Undue influence and the lender’s duty to inquire in hybrid transactions

Factual background

The Appellant commenced a relationship with Mr Bishop at a point in her life when she was emotionally vulnerable and financially independent, as the sole owner of a mortgage-free home and with reasonably substantial personal savings. Mr Bishop was in the process of building a property and persuaded the Appellant to exchange her home and savings for the property in question. The Appellant was given a charge over the property to secure her “investment” pending completion of the property. The Appellant moved into the incomplete property, and the legal title to the property was put into joint names with a declaration of trust stating that the beneficial interest in the property was held by the Appellant as to 99% and Mr Bishop as to 1% as tenants in common. Mr Bishop sought to remortgage the property with the Respondent. As part of this, the Respondent required Mr Bishop to pay off his existing debts, amounting to £39,500, constituting the asserted suretyship part of the joint loan. Following completion of the remortgage, the relationship between the couple came to an end and Mr Bishop moved out of the property. The Appellant continued to live there but without savings, her limited pension was inadequate to service the re-mortgage payments. Ultimately, the Respondent commenced possession proceedings.

Issue

The central issue was undue influence and the lender’s duty to inquire in hybrid transactions.

Procedural history and reasoning

held that a bright line test is the correct legal test for deciding when a lender is put on inquiry in a non-commercial hybrid loan transaction. 2. The bright line approach in this context simply involves treating a non-commercial hybrid transaction as a surety transaction and not as a joint loan. 3. The test to be applied, as set out by Lady Simler, is as follows: “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 mínimis 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”. 4. Adopting this approach achieves the same “workable simplicity” as established in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; [2002] 2 AC 773. 5. The Supreme Court found that this was not a radical departure from the established position, as it accorded with the principle in, and policy objectives of, the previous case law.

FIRST APPEAL - Edwin Johnson J Considered that the O’Brien principle encompassed a partial surety case: “Looked at in the round, I do not think that the Remortgage, as it was known to the Respondent, constituted a transaction in which the Appellant was properly viewed as being in a relationship of suretyship with Mr Bishop” (para 104). COURT OF APPEAL Dismissed the appeal. Sir Geoffrey Vos MR Rejected the Appellant’s argument that a hybrid case of this kind should be treated in the same way as a full surety case unless the surety element of which the lender is aware is trivial. Held that nothing in Etridge No 2 implies a third test for hybrid cases of this kind. Found that the Appellant’s test would introduce uncertainty with arguments about what was non-trivial. Recognised that it is not always easy for banks to know whether certain debts are truly for the sole benefit of the person in whose name they stand. Concluded that a fact and degree approach was appropriate. Peter Jackson LJ Rejected the test proposed by Appellant as unduly onerous to lenders and many borrowers.

DRAWING DISTINCTIONS The law regards banks and other lenders as put on inquiry whenever on the face of a three-way transaction the vulnerable partner in the relationship is offering to stand surety for their partner’s debts. (Barclays Bank plc v O’Brien [1994] 1 AC 180; CIBC Mortgages plc v Pitt [1994] 1 AC 200; Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44; [2002] 2 AC 773) By contrast, where on the face of the transaction the lending is advanced to the partners jointly, the bank is not put on inquiry unless aware that the loan is being made for one partner’s purposes as distinct from their joint purposes. However, it was common ground on this appeal that there may be less straightforward transactions involving non-commercial loans sought by a couple that are, on the face of it, partly for their joint benefit and partly for one’s sole benefit and therefore to that extent apparently to the financial disadvantage of the other.

Decision and key points

The Supreme Court endorsed a bright-line approach for deciding when a lender is put on inquiry in a non-commercial hybrid loan transaction.

1. In allowing the appeal brought by Waller-Edwards (the Appellant) against One Savings Bank Plc (the Respondent), the Supreme Court held that a bright line test is the correct legal test for deciding when a lender is put on inquiry in a non-commercial hybrid loan transaction.
2. The bright line approach in this context simply involves treating a non-commercial hybrid transaction as a surety transaction and not as a joint loan.
3. The test to be applied, as set out by Lady Simler, is as follows: “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 mínimis 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”.

Why this decision matters

The Supreme Court clarified when a lender is put on inquiry in a hybrid transaction partly benefiting one party and partly benefiting both. The decision affects lending processes, evidential analysis and remedies where undue influence is alleged.

Particularly relevant to: Banks, borrowers, secured-lending teams and commercial litigators.

Related practice areas

Commercial litigation

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