Facts of the case
Mrs Waller-Edwards was persuaded by her partner, Mr Bishop, to exchange her home and savings for a property that he was developing. The couple entered a joint remortgage, borrowing £384,000 from One Savings Bank Plc through a buy-to-let loan. While the bank was aware that a portion of the funds was being used for a joint purpose, it was also aware that another portion was being used for the sole benefit of Mr Bishop (around 10% of the loan).
The couple fell into arrears, and the bank sought possession of the home. Mrs Waller-Edwards argued that she had been unduly influenced by her partner and did not understand the full nature and implications of the transaction when entering the loan.
The Court’s finding
The Supreme Court ruled unanimously in favour of Mrs Waller-Edwards, holding that as the bank was aware that part of the loan was for the sole benefit of Mr Bishop, it had been put on inquiry as to the potential for undue influence. As such, the Etridge principle applied, and the bank had a legal duty to ensure Mrs Waller-Edwards received independent legal advice before entering the loan. The bank's failure to follow the Etridge principle resulted in the loan being unenforceable against Mrs Waller-Edwards.
In reaching its decision, the Court highlighted that the key question was not who benefitted from the loan, but whether Mrs Waller-Edwards had, for no consideration, taken on a legal liability that was not hers and for which she was not otherwise responsible.
Development of the Etridge principle
The Etridge principle was established in the case of Royal Bank of Scotland v Etridge (No 2), which involved eight joint appeals in which a wife’s interest in her home stood as security for her husband’s business loan. In each of the cases, the wives received no direct benefit.
The Court stated that if one party of a cohabiting couple — whether married or unmarried — offers to stand as surety for the debts of the other in a borrowing transaction from which they receive no benefit, and the bank is aware of that relationship, then the bank is put on inquiry. It is then the bank's responsibility to ensure that the non-benefitting party seeks independent legal advice at a private meeting with their nominated solicitor, who should explain the nature and implications of the transaction to them.
Waller-Edwards extended this principle to hybrid loans. In doing so, the Court determined that in respect of hybrid transactions, a new bright-line test should be applied, taking the case beyond Etridge. The new test determines that if more than a de minimis element of the borrowing serves to discharge the debts of one of the borrowers, the case moves from the joint loan category to the surety category, requiring the Etridge principle to be applied.
While the Court indicated that the sole benefit element of the borrowing in Waller-Edwards was not de minimis, it did not provide either a definition or any guidance as to the meaning of de minimis, leaving it open to interpretation.
Impacts
By extending the Etridge principle to hybrid transactions, the Court has created stronger protections for borrowers who are subject to undue influence. While this is beneficial to borrowers, it has increased the likelihood that the defence of undue influence will be relied upon. Additionally, the Court confirmed that if lenders do not apply the Etridge principle to transactions where more than a de minimis element of the borrowing serves a sole benefit to one of the borrowers, and it later transpires that the borrowing was entered into under undue influence, the tainted part of the borrowing will be unenforceable.
However, there is no longer a requirement for banks to review the facts of the situation at hand. The Court confirmed that lenders do not need to investigate if the sole debt does in fact benefit both borrowers — for example, a car loan in the name of a sole borrower, where the vehicle is actually used as a family car.
Conclusion
The Waller-Edwards decision can be seen as a landmark judgment for the law of joint borrowing. By extending the Etridge principle and introducing a clearer test for lender responsibility, the Supreme Court has reinforced protections for vulnerable borrowers while placing a greater duty on lenders to act with care. Although the de minimis threshold remains undefined, it is clear that where there is a risk of undue influence, lenders must apply the Etridge principle.
This article was authored by Rose Williams, Trainee Solicitor at MFMac.
