on inquiry that she may have been under undue influence to agree to the transaction, and it did not take steps to make sure she was aware of the liability she would be taking on. She said the remortgage transaction should be set aside as between her and the bank.
The County Court judge had agreed the appellant had entered into the transaction under undue influence but it, the High Court and the Court of Appeal all said the bank was not on inquiry because she was not a surety but instead a joint borrower. The Supreme Court disagreed. It said that where in any non-commercial hybrid transaction there is on the face of it more than a trivial element of borrowing that will discharge the debts of one borrower and therefore might not be to the other’s advantage a bank should view it as a “surety” transaction and therefore put on inquiry of the possibility of undue influence. It said the Court of Appeal’s focus on a “fact and degree” test to establish whether the transaction was a surety transaction or a joint borrowing was wrong, as was it wrong to focus on the purpose for which the loan was used. The relevant question was whether one borrower takes on a legal liability for which they are not responsible for no personal gain. In this case, the appellant did take on such a liability. So that meant the bank should have followed the “Etridge protocol” that required it to ensure Ms Waller-Edwards knew of the risks she was taking on.